You are currently browsing the monthly archive for December 2009.

Free Exchange rightly criticizes Ted Gayer at Brookings for his argument is that if households and firms are forgoing a profit opportunity (the supposedly profitable decision to weatherize buildings), then cap-and-trade will not work because these same households and firms will ignore all of the cost-saving profit opportunities that cap-and-trade is meant to induce. His reasons that:

“If cap-and-trade does not drive down costs, then EPA regulators might feel justified in imposing inflexible, command-and-control regulations to reduce greenhouse gas emissions. Why establish a flexible, market-based approach when consumers and firms (but apparently not analysts) lack the ability to identify and act upon the least costly means for reducing pollution?”

Gayer should think hard before espousing the logic that “if markets participants aren’t currently doing something that is profitable, then market based mechanisms won’t work, so you might as well go with command-and-control policies”. Paul Krugman and Robert Reich might jump at this statement in full agreement that we need a new Federal Weatherization Workforce; a fully unionized, public option for weatherizing homes, as well as a weatherization mandate. He should be careful what he wishes for.

In addition to being terribly misguided, Free Exchange is right to call his argument “too-clever-by-one-half”, because it is also incorrect;. Even if all homeowners and business are currently incorrectly underestimating the returns to weatherization, if cap-and-trade raises energy prices, people might still estimate that weatherization has, on the margin, become a profitable investment.

Say, for instance that all households have identical costs of weatherization of X and benefits of X + e, with X and e > 0. Also assume all households are underestimating the benefits by some amount k > e, such that they view the net benefit as X + e – X – k = e – k < 0, i.e. the net benefits are negative. Say cap-and-trade raises the benefit of weatherization by k, and everyone can clearly observe that. Then the benefits of weatherization are X + e – X – k + k = e   > 0, i.e. the benefits are net positive. Ta-da!

This is just an algebraic way of saying all that we need to happen is for cap-and-trade to raise the benefits of weatherization by as much as some households and firms are underestimating it by, then some households will respond to cap-and-trade by weatherizing.

Unless, of course, households and firms can’t estimate net present value when you’re in a liquidity trap. In this case, we may need the weatherization public option and mandate.

Is there any policy more backwards, inefficient, and at direct benefit to the few and rich at the expense of the many and poor as agricultural subsidies? The European Union is offering some reminders that the answer is “no”.

Let’s run through the Terrible Policy Checklist. First up, does the policy benefit a cartoonishly inappropriate group of recipients?

…billions of euros pump haphazardly through the system at large, which last year rewarded a variety of beneficiaries beyond the simple farmer. At the head of the line were giant American and European factory farm companies, Spanish road builders, German Gummi bear manufacturers, luxury cruise ship caterers and wealthy landowners — including Queen Elizabeth II and Prince Albert II of Monaco.

Ok, that’s pretty bad. But do policymakers show a complete lack of understanding of good governance?

Despite all the logrolling and special interests, ideas are emerging about a makeover.

One is the concept of public goods — rewarding farmers who meet environmental standards and animal welfare requirements.

Hmmmm… tell me more about these so-called “public goods”. It’s an interesting concept, perhaps the idea will catch hold.

Gummi bears are a public good though, right?

I won’t pretend to have a comprehensive answer to that question; it’s a pretty big one. But I do think the best evidence we have indicates that when health insurance comes with high deductibles and co-pays, consumers do on average make rational health care choices by reducing their health care expenses with almost no adverse health effects. This is the result of the famous $50 million RAND Health Insurance Experiment, a study which is old news to people who read about health care policy (it’s so famous it even has it’s own Wikipedia entry!).

Or so I thought anyway. Economist Paul Ginsburg seems to disagree, and finds the state of the literature ambiguous:

…many of those companies will rely on what she described as “the tried-and-true method” — passing along more of the costs to employees, in the form of higher deductibles and co-payments, in order to reduce overall premiums.

The public policy goal of the tax, in theory, is to have everyone spend less on medical care, even if it means using it less.

“We know people will use less care under such plans,” said Paul Ginsburg, president of the Center for Studying Health System Change, a nonpartisan group.

What is not so clear, Mr. Ginsburg said, is whether people will make — or be able to make — rational choices between treatments that are not particularly effective and treatments that may help them from becoming sicker later.

Mr.Ginsburg is a frequent author of papers in Health Affairs and a noted expert on the health care policy, so when he makes this claim part of me suspects my disagreement may be based on evidence I am unaware of. I skimmed some of his past articles looking for clues as to what studies he may be referencing but have found none yet.

The CBO at least seems to agree with me. In a paper on price transparency in health care (H.T. Tyler Cowen) they say

The RAND Health Insurance Experiment, conducted in the 1970s and 1980s, showed that individuals purchase less health care when faced with greater cost sharing and that the reduction in health services had little impact on their health. Although the study did not consider the question of price transparency, its results suggest that individuals who pay for health care on their own are responsive to out-of-pocket payments.

Clearly, the evidence shows consumers can make rational decisions about seeking effective versus ineffective medical care. Perhaps Ginsburg is referring to selecting among treatments once a patient has decided to seek some medical care, which the next line in the CBO report refers to as an unsettled question:

At the same time, the evidence indicated that the primary effect was on whether individuals sought care for a medical condition; once they went to a doctor, subsequent spending per person was similar in the different cost-sharing arrangements.

If this is what he meant, his statement seems consistent with the RAND HIE. However, that is a very selective representation of the literature by the authors of the article Ginsburg was quoted in. The article is addressing the “public policy goal of… hav[ing] everyone spend less on medical care, even if it means using it less”. The answer to whether consumers can do this without adverse health effects, at least to the best of my knowledge,  should be  “yes, the evidence suggests they can”, not a technically-correct-but-missing-the-bigger-point statement about selecting amongst treatments. Then again, perhaps Dr.Ginsburg and the article’s author, Reed Abelson, are aware of evidence that I am not.  Dr.Ginsburg is the expert, so this is certainly a possibility.

Rare earth metals, which are used by many green technologies, seem to be having some of the same problems historically associated with diamonds and other precious stones: they come almost entirely “from some of the most environmentally damaging mines in the country, in an industry dominated by criminal gangs.”

As in the case with diamonds much of the problem seems informational. If customers were aware of whether or not the product they were buying was manufactured “responsibly”, then they would be willing to pay a premium for it. Since these metals are used frequently for green technologies, the kinds of consumers who are the end-buyers of rare earth metals are probably the kind who will place a high value on minimizing the environmental and social costs. If buyers of green technologies are mostly concerned about signaling their social responsibility, than information on where the rare earth metals come from could go a long way in fixing this problem. Things aren’t looking so great here though:

“Western users of heavy rare earths say that they have no way of figuring out what proportion of the minerals they buy from China comes from responsibly operated mines.”

I would guess most consumers are pretty unaware of these problems associated with rare earth metals, and thus green technologies. More awareness of will hopefully lead companies to find innovative ways to credibly signal the social responsibility of their mines, since doing so will become more profitable. I’m optimistic about this one.

It’s not too late. With precious few hours left to shop you can still get horrible gifts for people you hate. Allow me to make the following suggestions:

Psychic Healing: Using the Tools of a Medium to Cure Whatever Ails You by Sylvia Browne – Nothing says “I hate you” like buying someone a book of health tips by a madwoman that if followed may lead to serious bodily harm

Rat Beef – Depending on how much you hate the person, you may want to go with something as little as a sack of rat giblets, or something as extreme as 100 pounds of whole skinless rats.

A generous donation to SarahPAC: Nothing will brings a sane person down like knowing $100 went to Sarah Palin in their name. Every time they see a “Palin for President” ad in 2012 they will know a piece of it belongs to them.

Behind the Bell by Dustin Diamond:  The bitter, exaggerated, biography from the guy who played Screech on the 1990s TV show Saved by the Bell. The awfulness is self-explanatory here.

Good luck with your enemies this Christmas.

Here’s a disturbing fact: plants scream and feel pain… well, sort of:

Just because we humans can’t hear them doesn’t mean plants don’t howl. Some of the compounds that plants generate in response to insect mastication — their feedback, you might say — are volatile chemicals that serve as cries for help. Such airborne alarm calls have been shown to attract both large predatory insects like dragon flies, which delight in caterpillar meat, and tiny parasitic insects, which can infect a caterpillar and destroy it from within.

