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Kevin Drum doesn’t like rewards cards that supermarkets offer. He makes the argument that the only party benefitting from them is marketers:

In the past, supermarkets charged everyone the same price and made a small profit margin doing it. Then came loyalty cards…

Today, overall supermarket prices are still the same as they’ve always been, they’re just tiered differently: those with cards pay less and those without cards pay more. So on average, consumers haven’t benefited. What’s more, competition is generally fierce in the supermarket biz, which means that overall profit margins are also the same as they’ve always been. So supermarkets haven’t benefited.

So who has benefited? Well, as near as I can tell, the answer is: marketing firms. Loyalty cards generate mountains of purchasing data that allow third parties to target advertising more effectively. This is great news for marketing companies and their clients. Whether it’s great news for the rest of us is a little harder to determine.

I tried to dream up how it could be possible that neither supermarkets or their customers are benefitting from this arrangement but marketing parties are, and I don’t think it’s possible.

To start with, I’m sure supermarkets aren’t giving this valuable data away, which means they’re selling it to the marketers. Whether they get paid lump sum or paid by the byte of data, this decreases the cost of being a supermarket. I agree with Kevin that competition in the supermarket industry is “generally fierce”, and I’ll assume he’s correct that profit haven’t changed, which means that the new revenue to the industry has to have translated into overall lower prices for consumers. This can either be through stores directly and unilaterally lowering prices in response to new revenue, or by competition and market entry driving down prices until economic profits are zero. So consumers are overall better off.

H/T Julian Sanchez

In response to a previous post on price discrimination by hospitals in India, commenters Apex and Chris L wondered how it is possible for price discrimination to make everyone better off, and even if you wanted to charge more to rich people, how could you do that in practice?

The general idea is that price discrimination allows firms to overcome fixed costs and thus offer products and services that they otherwise wouldn’t. But I’ll give a specific example using a really simple model.

Say there are four potential consumers of a hospital’s services. Three of them value the service at $5 and the fourth (the rich one) values it at $8. The fixed costs of a hospital are $5 and the marginal cost of treating one patient is $4. If the hospital charges a uniform price of $5, then all four will buy the service and the hospital will have revenue of $20, marginal costs of $16, and thus a total costs of $21. Thus the hosptial will not offer services at this price, since total costs are above total revenue.

At any uniform price above $5 and three of the four patients will not buy the service, and the maximum value the rich customer would pay ($8) is not enough to cover the total cost of treating him ($5 + $4 = $9). So under uniform pricing the services aren’t purchased by anyone, and thus everyone  is worse off.

However, if the hospital can price discriminate by charging $5 to the three poor customers, and $7 to the rich customer then the total revenue is $22, total cost is $21, and thus profit is $1.  In this case price discrimination allows the hospital to offer the services, and so being able to price discriminate makes everyone better off.

(The simpler case is where price discrimination doesn’t make all customers better off, but does increase overall welfare by making those with lower valuation and the firm better off by more than the higher valuation customers are worse off.)

How could hospitals do this in practice? They could do it rather directly by offering customers discounts if they can prove they are on food stamps (3rd degree price discrimination). Or they could allow customers to self-sort (2nd degree price discrimination) by charging a lot more for last minute reservations, better parking spots, or other “luxuries” and add-ons, which will tend to be demanded by people high time value of money (e.g. richer people).

…”cocktail cops” from the New York City health department busted New York cocktail hotspot the Pegu Club for using raw eggs in a fizz earlier this year. This was “[despite] warnings printed on the menu, and raw egg white listed in the ingredients,” according toReason. Apparently the bartender neglected to issue a verbal warning.

What no waiver to sign? Being in New York I’m a little surprised they can use raw eggs at all.

The article, by Derek Brown, goes on to recommend how to minimize the risk of salmonella when consuming raw eggs, how to use raw eggs in a cocktail, and includes a recipe for a pisco sour.

The jobs bill in congress includes a $23 billion dollar provision that’s being called “the teacher bailout”, to prevent school districts from laying off 100,000 to 300,000 teachers. There’s certainly something to be said for trimming the fat, and I’m sure every school district in the country spends hundreds of thousands of dollars on stuff that could, and should be cut from the budget. Nevertheless, Derek Thompson at the Atlantic Business points out that the good kinds of cuts are not necessarily the kinds of cuts we would get:

Smart education reform includes clear incentives for administrators to control costs and teachers to demonstrate achievement against a reasonable baseline. But we don’t want schools firing teachers willy nilly in the fog of deep budget cuts that could wipe out programs based on their cost rather than their effectiveness.

This certainly seems to be what you see with school districts cutting budgets during this recession. You don’t hear about school districts whose budget cuts involve finally firing some of the old, ineffective, teachers who everyone knows shouldn’t be teaching, or taking back some of the overly generous salaries commanded by 8th grade history teachers because they have PhDs they don’t need. No, what you see is the most recently hired teachers being fired, and whole departments like music and art being cut. And many State laws ensure that future cuts are not going to get any better:

Fifteen states, including New York and California, now operate under union-backed state laws mandating that seniority, or “last in/first out,” determines layoffs. These quality-blind layoffs could force a new generation of teachers, like those recruited by Teach for America, out of classrooms in the coming months

I understand the desire to force school district towards efficiency, but it does not seem like the most inefficient costs are being cut as a result of budget shortfalls. However, that doesn’t mean that this is not an opportunity for reform. One way to get more reform and efficiency out of this is to go ahead with a teacher bailout, but model it after Obama’s successful Race to the Top program. States could compete for a piece of the bailout by getting rid of the first come/first fire laws, making it easier to get rid of bad teachers, and implementing other reforms. Given what RTT was able to achieve with $4.3 billion, $23 billion would likely buy some pretty significant reforms.

Legislators would be wise to consider what Obama said in his State of the Union: “Instead of funding the status quo, we only invest in reform”.

At this point it’s quite uneccessary to pile on Matthew DeBoard’s reaction to Felix Salmon’s article on congestion pricing. Ryan Avent and Felix Salmon have offered capable refutations, and Brad DeLong has put the whole failure in a wider, snarkier context:

Slate has found that it is a lot easier to be contrarian and edgy and counterintuitive if you are also really dumb–and is, here, clearly taking the line of least resistance.

There’s no point in kicking a dead horse, but I can’t resist pointing out one final and glaring error in DeBoard’s tirade, which in fact was his final point:

“I mean, you never hear about guys like Charles Komanoff trying to perfect Houston, do you?”

His point is that Houston is a driving town, for driving people, and when drivers get sick of congestion in New York they’ll “move someplace where the driving life is tolerated and even embraced”, someplace like Houston. In a driving town like Houston they surely have no need for “utopianism” like congestion pricing. Except that Houstonians actually were early pioneers of congestion pricing: they implemented a congestion pricing scheme on Interstate 10 way back in 1998. Oops! Turns out Houstonians are fortunately not as misguided about congestion pricing as DeBoard is.

Tyler Cowen quotes Raghuram Rajan on health care in India:

Hospitals in the United States could learn more from each other, as well as from hospitals elsewhere, including India, where costs have been brought down by bringing mass-production techniques perfected in manufacturing to health care….Greater competition between hospitals could also bring down costs; an easy way of encouraging cross-border competition is to authorize Medicare and Medicaid reimbursements for procedures performed by authorized hospitals in other countries, like Mexico and Thailand.

This reminded me of a paper from last years Health Affairs which compared the cost of open heart surgery at a hospital in India staffed largely by U.S. trained doctors, to the typical cost in the U.S. They found that the costs were $6,000 in India compared to $100,000 in the U.S. The obvious explanation is low labor costs, but the authors argue that does not explain the entire difference, and that innovation and efficiency played an important part.

One of the Indian hospitals the paper looks at, called Care Hospital, uses a textbook application of price discrimination:

Care, for example, has deployed a “multi-tariff ” system for the provision of standard services, charging higher fees for comparable services to higher-income segments of the patient base. This tiered pricing model is one of the cornerstones of the Care business model, allowing the organization to provide services either with minimal margins or below full cost (but above variable cost) to approximately 75 percent of its patients.

Having to charge a uniform price would mean that the quantity of medical treatment would be lower, and the price discrimination allows them to increase output. This is a literally an example you will find in economics textbooks under “how price discrimination can make people better off”.

Outsourcing medical care by allowing U.S. citizens to take their Medicare and Medicaid to get treatment in other country’s (where people understand the benefits of price discrimination) seems like low hanging fruit for bringing down health care costs.

That’s a man doing his job.

H/T Yglesias

In response to my last post on salt regulations, several commenters expressed some further points that are worth addressing. Much of it amounts to the argument that the regulations are, from the consumer’s perspective, a free lunch.