All I can say is thank goodness we don’t hear it. Eating a salad would feel like a massacre, and mowing the lawn like genocide.

What someone thinks about Christmas can often tell you something about them: people with inflexible or extreme beliefs are prone to apply those beliefs rigorously and fully to the institution of Christmas, sometimes with comical and Scrooge-like results. In this way, Christmas is a litmus test of ideological rigidity.

So who fits this bill? Think to yourself: if you were a child, who is the last person in the world you would want telling you Christmas stories, or explaining Christmas to you? Any clear thinking person should immediately think of Christopher Hitchens.

Imagine a small boy on Christmas eve, with a boozed up, clammy Hitchens sitting at the foot of his bed, swirling a scotch and a meditatively smoking a cigarette. “Mr.Hitchens,” the boy asks innocently, “what’s the meaning of Christmas?”. To which Hitchens would grumpily reply “My dear boy,…

I never cease to be amazed by how little the Bible-believing Protestants, who constitute most of the soldiery in the Christmas wars, know about their own tradition. Under the rule of the Puritan Revolution in the England of Oliver Cromwell (ancestor in many ways of the Pilgrim Fathers) the celebration of Christmas was banned outright. This was for three reasons: the December fiesta was actually the honoring of Paganism in disguise, and a descendant of the old rites of the Winter Solstice. Then, it was also a manifestation of Popery and superstition (the “Christ-Mass”). Finally, it was an excuse for the riff-raff to get drunk and over-indulge in general. Only the last part seems to have truly survived into our present day…

…None of the four gospels gives any notion of what time of year (let alone in what year) the supposed Nativity occurred. Only two gospels mention the virginity of Mary and only one has any mention of a “manger”. Nowhere is there any record of a “stable”. Wise men and shepherds are likewise very unevenly distributed throughout the discrepant accounts….Moreover, the erection of this exhibit near the turn of the year is actually a placation of the old Norse gods of the winter solstice – or “Yule” as the pre-Christians sometimes called it.

He would probably top that off with a diatribe about how we’re all better off that Santa Claus does not exist; “he knows when your sleeping, knows when your awake, keeps a list of enemies and allies labeled ‘naughty’ or ‘nice’; I should rather not live under such a totalitarian regime, thank you very much!”

Or if Hitchens were unavailable, imagine having the atomistic and uber-logical mind of Robin Hanson explain Santa Claus to you as a child. Think of poor Robin’s child when he asks “How does Santa deliver all those toys in one night?”. Of course the child would not receive the standard fairy tale explanation, but rather a realist analysis of what it would mean if a man could deliver all those toys in one night, and, given that a man can do that, the morality of his decision to do so:

consider what you could accomplish with such capabilities. Toward the naughty side, you could achieve a military takeover of most of the world, and maintain totalitarian control thereafter. Cooperative homes get good stuff; uncooperative homes get bombs; pretty soon they’d fall in line.

On the nice side, you could deliver food, medicine, tools, and self-defense weapons to a bottom billion of the world’s poor, sick, or oppressed. You could also identify and punish the world’s corrupt and criminal, and reward the innovative and generous…

…So what does Santa actually do? He gives toys to billions of children, mostly ignoring adults. He gives far more to rich kids than to poor kids, and he greatly favors cultures that celebrate his name over others..

…he prefers to help high status folks who celebrate his eccentric contribution. Apparently even in our dreams this is about as much as we dare hope for from a human, no matter how powerful. Deep down we know human charity is not about help, even if it does sometimes help.

“…Goodnight, son” he might end, leaving a terrified child to lay awake and wonder about the immorality and totalitarianism of Santa, and what that means about the ultimate shallowness of human charity.

Megan McArdle doesn’t understand the politics of this health care bill:

“No bill this large has ever before passed on a straight party-line vote, or even anything close to a straight party-line vote.  No bill this unpopular has ever before passed on a straight party-line vote.  We’re in a new political world.  I’m not sure I understand it.”

Perhaps some of the handouts for particular states, detailed by the New York Times today, help to explain the seeming political suicide some congressman are willing to make. Apparently the bill has some vague provisions where “beneficiaries are identified in a cryptic, mysterious way”. I find “cryptic” and “mysterious” to be troubling descriptions in this context.

David Axelrod doesn’t deny the existence of such handouts, arguing that

…the provisions benefiting specific states, like Nebraska, and favored constituencies were a natural part of the legislative process.

“Every senator uses whatever leverage they have to help their states,” Mr. Axelrod said on the CNN program “State of the Union.” “That’s the way it has been. That’s the way it will always be.”

Well as long as it’s a natural part of the legislative process….

Some of the provisions are obviously inefficient. For instance, medicare payments will be increased for states where 50% of the counties are “frontier counties”, meaning they have a population density of less than 6 people per square mile. Is there any reason whatsoever that it would be done this way rather than simply increasing medicare payments to all counties with some given population density? What about the “frontier counties” in other states? Should their hospitals receive less medicare payments than those in Billings, with it’s population density of 2,500 people per square mile? Oh right, doing it this way buys the maximum political support from Montana, North Dakota, South Dakota, Utah, and Wyoming.

Like spoiled children with too many presents on Christmas morning, the amount of handouts in the bill must have been so overwhelming that congressman began to lose track of what gift  is for who. For instance, one particular hundred million dollar gift seems to be generating some confusion:

Another provision would give $100 million to an unnamed “health care facility” affiliated with an academic health center at a public research university in a state where there is only one public medical and dental school.

Senators and their aides said on Sunday that they were not sure who would qualify for this money or who had requested it.

The problem with these handouts is that they are going to generate even less complaints than defense handouts do, because it’s a lot harder to get mad about $100 million for a health care facility than it is for a $100 million space laser or some failed helicopter project. I mean, who is going to complain about money going to medical treatment for workers exposed to asbestos in a vermiculite mine? Similarly, can you picture anyone angrily declaring “the government is building another childrens’ hospital!? My god, this is what my tax dollars are going to? Curing diseases for children!?” And to a certain extent, there’s a good reason why few people would make that complaint; we obviously want to cure sick childrens’ diseases, and we want there to be enough health care facilities.  But there is such a thing is too much of this stuff,  and there is an unlimited supply of lobbying for it, which suggests to me that we will be getting quite a bit more than “enough” health care facilities in the future.

Has anyone coined the phrase health-care-industrial-complex yet?

The L.A. Times reports on nepotism in California’s public sector:

Lawmakers have broad powers to hire whomever they wish, and those they employ need not go through the Civil Service exam process that requires applicants to compete for jobs on merit. Some are paid as consultants, with vague responsibilities or assignments. Others have titles that bear little relationship to what they actually do.

At least a dozen political allies, relatives and friends of legislators, including political candidates in need of a salaried landing or launch pad between elections, were on the legislative roster last year at a cost of $754,000.

Not really anything new or surprising here. Just a friendly reminder of government waste and cronyism to feed the populist backlash. Something to think about while you sharpen your pitchforks.

I hear it said often these days that our country has become “ungovernable”. We can’t get the serious reforms we need because both parties are so desperately unwilling to make their constituents face up to the costs our long-term problems. What’s the solution? Uwe Reinhardt suggests that with drug reimportation, some politicians are essentially trying to outsource health care policy:

American politicians who support importing drugs from countries with lower, government-controlled prices — including the reimportation of American-made drugs originally exported to these countries — effectively ask the governments of these countries to do for American politicians what the latter are either unwilling or powerless to do at home.

It may be a nifty political expedient; but it is camouflage for a truly bizarre form of health policy.

I don’t think this policy is a good idea. But I am intrigued by the idea of outsourcing tough choices to countries with political systems capable of making them. I once had a micro professor, who does a lot of work in mechanism design, try to convince my class that an optimal policies could be designed where other County A’s policies are decided by popular vote in Country B. I think this scenario is a long way from there, since Country B (Canada) made the policy choice for themself, and we (Country A) are just trying to piggyback on it. But this type of solution, where we can import a policy decision, may be our best option.

Here’s another suggestion. Since we can’t seem to free ourselves from occupational licensing, especially in medicine, we should start making bilateral treaties where we agree to recognize the occupational licensing of other countries. Start small and not scary; like treaties with England and France. This will lead to a competitive advantage for the educational systems in the countries with the least burdrnsome licensing; why spend 8 years getting your degree in Country A, when you can get it in Country B in 6, then practice in Country A.

Of course this would be good at a state level too, but it might be politically easier at the federal level. In either case, it’s time to start thinking creatively about how to govern the ungovernable.

HT: Greg Mankiw

Andrew Gelman peers into the land of economists from the land of statisticians and wonders why everyone is arguing over a policy that will never ever happen. It probably looks a little like listening to two cancer doctors argue over whether we could cure a poisonous bite from an alien. “What?!? Why are you arguing about that? Don’t you have cancers to cure?”

I think I can help explain some of the underlying impulsion going on here. I apologize in advance for the gross generalizations that follow.

Libertarian economists who are arguing that decreasing the minimum wage would increase unemployment want a cudgel with which to bash liberal economists who are arguing for a variety of fiscal stimulus. This puts liberals into the position of either accepting that the minimum wage should be cut -and ooh that stings to a liberal!- or admitting that their primary goal isn’t really creating jobs, but rather promoting progressive policies (this is the secret suspicion of libertarians everywhere). This would be a bitter pill to swallow for liberals, and they would hate to give libertarians that satisfaction, so they are fighting back tooth-and-nail, declaring  “when you’re in a liquidity trap if prices go down quantity goes down too, and then the sun turns into a supernova!”

Let me put the phenomenon in a general framework: it’s gratifying to believe that your own group has the solution to a problem, but the ideology of the other group is getting in the way, especially when the other group is promoting their own solutions to the problem that conform with their ideology but are aggravating to your ideology.

This is why libertarian economists LOVE arguing about carbon taxes with environmentalists; to economists the solution to global warming is simple, and it does not involve micromanagement, moralizing, and making a lifestyle out of environmentalism- things the libertarian minded economist does not like. So environmentalists must either accept that economists have a solution that is better than all of the other policies and behaviors environmentalists spend so much of their time arguing for, or admit the environment really isn’t their primary concern. That is satisfying to the economist.

Paul Krugman once did a good job of explaining why economists overemphasize some issues that I think is in a similar vein to my theory:

But there’s also something going on with economists, a phenomenon I recognize wearing my other hat: the tendency to place excessive weight on issues where professional judgment differs from lay opinion.

The classic example is free trade versus protectionism. Economists are justly proud of the close reasoning that produced the classical case for free trade, and love to skewer dumb protectionist arguments. I’ve done it myself.

But all too often, economists then become like the little boy with a hammer, to whom everything looks like a nail. Because protectionism is an issue on which they believe they have some special insight, they inflate its importance, and make free trade versus protectionism THE crucial issue in economic policy — which it isn’t.

So I think that’s part of the motivation. The other part is that it is fun to argue about these things, and flex your fundamental economic-theory-muscles. Notice none of the tools being used are very complicated; it’s elementary partial or general equilibrium analysis. Nor is the policy being debated something abstract or complicated to intuit; “what are the effects of the minimum wage in a recession?” is a fundamental topic. There’s a beauty in the simplicity of an argument as pure and fundamental as this when so much of what economists do and are trained to do is complex, abstract, and in pursuit of unintuitive goals like maximizing the utility of an infinitely lived representative agent. In a way that I can’t really explain, it’s a little like watching a lightsaber fight. Jedis spend their lives learning to be one with the universe, see the future, and becoming masters at piloting complicated flying machines, but in the end, all those deep and complex skills all get boiled down to a sword fight.

[Hat tip to Mark Thoma on the Andrew Gelman post]

An op-ed from Paul Steinberg in the New York Times a few days ago discusses the fact that families of soldiers who have committed suicide do not receive presidential condolence letters. The concern is that actions taken to commemorate or honor people who commit suicide will encourage more suicides. Steinberg writes

“The hard truth is that any possible glorification of suicide — even reports of suicide — make the taking of one’s life a more viable option. If suicide appears to be a more reasonable way of handling life’s stresses than seeking help, then suicide rates increase.”

The theory that the publicity of suicides can cause more suicides is known as “the Werther effect”, after Johann Wolfgang von Goethe’s The Sufferings of Young Werther. According to Robert Cialidini’s book Influence, when the Goethe’s novel about the suicide of Werther was published, it set off a wave of copycat suicides.

Evidence for the theory was first offered by David Phillips in 1974 (gated version of the paper here). He found that suicides dramatically increase after a story about a suicide makes the front page New York Times. His estimate was that after each front page story, 58 more people kill themselves than otherwise would have. The idea is that finding out that someone else has killed themself gives people considering suicide the impetus to do it themselves. He later found that suicides also increased the number of deaths from car accidents. The theory here is that drivers are wrecking their cars as a way to kill themselves.

This theory is believable enough. And it makes sense to take such things into consideration when deciding how to commemorate and honor soldiers who have taken the own lives. Where things become slightly unbelievable is another of Phillips findings; that commercial airplane crashes increase after publicity of suicides. My instinct would be to interpret this statistical result the exact opposite way that Phillips did; I would take it as calling into question the validity of the original model, and thus the original result that publicity of suicides cause more suicides.

A common approach economists take to testing an empirical model sensible is to test whether they can find a relationship by plugging in something similar to the dependent variable they are investigating, but that couldn’t possibly be affected by the explanatory variables at hand. If you find an effect when it is not plausible, then something may be wrong with the model.  For instance, say someone has what they think is a good exogenous proxy measure for Wal-Mart store openings, and they find it has a negative effect on retail employment. A good test of this would be to see if the instrument effects manufacturing employment, which, like retail employment, would be related with overall economic growth but would not plausibly effected by a Wal-Mart opening (This exact study was done in this paper by Emek Basker). If you find your proxy variable for Wal-Mart openings has a strong effect on manufacturing employment, then something is probably wrong with the model or the proxy measure, and your previous results are called into question.

So if I found that publicized suicides were causing more suicides, and more car accidents, as Phillips does, I would test it against something similar that it wouldn’t likely be affecting, like commercial airplane crashes, or even better, boat crashes. If I found a positive effect, I would question my model’s specification, not assume that I had found some new effect of suicides.

The reason I find it so unbelievable that suicides cause commercial plane crashes is the (what seems to me) lack of any specific plane crashes that can be blamed on a pilot’s suicide. If this was occurring so frequently, then surely there must be specific cases where an after-the-fact investigation cited suicide as a probable or even possible cause for the plane crash. In one of his papers, Phillips calls for interviews with family members of people who have recently committed suicide to see if the story holds up. This kind of evidence may well exist for plane crashes, and if I did I would reconsider the hypothesis. But a result like this can’t stand on the statistical evidence alone.

According to Jane Pirkis, of the University of Melbourne, over 100 studies have been conducted to examine the impact of media reporting on suicides, and that the evidence overwhelmingly supports the causal relationship. I am curious if any of these look at commercial plane crashes, and if that relationship is robust. Robert Cialdini certainly finds the evidence persuasive. It seems like the question of whether or not publicized suicides cause plane crashes is something we would like to have an answer to, especially when considering policies regarding how honor those who have killed themselves.  In addition, if the result is sound, it seems we should be a lot more critical of the media for sensationalizing suicides.

It may well be that this result is long settled and the hypothesis rejected, and that I am simply unaware of it. If so, Robert Cialdini is incorrect. If this is not the case, then I think awareness of this potential problem is far too low.

David Stevens has the answer I was looking for to my question: how can price discrimination exist if everyone pays the same price? He writes

The market segmentation comes from Philips Intl charging the same price to all markets despite different distribution costs. Consumers in a distant country essentially get a discount because normally higher transport costs are not reflected in the price. Consumers in a neighboring country to Philips Intl end up paying a relatively higher price when their transport costs are lower, but not reflected by a lower price.

The short answer I was looking for is “free shipping”. The story need not be international shipping either, as long as shipping costs are increasing (or decreasing!) with distance.

Phlips comes from Louis Phlips, who wrote a classic book called “The economics of price discrimination”, where I first read about this counterintuitive kind of price discrimination.

Good work David. There were other good guesses as well.

Felix wonders why anyone would turn the offer of $80,000 to delay starting work at a law firm for one year. My guess is they don’t want to send a negative signal to their employers. Declining the offer signals a passion for the work, that they are eager to get started, etc. Accepting the offer signals that the person would rather be on vacation.

For future promotions, and the chance at making partner in the future, this signal probably matters. It’s sort of a really really expensive version of your boss asking “want to take lunch early today?” and you saying “you know, I’m really into what I’m doing right now, I think I’m going to work through lunch today”.