Commenter JzB argues that, for the most part, lowering that lowering salt in packaged foods will not result in significant taste changes, and to the extent it does, it can be fixed by adding salt:

So some of the salt is there for good reason, but the amounts used are overkill. I’m suggesting reductions of 25 to 50% will be transparent, or close to it. And also adjustable on the plate, if so desired.

The notion that reductions in sodium of the scale argued for by the Institute of Medicine can be achieved without significantly impacting the food as experienced by the consumer is, I believe, incorrect. In agreement with me is the actual  IOM report:

Current and ongoing industry reformulation has demonstrated that substantial reductions in sodium can be achieved based on existing technology and science. However, given the need to significantly reduce the sodium content of the food supply to achieve recommended population intake levels, additional innovations and research will be necessary to secure reductions while maintaining product taste, texture, safety, and shelf life.

These innovations will be necessary because, as the study points out, companies have already been taking advantage of the low hanging fruit in sodium reduction:

…some of the “easy” food reformulations to reduce the sodium content of processed foods have been achieved by the major food manufacturing companies, and in these cases, efforts to continue lowering the sodium content now require more creative and intense efforts.

You certainly get the sense when reading the report that the authors do not believe that the regulations will be simple, costless, or that our understanding of if and how the regulations will work is anywhere near certain. And remember, these assessments are from advocates for the regulation; it is almost certain that representatives of the food industry would be even less sanguine.

Another point that supporters of the salt regulation have made is that if you slowly reduce your salt intake, you won’t notice the decrease in saltines of foods. The IOM report, however, cautions that this a) this is far from certain, and b) may not apply to all foods:

…while data from perceptual studies may point the way to quantitative levels at which changes in the presence of a substance may not be perceived, much is yet to be learned about the application of such work to the wide range of food products and to other practical considerations in the real world….

Elsewhere they offer even more reasons to worry that sodium cannot be reduced without consumers tasting the difference:

First, the time course of changes in preference for salty foods in response to changes in salt intake is not well understood. Second, there are questions on the extent of a salt reduction that can be accomplished in a single reformulation without greatly altering the palatability of food…Third, it is unknown whether individuals are able to acclimate to lower-sodium foods when some high-sodium foods remain part of their diet.

The last point in the above quotation is worth unpacking a little. The report cites some disagreement among IOM committee members about whether exceptions to salt regulations should be made for certain foods. This discussion highlights that when faced with the possibility that their relatively lighter-touch regulation won’t work, some of the study’s authors would be willing to recommend more draconian measures:

…it is not known whether sensory accommodation would occur if salt were reduced in a single product category such as soup of bread or if the majority of the diet were low in sodium but consumers occasionally consumed foods that might be exempted from sodium reduction (anchovies, olives, etc.). This gap in current knowledge has been a concern for some committee members in determining whether exemptions should be considered for salty foods consumed in small quantities.

In previous quotations, the authors worry that it may be impossible to lower the sodium to a level acceptable in some foods, and here they recognize that the availability of these foods could prevent people from having their salt tolerance lowered. If foods like anchovies or olives aren’t amenable to sodium reduction without significantly altering their palatability, some of the committee members seem okay with those foods being effectively banned. This shows that the failure of a relatively lighter-touch regulation may simply lead policymakers to take a harder line with more draconian regulation. If you’re looking for the next slippery slope, this is a good place to start.

The problems mentioned above do not even get at the possibilities of public choice problem of allowing special exemptions, higher food prices due to higher R&D costs for food producers, increased barriers to entry, increased incentives for industry consolidation, lower levels of future innovation in new food choices, and that regulators will make “mistakes”  and set suboptimal levels.

If you want to argue that the benefits of these regulations outweigh the costs, that’s an argument to have. But let’s be realistic about the costs. The old maxim is a useful one: there is no such thing as a free lunch.

“…if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children’s prospects would be transformed. Much suffering is caused not only by low incomes, but also by shortsighted private spending decisions by heads of households.”

More here.

Bad news for employers and workers who oppose unions: you’re going to hell. That is according to a group of Catholic scholars who claim that

…actions to thwart union organizing campaigns, stifle contract talks, unilaterally roll back wages and benefits, and break existing labor agreements are a “grave violation of Catholic social doctrine on labor unions.”

“This violation of Catholic doctrine constitutes material grounds for mortal sin because it stands in grave violation of both the letter and spirit of Catholic social doctrine,” said the document, titled “Union Busting Is a Mortal Sin.”

In laying out their argument, the scholars said efforts to deny workers the right to organize violate the First, Fifth and Seventh commandments regarding idolatry, scandal and theft, respectively.