Even still, it takes a crazy person to turn that offer down.

Phlips International makes widgets, and nothing but widgets. Each widget is produced the exact same way, rolls off the assembly line and is packaged exactly the same way. They only make and sell one model of widget, and they always charge the same price: $100. Nobody ever pays a different price, and anyone can buy them. Yet Phlips is practicing price discrimination when they sell this widget to customers. How can this be?

[UPDATE:  Forgot to mention they produce at constant returns to scale]

The city of Pittsburgh is apparently looking to tax college tuition in order to pay the pensions of retired public sector employees. In a way, this is an impressive feat; it would actually be difficult to design a less optimal use of taxing and spending. Maybe if you directly taxed literacy and used the money to subsidize illiteracy it would be worse. You could tax good parenting and subsize child abuse. Maybe if you taxed recycling and subsidized pouring motor oil into bodies of water it would be worse. Either way, impressive feat, Pittsburgh.

Robin Hanson has questions

We usually see strong correlations between death and smoking, and we see those same correlations within each random arm (i.e., group) of a randomized trial.  Nevertheless, we see no significant net death differences between control arms and arms induced to smoke less.

So we don’t have clear evidence that smoking kills on net; it could be that most or all of the death-smoking correlation is due to selection effects, and not smoking causing death

Digging through the literature this question is shockingly open, but I did manage to track down at least one study that shows a reduction in all cause mortality from smoking cessation.


Background: Randomized clinical trials have not yet demonstrated the mortality benefit of smoking cessation. (KS: This study was completed in 2005!)

Objective: To assess the long-term effect on mortality of a randomly applied smoking cessation program.

Design: The Lung Health Study was a randomized clinical trial of smoking cessation. Special intervention participants received the smoking intervention program and were compared with usual care participants. Vital status was followed up to 14.5 years.

Setting: 10 clinical centers in the United States and Canada.

Patients: 5887 middle-aged volunteers with asymptomatic airway obstruction.

Measurements: All-cause mortality and mortality due to cardiovascular disease, lung cancer, and other respiratory disease.

Intervention: The intervention was a 10-week smoking cessation program that included a strong physician message and 12 group sessions using behavior modification and nicotine gum, plus either ipratropium or a placebo inhaler.

Results: At 5 years, 21.7% of special intervention participants had stopped smoking since study entry compared with 5.4% of usual care participants. After up to 14.5 years of follow-up, 731 patients died: 33% of lung cancer, 22% of cardiovascular disease, 7.8% of respiratory disease other than cancer, and 2.3% of unknown causes. All-cause mortality was significantly lower in the special intervention group than in the usual care group (8.83 per 1000 person-years vs. 10.38 per 1000 person-years; P = 0.03). The hazard ratio for mortality in the usual care group compared with the special intervention group was 1.18 (95% CI, 1.02 to 1.37). Differences in death rates for both lung cancer and cardiovascular disease were greater when death rates were analyzed by smoking habit.

So it does seem that smoking in and of itself kills. What’s truly scary to me is how seemingly difficult it is to get these studies done. The public good here is clear, knowledge about what does and does not cause cancer, heart disease, stroke, is a non-rivalous and non-excludable input into health.

In one of Adam’s posts on housing Myron says

Every person who buys a home is making an investment. Period. It is also the largest investment most people make in their lifetime. The “dream of home ownership” should more accurately be “the dream of using leverage (OPM)”.

I think there is quite a bit of truth to this. I think we are getting to a point where the high social cost of leverage is being appreciated. However, I still think there is wide spread underestimation of the low private cost. Your creditors can’t get blood out of a turnip and you can’t end up with less than nothing. Thus, your losses when using Other People’s Money are inherently limited.

This means virtually all borrowers have an incentive to overborrow. This in turn is why risk evaluation is one the key functions of banks. It is also why collateral values are of systemic importance.  Higher collateral values effectively put blood in to the turnip and reduce the distance between lender and borrower optimums. Falling collateral values do just the opposite.

When home prices go down the world really has suffered a structural change. There is now more distance between what is in the borrowers interest and what is in the lenders interest. This distance acts as a tax on the market for loanable funds.

More fun facts from the Pew survey I linked to yesterday. It turns out that the more educated you are, the more likely you are to have visited a fortune teller. It could just be randomness, or maybe it’s some other variable… Or maybe it’s the notorious pro-fortune telling bias of academia. Either way, a college education can clearly only teach you so much. That’s what my fortune teller always says anyway.

If opinions on the shape of the earth did differ would it be the place of journalists to choose a side? What if they chose the wrong side? What if they ended up supporting a war over non-existent weapons of mass destruction? Is that a possibility that should concern us?

Derek Thompson posts this chart


and then says

As James Fallows pointed out here during the climate scientists’ email scandal, the New York Times treated global warming as a problem, and the Washington Post treated it more like a debate. This is silly. Global warming isn’t a debate. (and it’s alarming to watch the Washington Post sacrifice its integrity for some editorial hot air.)

Really? Are we to believe that the nearly 50-50 split among the American public is solely over the discount rate that we should use? 42 per cent says a Stern-like .01% , while the rest want to use the government’s long term average cost of funds?

I tend to think that there is genuine disagreement over the causes and consequences of global warming itself. This disagreement leads to differing assessments of what we should do to tackle the problem.

Now, Thompson might think that the 51% are tragically misinformed and that anyone who knows anything, knows that major action is needed now. Perhaps, he is even correct. However, that doesn’t make it “not a debate.”

According, to Greg Mankiw 93% of economists believe that raising tariffs decreases the general welfare. I am betting that most economic journalists believe the same thing. Promoting protectionism is a surefire way of getting yourself labeled an economic bumpkin. 

However, it would be madness to suggest that there is not a debate over protectionism in the United States. That well meaning people do not advocate for limits on what is imported in this country. Nor is it clear that if it was put to a vote, that broad free trade agreements would win.

I think Felix and I are coming to agreement about housing as an investment, thanks to Ryan Avent at The Economist, who attempts to provide a grand unifying theory of housing investment. Let me give a few final thoughts on this issue, and hopefully make this my last on this topic.

Felix suggests, for the most part correctly, that I would agree with this statement by Ryan:

“Sure, it’s fine to think of homes as investments, so long as the kind of investment you have in mind is the highly risky sort you wouldn’t recommend to anyone who didn’t have the ample knowledge and financial cushion you’d expect to see in a successful entrepreneur. And that does not describe most potential homeowners.”

I certainly agree with the general sentiment that homeowners should know the risks, understand fully what they’re getting into, and have some financial safety nets in the event of an income shock. However, I can’t agree that only people aware of the risks and with ample financial cushions should think of homes as investments. In fact,  quite the opposite, I think the people who most need to think of a home as an investment are those who are unaware of the risks, don’t have a financial cushion, but are going to do it anyway.

Felix and Ryan may think we should tell people like this not to buy homes at all, but we don’t know their preferences. Remember, buying a house is an investment and consumption, and whether or not someone should buy a house depends on how much they value owning versus renting. (I don’t think we need to get into the non-financial reasons people value homeowning, but one important reason is that the stock of homes to buy is systematically different than the stock of homes to rent, and people may be unable to rent a home they like in a neighborhood a want.)

Felix gets at the core problem with home buying, and I think the thing that is both his and my biggest concern, when he argues that buyers aren’t thinking about the decision like they should be. He says that

“…no one ever buys a house with their eyes that wide open, fully cognizant that they are taking a calculated risk in which they know full well that there’s a non-trivial probability that the consequences of their “investment” will be foreclosure, bankruptcy, and homelessness. Investments don’t work like that: if you’ve laboriously saved up enough money to scrape together a downpayment on a home, that’s money you’re not going to gamble. The number of people genuinely comfortable with taking that kind of downside risk is basically zero, as it should be.”

And he may be right, most homebuyers may be completely underestimating the probability of a worst-case scenario, or may not be considering that at all. I would be very interested in seeing a study that looks at that, and I think Felix is probably correct. Either way, even if the majority of homebuyers are fully aware of their risks, surely many many homebuyers aren’t.

But what’s the solution to that problem? As I’ve said, you can’t a priori argue that people shouldn’t buy homes, since we don’t know their preferences, but what you can do is argue that people should make the decision, as Felix puts it, with their eyes wide open.

This means that potential home buyers should consider, to name just  a few things, their income and job stability, the covariance -if any- between the home price and their income, the covariance between their house value and their existing investments, whether or not the home could be rented in the event of an income shock, the expected path of future prices based on their private knowledge and/or knowledge of their realtor, the expected future rental opportunity costs, and more. In short, they should be thinking of a home like an investment as well as consumption. If more people thought like this we would almost certainly have many fewer homebuyers, more renters, and fewer foreclosures.

I think Felix will agree with most of that. So let me discuss one last area where we may still have disagreement.

Since most buyers will choose to sell at some point, and even those who don’t plan on it should consider the scenario in the case of a severe income shock, the difference between what they pay for their house and what it will or could sell for is an important consideration.  I think, probably, that Felix would agree that housing markets are not perfect, and that unlike commodities there isn’t just an obvious observable market price for a home that represents the best possible information about it. If this were so, then people would not need to hire realtors to negotiate for them and tell them whether a seller’s offer is a good one. This lack of an observable market price means that the buyers private expectations of the homes future price, and/or their realtor or other expert’s expectation, is often important information, and may actually be a better estimate than the seller’s offer price. This means buyers can reasonably believe that homes will have negative or positive appreciation, or at least a probability distribution with a positive or negative expected value. These valuations are definitely uncertain, and buyers should recognize that, but that does not mean buyers should, or can, be agnostic about them; especially since it may be the best information available.

I think Felix would well agree that if someone believes that the value of a home is going to go down by 25% in the next 10 years, then even if that fact is not implicit in the buyers selling price they probably shouldn’t buy it. Thus they should have preferences over the future returns of the asset if those returns are negative. Where I think Felix and I disagree is that buyers should have preferences over future returns if they are expected to be positive as well. For instance, a home with 10% expected appreciation should, ceterus paribus, be valued more highly by a buyer than an identical home with 0% expected appreciation. Thus on the margin, homebuyers should take expected financial returns into consideration, which is very specifically thinking of it as an investment. In the same way, someone who -with their eyes wide open to the risks- is otherwise indifferent between buying and renting may decide to buy based on their beliefs about the expected appreciation of the home. Even if the individual is, somehow, indifferent to the monetary value of those returns, they should still have preferences over them because an appreciating home makes it less likely that the buyer will have to foreclose in the case of some unforseen events, because they will be more likely to be able to sell it and not ruin their credit.

There’s a welfare impact when movie theaters charge higher prices for popcorn, that much is obvious. The intuitive guess would be that the movie theater benefits and customers lose out; consumer surplus goes down, producer surplus goes up. The slightly more nuanced take is that consumers are also better off, because if the theater couldn’t charge a price above marginal cost, then they wouldn’t be able to cover their fixed costs and therefore wouldn’t sell popcorn at all. But say that the price is already high enough that fixed costs are covered so that the movie theater would be willing to supply popcorn. Surely, any price increase above that must benefit only the producers at the expense of consumers, right?

It turns out that even at the margin, and even given that price is already high enough to cover costs, higher popcorn prices may make consumers overall better off. How can this be? This paper explains that total consumer welfare can go up when producers use “metered” price discrimination. This is where consumers are charged more for “aftermarket goods” (the popcorn) and charged less for the primary good (the movie ticket). This type of pricing scheme can benefit both producers and consumers; the theater can charge a lower ticket price, which means that some consumers who would have been priced out of seeing the movie instead choose to attend the movie at the lower price. The paper provides evidence that this type of price discrimination is in fact occurring.

So the next time you’re barely willing to pay the ticket price to see a movie, thank the customers grumbling about their $10 buckets of popcorn.

A new Pew survey reports on Americans’ increasing belief in the paranormal. According to the chart below, the number of people who were “in touch” with a dead person has increased by 11 percentage points, and the number of people who have seen a ghost has doubled. To the skeptical, rational, scientifically minded this presents an interesting empirical question: why are ghosts increasingly appearing before and communicating with the living? Are they trying to warn us about something?  2012? Can we get an X-Prize to answer this question?

HT Charles Blow

I’ve written about the different theories to explain Black Friday sales before, and how none of the leading theories predict that retailers would want to keep some sales secret. In fact, the loss-leader model, which has the most empirical evidence in it’s favor, specifically predicts that stores will advertise their deepest discounts to lure shoppers. Thinking and discussing this issue recently, I have a simple theory as to why stores would keep their prices secret, and a new explanation for the allegedly higher price elasticity during the holidays. (I say allegedly higher price elasticity because I have yet to see empirical evidence for this. If anyone knows of any, please send it along.)

The first question is: do stores really want to keep their biggest sales secret? According to Wikipedia, Wal-Mart, Target, Office Max, Big Lots, and Staples have gone so far as to insist that their Black Friday price lists are copyrighted. They have even used the Digital Millenium Copyright Act to have take-down notices issued to websites posting the sales list. So yes, they very much want to keep their discounts a secret.

Arnold Kling has written before that Black Friday crowds work as separating mechanism to keep less price sensitive shoppers, to whom they can usually charge a higher price, from taking advantage of the discounts. I think the secret sales also work as a separating mechanism. Since they don’t know what will be discounted,  the secret nature of the sales lure in shoppers looking for the cheapest deals on a wide range of goods, not necessarily looking for a specific product. This is good because stores want the buyers of their largest discounted products to be people who wouldn’t have otherwise bought that product. If you announce in advance which products will be discounted, then the buyers who will get the highest return from coming to the store are those that were already planning on buying that product.

For instance, if on Black Friday a store discounts Sony’s 60 inch LCDTV 30%, anyone who was planning on buying that TV would have a huge incentive to go to that store on Black Friday. Thus the proportion of buyers who would otherwise have bought that TV are high. If they don’t announce the discounts, then you won’t be providing those specific buyers with incentive to come in, and thus the cannibalization rate will be lower.

This brings me to the novel, and seemingly obvious, explanation for the higher price elasticity during the holidays; because you’re buying gifts for someone else you are much more indifferent between products. To someone shopping for a TV for herself, a recliner makes a pretty poor substitute. If she’s looking to spend $800 on a gift for your husband, then they are actually pretty decent substitutes. During the Holidays many more products are good substitutes for each other than they are during other parts of the year. Tell me this, is there any other time during the year other than Christmas when a pair of slippers is a good  substitute for a box of cigars?

There’s a whole other discussion to be had about why people are more indifferent between products when buying them as gifts for others, including signalling theories, limited information about preferences, etc. But it seems obviously true enough that I’ll leave it there for now.

Currently, we face a situation where the fate of the poorest Americans would be better off had they been paying more in taxes.

The biggest problem facing low income Americans today is the paucity of job openings. There is strong reason to think that additional government stimulus could help that. Yet, the effort to increase stimulus has been stymied by concerns over the US debt-to-GDP ratio.

Yet, if we look back on the past decade a low flat 5% consumption tax would have eliminated most of the debt. No doubt low income households would have been worse off paying such a tax. However, they are much worse off without the possibility of stimulus, today.

When we think of helping lower income households we typically think of transferring wealth from the rich to the poor. However, perhaps more useful is transferring wealth between the poor under different circumstances. Taking more from the poor when times are good and giving more when times are bad.  Providing low income households with this type of consumption smoothing is at the margin likely eliminate much more hardship then small increases in wealth.

Tyler Cowen’s newish book, Create Your Own Economy: TPTPIADW*, has a big heart. It’s a passionate appeal for tolerance and understanding of autistics, a group he sees as unjustly stigmatized. He advocates for the autistic cognitive style in the name of societal and personal self-interest. He’s also simply offering a scientifically superior understanding autism than popular perception provides, but ultimately his aim seems to be more compassion and appreciation for a group our culture treats poorly. For a guy who could have written a book about literally anything, from the folk art of 18th century Peruvian chinchilla farmers to dynamic stochastic general equilibrium real business cycle models, I think his choice to fight this worthy fight is praiseworthy in itself…. Then again, perhaps the book was nothing more than an elaborate attempt to defend atonal music.

That said, Tyler Cowen has clearly never worked in a grocery store. In CYOE he argues that milk is placed in the back of the grocery store to “spur impulse purchases of candy and soda as you walk to get your dairy”, but to anyone**  who has worked in a grocery store, this is clearly not the most plausible hypothesis. Having spent some teenage years working in a grocery store -albeit not in the dairy department, but in the nearby meat and seafood department-, I think I can debunk what I am going to term “the behavioral milk fallacy”.