It sounds like Catholics with a different empirical understanding about the impacts of unions could just as easily claim that unionization is actually the mortal sin:

“The church’s support for labor unions is rooted in the philosophical principle of freedom of association and the moral principle of a just or living wage,” it continued, explaining that Catholic teaching has long held that workers have “the natural right of free assembly.”

The scholars explained that under church teaching, such a right is rooted in divine law and that efforts to break a labor organization using civil laws is comparable to idol worship, which is contrary to the First Commandment.

Freedom of association could just as easily apply to the rights of non-union workers to be hired at unionized places of work, which would support right to work laws. Also, if you believe that unions cause unemployment, then they violate the principal of a just or living wage, since no wage is obviously not a living wage.

I’d say that if you believe the negative impacts of unions you can accept the analytical framework of these scholars and feel relatively safe that you’re probably not going hell… for this anyway.

It has been said by many commentators that the potential regulation that limits the amount of salt in foods does not limit freedom because, after all, you can add salt to anything. So really, it increases net freedom since people who like salt can still add it, and people who don’t now have the option to have less of it. There are several problems with this.

First off, I’m no chef, but it strikes me as obvious that for many foods there is a difference between cooking, baking, and generally preparing food with salt as an ingredient and sprinkling it onto food after the fact.  Since I know little to nothing about cooking, I’ll go no further with this except to say that it strikes me as obvious, and ask does anyone seriously disagree with that? If you do, buy some low sodium pepperoni, and then sprinkle salt on top. Same thing as regular pepperoni? I seriously doubt it.

The second problem is that food products, like many products, are actually a commodity bundled with a service. When you buy a loaf of bread you are not just buying a random collection raw ingredients put together, you are buying the service of the bread-makers best guess at the mix of ingredients that you will enjoy most. When I buy a loaf of bread at the grocery store, I’m buying the service of the baker taking his best guess at what level of salt the customer likes. This way I don’t want to have to deal with the iterative process of sampling every loaf of bread I buy, adding salt, and thinking about whether the salt level is just right. I’d prefer to pay to have that service performed for me by the baker. In a similar vein, at a nice restaurant part of the service I’m purchasing is the expertise of the chef in adding, among other things, the best tasting amount of salt. This regulation prevents me from purchasing that service.

You may prefer to have things the other way, and be able to select the amount of salt in all your food, and this law would increase your ability to do so. But the value to consumers of being able to select their salt amount is far less than the value to consumers of having their salt amount selected for them. How do I know this? If consumers valued it, then they would be willing to pay for it, and businesses would offer it. Since businesses offer a lot of one and little of the other, it’s a good indicator that consumers value one much more than the other.

The debate as to whether so-called “nanny state” laws lead down a slippery slope is an empirical question that will be answered; either the paternalistic laws will continue to encroach on personal freedom, or they will reach an equilibrium. Let me file this under evidence that the slippery slope is real:

Smoking is already illegal inside the state’s bars and restaurants, and now Kane County will research the legality of implementing an outdoor smoking ban as well.

Note that this is not smoking in public places outdoors, but smoking on private property outdoors.

I think it would be useful to for critics of the slippery slope theory of paternalism to demarcate now what future policies would constitute evidence that they are wrong, because my guess is the point of demarcation will move right along down the slope with policy. Several years ago many of todays critics of slippery slope theory would have said that an attempt to regulate salt would constitute evidence. But now, farther down the slope, salt regulation is just sensible policy.

The CPI fell last month 0.1% as gas prices declined.  Potentially more disconcerting, however, is the fact that the core rate of inflation was flat in April and up only 0.9% over the last twelve months.

Regardless, I am less concerned about deflation than I was 6 months ago. If we parse the table what we see is continued weakness in the Shelter component. Housing alone makes up 41% of the average consumers budget – with rents on the declining by .8% year over year, the CPI will be tepid for some time.

However, if we look across at a few other items we can find some strength. New and Used Car prices are up 4.8% over the last 12 months. Medical Care is up 3.6%. Education is up 5%.

We are not seeing a general collapse in pricing power, simply weakness in some of the largest sectors and weakness that we would have anticipated 6 months ago.

Nonetheless, I would not want to be overly caviler about falling rents. Falling rents imply even greater declines in home price to bring the price-to-rent ration in equilibrium. This, of course, increases debt deflation (asset prices falling below the level of the mortgages used to buy them) and decrease retail spending. That is, of course what we should be worried about.

This process takes time, however, and time is what we need for monetary policy to juice the economy to the point of sustainability. All in all, I am cautiously optimistic.