The central facts are that milk is heavy, has a high turnover, and requires cold storage. Thus any intra-store transportation of the milk requires a lot of MPMPSS (milk pound meters per second-squared) of energy, which translates into more labor hours. This means that displaying milk far from where it is stored, or storing it far from where it is loaded, is expensive.

This answers the first part of the question: why you will rarely see milk on the interior of the grocery store, but rather on an exterior wall. This is done because it allows the rear of the display case have an adjoined a storage room. From this room milk can be loaded from cold storage directly into the display case from behind. Milk is therefore stocked while minimizing it’s expensive transportation costs.

In addition, the high cost of intra-store milk transportation explains the second part of the question: why, of all the exterior walls, milk is usually stored on the one in the rear of the store. This is not to force customers to walk past other food and lure them into impulse buys, but because the back of the store is where milk is unloaded from delivery trucks. It would simply be much more expensive to store milk on any exterior wall other than the one closest to where it is delivered.

In short, it is all about technology and transportation costs, not behavioral economics.

*For someone who has praised books for forgoing subtitles, this is a mouthful.

**I say anyone, but I mean anyone except the bakery workers, who quite frankly have no clue whats going on, am I right meat and seafood people?

Matt Yglesias is frustrated at occupational licensing:

unlike caps on greenhouse gas pollution or taxes that finance public services, there’s no real value in these regulations. Your average citizen is not closely monitoring the state of hearing aid dealer regulation, the only people paying attention to these bodies and lobbying their members are the incumbent stakeholders trying to insulate themselves from competition.

The unbalance of interest between consumers and industry groups on this issue has always made it seem rather intractable. As an area where, what Arnold Kling calls, technocratic liberals and libertarians agree, who has the best solution to this problem? My guess is that the technocratic liberal solution is a federal law restricting occupational licensing, while the libertarian solution is that states should allow counties the autonomy to set these laws, and competition between counties will drive them out. I’m not sure either is tractable, or sustainable.

Both sides would agree though, that a first step is a public awareness that this is even a problem. So bravo to Yglesias for this.

Jonathan Gruber and Helen Levy have a paper in the Fall ’09 Journal of Economic Perspectives on the risk of high medical spending households face, and how that has changed over time. They show that private health spending per capita has gone from $700 in 1960 to $3,500 in 2007, and government health spending has gone from $250 to $3,500 in the same period. Meanwhile, out-of-pocket spending has merely doubled. Almost all of the increase in private spending is due to higher insurance.

They conclude that

“the real problem facing the health insurance system in the United States is not so much the risk of high spending by individual households as the systematic risk of increasing aggregate spending. Much of the public discussion about health insurance reform focuses on inadequate coverage, but uninsurance is not obviously worse than it once was, and public policy has stepped in to fill important gaps…The fact that the real problem is systematic risk rather than individual risk may explain a paradox of the current debate: while everyone claims to believe that the health care system is broken, a large chunk of citizens seem none to excited about fixing it.”

Perhaps exposing more individuals to the actual risks of rising healthcare costs a necessary step to getting political support for the radical reforms we probably need. As long as individuals are shielded from directly bearing the costs the political will may never be there. Related question, will politicians ever be able to pass a policy whose goal is to expose voters to true costs? Hiding costs from voters seems to be a primary policy goal in our country.

Felix provides some counterarguments, and a dash of -probably deserved- snark, to my defense of housing investment. I’ll try and respond, sans snark but with graphs.

One of his main points, which he’s argued before and I’ve seen other commenters echo, is that if you buy a house and it’s value goes up it doesn’t matter unless you sell it and move far away, because in“an up market, it doesn’t matter much either. Yes, that gentrifying neighborhood is going up in value. But so’s the old-money neighborhood a mile away, and so’s everything else in a 20-mile radius”; and “you may or may not have any desire to sell in ten years’ time. And even if you do sell, there’s a very good chance that you’ll just end up buying another house elsewhere, which will be similarly more expensive. “ Similarly, Matt Yglesias argues that

“…no matter what happens to the price of your home, it’s very hard to actually take advantage of any gains you may make. Bubbles aside, property values in a given metro area really can separate from the national trend in a fundamental way. Over the past several decades, the Detroit area has become a much less attractive place to live relative to the national average and some other cities have become more attractive relative to others. So you can “make money” buy buying property in a city whose attractiveness increases relative to the average. But how are you going to realize these gains? By moving to Detroit?”

The idea that the only way to get the financial value out of a house that has appreciated is by moving out of that city, because you’ll either have to rent or buy a similarly appreciated house, is wrong for several reasons.

Yes, in general, submarket prices tend to follow the metro level trend, but it’s relative appreciation that matters, and there can be a large disparity on a submarket level within a metro area. For instance, the chart below shows median home price sales in Philadelphia submarkets from 1995 to 2007 from a study I worked on. As you can see, in 2001 the median prices in West Philly, South Philly, and North Philly were about the same. By 2007, prices in South Philly were 50% higher than prices in the other two areas. Granted, since then we have probably seen some mean reversion, but not enough to do real damage to that relative gain.

You don’t need to be in a bubble to see such divergence either. From 1997 to 2000 University City had huge gains over the Lower Northeast, despite starting from identical and stable median prices.

The relative appreciation is even more stark in the chart below which uses much smaller geographic areas in the same time period.

So yes, prices in all neighborhoods tend go up together, but relative differences in appreciation between submarkets and neighborhoods within a metro area can be huge.

This is beside the point however, since even if all homes within a metro area appreciated at exactly the same rate it would still be possible to fincially gain from a housing investment. If you bought a house with an NPV based on one rent, and rental prices subsequently go up, then every month you’re getting financial value out of your investment by avoiding higher rent payments. Yes, Felix is correct, this can work in the opposite direction. But this is the nature of investments, they are uncertain. Pointing that out doesn’t make them not investments.

Another counterpoint to the notion that higher home prices screw your future self out of financial gains from the rising value of your home, is that if home prices go up in the future you’re going to have to pay a higher price to rent or buy regardless whether or not you buy a house today. It’s a sunk cost in this calculation. You can either have benefited from the price rise by purchasing a house when prices were low, or you can have not benefitted by renting at the rising market price. Either way, you face the same higher future prices. You’ll either buy a more expensive house or rent a more expensive house, except in one situation you’ll have an asset worth more than you paid for it.

Another of his other main points seems to be that there are a lot of ways to lose money when investing in housing, and a lot of people do so. For instance:

“Remember that it’s sometimes not a good idea to buy a house even if your total monthly payments are lower than what you would be paying in rent on the same place. If prices fall, rents can fall too… If only you’d held off buying, your monthlies would be lower while renting, and you could buy now, if you were so inclined, at a lower price.”


“When unemployment is high, there’s a premium on mobility and the ability to go where the jobs are. Houses, by contrast, tend to tie people to one spot. And what happens if your neighborhood goes in the opposite direction to the one you’d hoped for, with crime increasing and all those overextended boutiques and coffee shops moving out? Try asking anybody who owns a home in Detroit whether houses are a good investment.”

He also points out that many homebuyers who beleived they were “investing” based on their “local knowledge” were actually just suffering from confirmation bias, and mistook rising prices in a bubble for investor savvy. I agree, and based on my anecdotal observations, this is in fact endemic, and not only to housing investments, but stocks and pretty much anywhere else people invest. People mistake noise for skill; it’s a fundamental human propensity. It is unfortunate, and Felix is doing a good deed to disabuse people of the notion that housing is a riskless investment goldmine, and that any price rise is a sign of their investing skills.

I also agree with Felix that buying a house is not a certain investment; you can lose your money and your home. Obviously in the past few years many people have, and that’s terrible. Where I disagree, is with his contention that since the outcome is so bad, the potential investment returns are never worth it, and you should stick with other investments which don’t have the added downside of homelessness. I think this notion is belied by the fact that Felix  isn’t arguing that people shouldn’t buy houses, just that they should not do it even partially for investment reasons. He has no problem with you taking the risk of home buying for the consumption value of housing. He says

“In my experience, most people who buy a home do so primarily for psychological reasons. They’re not bad reasons, necessarily, they just don’t make a lot of financial sense.”

So why can the potential cost of losing your money and your home be worth it for the consumption or psychological benefits, but not for benefit of potential financial returns? You can also lose your home and your money if you bought it for consumption reasons, just as easily as you can buy and live in a home you can safely afford whose value is way below what you would rent because you see it as an investment.  If Felix’s point is that the terrible potential downside of buying a home is too great of a cost to risk for the sake of potential investment returns, no matter how large, then shouldn’t he be arguing against homeownership for any benefit?

I understand, given we’re living through such a devastating decline in housing prices nationwide, why Felix would argue that housing investments aren’t investments at all. It is hard to fathom buying a home as a good investment in an environment where so many people, and their families, are paying a terrible price for tempting that same fate.  But Felix is mistaken in ascribing what is true right now in many places to what must be true everywhere and everyplace.

Bryan Caplan quotes Thomas Macaulay writing to us from 1848

We too shall in our turn be outstripped, and in our turn be envied. It may well be, in the twentieth century, that the peasant of Dorsetshire may think himself miserably paid with twenty shillings a week; that the carpenter at Greenwich may receive ten shillings a day; that laboring men may be as little used to dine without meat as they are now to eat rye bread; that sanitary police and medical discoveries may have added several more years to the average length of human life; that numerous comforts and luxuries which are now unknown, or confined to a few, may be within the reach of every diligent and thrifty workingman. And yet it may then be the mode to assert that the increase of wealth and the progress of science have benefited the few at the expense of the many, and to talk of the reign of Queen Victoria as the time when England was truly merry England, when all classes were bound together by brotherly sympathy, when the rich did not grind the faces of the poor, and when the poor did not envy the splendor of the rich.

My working theory is that as people age their opportunity set shrinks. So, it is true that the world is a darker place for me than it was twenty years ago. It could scarcely be anything else. It is, however, a brighter place for young people coming of age today.

A few posts back I asked Arnold Kling about Gross Job data and a recalculations story. However, I think it worth examining how with think about recessions in general.  My tendency has been to describe recession as periods in which people “lost their jobs.”  However, the JOLTS data suggest that we might more accurately think of recessions as periods it hard to find a new job.

Calculated Risk provides the graph


Layoffs and discharges increased during the current recession, but hiring decreased by far more. Indeed, the increase in layoffs was overwhelmed by a decrease in quits, causing overall job marker turnover to fall.

I wouldn’t have though of a recession as a time in which employer-employee relationships became more solid, but that seems to be what is happening.

So what do working poor people do with 200% APR payday loans? Can they possibly make them better off? A paper* by Dean Karlan and Jonathan Zinman employs a clever randomization technique to estimate the effects on borrowers of receiving high APR cash loans in South Africa.

They find that expanded access to credit significantly improves overall outcomes. Borrowers have higher employment, income, food consumption, and an index value of several measures of subjective well-being for the six-to-twelve months after the loan decision. Receiving a loan increased the likelihood of being employed by 20% for marginal borrowers. This is a stunning number. The authors argue that this may be because many of the loan applicants were borrowing to avoid losing their jobs. As seen in the table below, which I created using numbers from the paper, 19.4% used the loans for transportation costs. One can also imagine the 5.4% that went to healthcare may have helped people keep jobs as well; if they cannot get rid of an illness fast enough they may be fired for absence.

The study did interestingly find a negative effect on a second measure of subjective well-being that captured stress and depression. Looking at the impacts over longer horizon, the study finds that in the 15-27 month period following the decision there is a positive impact upon whether or not the borrower has a credit score, and no effect on the actual credit score. They also report confidance intervals that rule out substantial negative effects, so that, at worst, the impact of the policy is zero. Finally, they find that the loans were profitable for the lender, although less profitable than normal.

Consumer borrowing and credit access is an area of conflict between behavioralist and revealed preference approaches to economics. The revealed preference approach argues that it is good for consumers to be able to borrow at any rate of interest, because they will only borrow if it makes them better off, thus the option of even very high interest rate loans can only make people better off. The behavioralist response is that consumers may be worse off. They may have present biased preferences, be overly-optomistic, or underestimate the interest rate on short-term loans. Behavioralists have argued that all three of these may cause excess borrowing.

This study presents evidence for revealed preferences; the borrowers are by almost all measures better off.

(You can find a working paper version here. Gated final version at the Review of Financial studies here, not sure if there’s much difference.)

I’m puzzled by Daniel Inviglio and Felix Salmon’s war on housing investment. Felix argues that:

“Some people are looking to buy a home — that’s understandable, given that everybody needs shelter. And some people are looking to invest money with a long-term time horizon. And some people even fall into both categories at once. But that’s no reason to desperately try to conflate the two, and to describe yourself as being ‘in the market for a home as a long-term investment’…. homes aren’t investments, they’re places to live. If you can buy a nice house for less than you’d otherwise pay in rent, then go ahead and buy — no matter what the market looks like, or where mortgage rates are. On the other hand, if you’re looking for an “investment”, stick to securities. You can sell those much more easily when you need some money, and they won’t drive you into possible bankruptcy and homelessness if they go down rather than up.”

Felix is arguing that housing should only be considered a consumption good, and you should only be willing to pay the net present value of the future stream expected rents. In fairness, Daniel at least concedes that housing is inherently an investment, whether you want to speculate or not. He does, however, ultimately agree with Felix that “If you’re looking to use capital in order to speculate on an investment to maximize return, then by all means do not buy a house now or ever”. Both seem to be suggesting that securities or other investments are perfect substitutes for housing investment, and even more than that they’re arguing that securities are always better investments. There are several reasons why housing as an investment is different than securities in a way that makes it an optimal investment for some people.

I should note that I’m not arguing that now is the time to buy, or that I would even know when that was. I am simply arguing that sometimes owner-occupied housing investment is optimal as an investment and as consumption.

It is also important to note that many of the benefits of housing investment given below are actually driven by the fact that you live your house, which means a lot of the investment benefit of buying a home is inseperable from living in it. Contra Felix, there is definitely good reason for some people to conflate the consumption of and investment in housing.

1: Leverage – Securities are not a perfect substitute for housing investment because two 20-somethings with steady jobs and good credit scores can’t get a 80% LTV loan for $200,000 to buy stocks and bonds. You can, get that loan to buy an owner-occupied house. The reason you can borrow heavily to invest in a house and not securities is that you live in the house, and so banks have a greater confidance you will pay them back. You can make a hugely leveraged bet on a housing investment that you can’t on securities. This alone makes housing investments very different than securities.

2: Diversity – Housing markets are very local in a way that securities are not. As this paper by Bosch, Morris, and Wyatt shows, housing can be an optimal investment if it’s covariance with the rest of your portfolio is low.   There’s no security that allows you to invest in a neighborhood like a house does, and diversify your portfolio in the same way as investing in a home.

3: Rental Price Risk – Buying a home allows you to insure against rental price increases and volatility. Say you live in a neighborhood that you believe is going to clean up, crime will go down, housing stock will improve, and rent is going to go from $500 a month now to $1,000 in three years and then grow at 8% a year perpetually. Investing in a house allows you to insure against having to pay that higher rental price in a way that rental markets may not. Long-term leases may be available, but they may not.

4: Local Markets – When you speculate in the market for securities your investing in a highly liquid, highly global market where your ability to “spot a deal” that the market hasn’t is slim to none. Housing markets are extremely local; block by block even. It’s much easier to spot a trend that others haven’t, and have local knowledge that others don’t, when the relevent market is your neighborhood. The idea that you’re better at predicting future prices on your block than all your neighbors, and even all the rubes in your town, is a lot easier to believe than it is to believe you’re better than the market at predicting the future path of G.M. stock.  Your knowledge of local markets may also allow you to make improvements to your asset to increase it’s value in a way that matches the local tastes. This might even be a skill of yours. You can’t make improvements to GM stock.

Overall, a housing investment is more like buying a small business than it is like a security investment. In fact, it is buying a small business; the business is being your own landlord. Being a landlord is more likely to be a profitable venture if you have reliable renters who you can trust. As a landlord, you’re the best renter you could ever want, which makes being your own landlord less risky than being someone elses landlord.  This is because being your own landlord solves the principal agent problem inherent in the rental relationship; the owner/renter interests are exactly aligned.

These are all things you can’t get in a security, and reasons why the consumption of and investment in housing should be conflated. If someone sees Felix Salmon and Daniel Inviglio buying up dozens of homes in the D.C. area let me know. Then we will know why they are discouraging owner-occupied housing investments; the soon to be launched Inviglio-Salmon Realty, Inc. Until then, I am puzzled by their war on housing investment.

[UPDATE: Fixed link to paper, but still can't find an ungated version. If anyone knows of one let me know.]

Alex Tabarrok thinks that in the future superstar teachers will teach classes online to thousands of students. What are the best examples of this for economics so far?

I have not looked closely at MIT’s openware courses, but I know Hausman’s graduate econometrics materials are available. Ken Train of UC Berkely has excellent video lectures, homework, and a free online textbook for his graduate econometrics class on simulated discrete choice and heirarchical modelling.

Are there excellent online econ courses I’m missing?

Krugman and Yglesias pile on James Hansen for misunderstanding the carbon tax, but I think they misunderstand his misunderstanding. Hansen’s claim, quite justifiably, is that with a cap reducing your own emissions doesn’t reduce global emissions. Instead, it just gives other people more room to pollute. Hansen also says

Because cap and trade is enforced through the selling and trading of permits, it actually perpetuates the pollution it is supposed to eliminate. If every polluter’s emissions fell below the incrementally lowered cap, then the price of pollution credits would collapse and the economic rationale to keep reducing pollution would disappear.

This is also correct. What Hansen misses is that both these effects work in reverse.

Suppose I decide that I really don’t care about the climate one bit and I am so rich that I don’t care about the tax. I am going to pollute to my hearts content. Under a pollution tax scheme this rampant polluting on my part is not offset by any reduction in polluting by anyone else. The pollution tax remains the same and my pollution is simply added to what would have otherwise existed. Under a cap, however, I may be polluting to my hearts content but I am really just driving up the price for someone else, who will be forced to reduce.

Similarly, suppose the demand for power skyrockets as the population grows. With a tax the incentive to move away from carbon is overwhelmed by rapidly growing demand and carbon levels would rise faster than projected.

With a cap, however, a surging economy produces a surging demand for permits and an increased incentive to move away from carbon.

Hansen is right about both effects, he is just missing that they work in either direction. The carbon reducing potential of greater conservation and lower energy demand are undone by a carbon cap. However, the effects of less conservation and greater energy demand are also undone by a carbon cap.

The tax results in stable incentives, but the cap results in stable environmental effects.

Megan McArdle talks with Russ Roberts. A few points

I disagree with many of Russ’s substantive points but the one we are in complete harmony about is that Social Security and Medicare are not liabilities. They are promises and they are promises that will be broken.

These promises are little different from me telling my wife that one day I will take her on a three month long cruise in the South Pacific. Its an enormous future expense. We could try to budget for it, but this would just be engaging in an extended fantasy. There is really very little chance that this is going to happen.

Indeed with Medicare I think its important to point out that most of the things we have promised to buy future generations do not even exist yet. We are projecting that sometime in the future some new way to spend money will be created and then we are promising that we will buy it.

On the other hand, I don’t see the current debates as simply proxies for “whether we become more or less like France.” I don’t see any serious push for greater government ownership over major industries. I don’t see a push for radical new labor laws. The support for union backed card check regulations is weak.

The size of government is expanding but this is primarily driven by rising health care costs and shrinking health care coverage. There is a massive debate over the externalities associated with carbon emissions. These, however, are specific issues that carry a lot of import themselves.

On New Keynesianism in general. Russ acknowledges that people are holding more cash. He said he “didn’t doubt” Posner’s contention that the purchases of personal safes had skyrocketed. McArdle herself, is detailing a cash holding strategy that is increasingly popular. Yet, he seems to doubt that the conduit between savings and investment has broken down.

If the extra cash is not forgone consumption and investment, then what is it?

Mike Konczal has some thoughts on why we had a housing bubble rather than some other bubble. I’m going to highlight some disagreements I have, but there’s more in it that I agree with, and I recommend reading the whole thing.

First, was housing the only bubble? There was certainly widespread price appreciation in other markets, including commercial real estate. For instance according to the world art price index from, prices have declined 37% from their peak. Of course this may simply be a demand driven shock caused by the Great Recession. The timing of the art bubble certainly seems to suggest this, as seen in the graph below from However, I recall reading others who actually follow the art market, unlike myself, claim that there was in fact an art bubble. Either way, this isn’t really me disagreeing with mike, moreso just asking a question.

My second point is an actual disagreement. Mike writes that housing is different from tulips or other bubble prone markets because

“as opposed to me stockpiling tulips, which doesn’t effect you unless you envy my tulips or feel status externalities to my tulips etc., me bidding up housing in a neighborhood does effect you if you are my neighbor, as neighborhood value drives a part of housing value.”

In fact, if you started buying up some specific kind of tulips and I had a warehouse full of them, it would affect me in the same way as if you started bidding up house prices in my neighborhood. Spatial proximity in housing is the same as product proximity in tulips. If demand is bid up in one product, then the price of products with similar characteristics will rise. This is true in housing and in tulips.

Houses could be different if an exogenous price shock that doesn’t reflect any systematic change in demand has a different effect on housing than on tulips. Say some eccentric millionaire completely randomly overpays 200% for a house and also overpays 200% for a warehouse full of tulips. If everyone knows it was a random shock that did not reflect underlying demand, than it won’t affect neighbors’ home prices or the prices of similar tulips. If people believe that it reflects a true demand change, i.e. “eccentric millionaires love this neighborhood (or kind of tulip)”, then it will affect the prices of similar tulips or houses. I don’t think houses are any different from tulips in this regard.

Mike seems to be suggesting, and I may be reading him wrong, that the prices of the houses in your neighborhood are hedonic characteristics of your house, but this is not true. If the price of your neighbors’ houses start selling for higher and higher prices of your house will probably be going up too, but because those house prices are signals that the price of the neighborhood has gone up, not because that price signal changes the real value of the neighborhood.

Mike seems to be conflating house prices as signals of changes in demand with actual neighborhood characteristics that affect the demand of individual houses. If I build a tree in my front yard and that amenity makes your home price go up because people like to see trees across the street,  that is a different phenomenon than if your neighbors’ house sells for an unexpectedly high price. The tree has changed the value of the neighborhood, while the higher price of the neighbors’ house signals that the expected value of the neighborhood has changed. One is a cause of price changes, the other is a signal that prices have changed.

Now if house prices are going down and causing foreclosures, then we may be looking at a true externality indirectly cuased by house prices, but that is another issue for another day.

Overall though, read Mike’s post, there is much to agree with.

A friend sends me this website cataloguing a major record label phenomenon he calls “uncomfortable manposes”.  Prepare to waste an hour or more in stunned disbelief at the unintentional hilarity. I’ll put my nominees for the three best below the fold:

Read the rest of this entry »

Words of wisdom from Dean Baker, who admirably and consistently hammers away at this issue.

I criticize occupational licensing as an inefficient grab at economic rents, but as I’ve pointed out before, there are examples where they seem like the most effective way to reduce public risks. Even where I disagree with, or am at least skeptical of, the desirability of occupational licenses, it’s important to recognize the benefits. So sometimes it’s good to call attention to the victories of the American Medical Association; to many libertarians, the scapegoat for all of our medical cost woes.

Charlatan, a book by Pope Brock, seems like one of these victories. It follows the 1920s-30s cat-and-mouse battle between medical quack John Brinkley, and the Morris Fishbein, the editor of the Journal of the American Medical Association. Brinkley’s scam was a “cure” for -ahem- lack of vitality, and his “treatment” was to sew a goat’s testis into the scrotum of the afflicted. Obviously, many died and many were injured. Fishbein eventually got the quack dragged into court, where he was stripped of his medical license.

Should people be allowed to have invasive procedures that have no chance of having an effect? To many of the same libertarians that are highly critical of the AMA, the answer will be yes, if these procedures do no harm to anyone else (we’ll ignore the goat for now), and the individuals are of otherwise sound mind, then they should be allowed.

To most of the people who believe the net benefits of the AMA outweigh the costs, the answer will be no, people should not be allowed to pay someone to do serious physical harm to them under the guise of medicine.

In some ways, the desirability of organizations like the AMA and other medical regulations depends on how willing you are to allow individuals with extreme preferences to exercise their autonomy. Homeopathy and other New Age “treatments” are the mild areas over which this debate occurs. Cases like this goat treatment, and Body Integrity Disorder, are the more extreme examples.

In any case, in the event that you think people should be prevented from having goat testis sewn into their bodies, this was a victory for the AMA. I’m going to call the prevention of this surgery a good thing, but I’m open to persuasion.

H.T. Michael Shermer

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