“Despite the reality that the overwhelming bulk of technological innovation comes today from the organized laboratories of commercial firms, the mystique of the lonely, misunderstood, and ignored inventor, toiling away in his garage (yes, in the myth it is always a “he”), ranks with social security, the family farm, and home ownership among potent American political icons. It does not matter who you are, if you are fighting for the small inventor, you are likely to get  serious hearing.”

That is from Jaffe and Lerner’s Innovation and Its Discontents , and the context is the political inability to reform the patent system. Many areas of policy policy reform seem to be negatively influenced by myths. In addition to family farms and home ownership I would add the virtue of small businesses and “mom and pop” stores.  Others?

Over at The Economist, Ryan Avent has a thoughtful rejoinder to my criticisms of his post on the value of a college education. I don’t think Ryan and I are too far apart in terms of both assessing the the facts of the situation and what to do about it, but rather wish to emphasize different things. I want to emphasize that on the margin a lot of people are probably going to college who would be better served doing otherwise, and much of our money and theirs is being wasted. Ryan wants to emphasize that in the long-run, both individuals and society in general benefit when the population is more educated, and so we should work to get people more educated. I think there is truth to both of these and they are not necessarily contradictory ideas. However, I do want to elaborate on some points of disagreement.

Ryan disagrees with my analogy that housing and education are alike in that they are large, leveraged, illiquid, and speculative investments. His first reason is cost: median housing cost is $218,000, whereas the average education cost is $50,000. But here he misses opportunity costs. If you go to school you not only have to pay tuition, but you forgo the earnings and experience you would have got by working instead. For four years of school and an income of -let’s be conservative- $15,000 a year, this means forgone wages of $60,000. That puts the cost at $110,000. In addition, while the full opportunity cost of not buying a house is a complicated question, some type of rental or housing cost is going be incurred no matter what, so the $218,000 is certainly too high. If rental costs would have been 50% of housing costs (good luck!) then you’re at the same cost for housing and education.

He also argues that the benefits of education accrue over a lifetime, whereas the benefits of housing only accrue while you live in the house. I think this actually favors housing over education as a more liquid investment. The benefit of housing services can accrue to the owner over the life of the building, or the owner can rent that flow of services, or can sell the house for the net present value of the future housing services, in essence taking all the benefits today. In contrast, the benefits to education can only accrue over the whole of an individual’s life. There’s no way to sell the net present value of the benefits of the investment, it is what you would call in irreversible investment.

Lastly on this point, Ryan concludes that “an investment in higher education is unambiguously more conducive to mobility than an investment in a home”. There are multiple dimensions upon which one can be immobile. Having a highly specialized PhD in one method of repairing a particular kind of windmill only found in Holland restricts you occupationally and geographically. Having a highly specialized PhD in repairing a particular kind of windmill found all over the world restricts you occupationally. Owning a property with negative equity in Holland restricts geographically. None of these restrictions are insurmountable of course, but only at a significant cost. If you’re willing to lose the investment value of your education, then a college degree doesn’t restrict you to any industry. If you’re willing to lose the moving costs and a potential equity loss from a poorly timed market exit, than a housing investment doesn’t restrict you to a geographic location. Both types of investments can put you in a large debt hole, and both can cash constrain you. Both are risky and speculative. And both have their own type of illiquidity problem. And it seems to me that there are many people in this country every year who make bad investments in both.

Some things we probably agree on: I believe Goldin and Katz, who Avent cites, that education is one key to slowing or ameliorating inequality. I also believe that having an educated population is important to long-run growth. But importantly, I also believe the work of Erik Hanushek that shows that it is not years of education that matters, but quality of education. The following chart from a recent paper of his shows that the relationship between standardized test scores and economic growth is much stronger than the relationship between years of schooling and growth.

To quote Hanushek, “A country benefits from asking its students to remain in school for a longer period of time only if the students are learning something  as a consequence.”

I suspect Ryan would agree with this. Where he and I might differ is that I think we need to first make sure that marginal college students are getting their dollars worth and increasing their human capital, and then discuss how to send more people to college. If individuals are not getting their dollars worth on the investment, then that to me is a good sign it is not the best human capital investment we could make.  I am not an expert on this, but I’m not convinced that the twin studies, clever instrumental variables, and other complex econometric techniques that attempt to tease out returns to education while controlling for other investments and innate ability persuasively tell us that expanding college enrollment today will generate positive returns for the individuals or society.

If greater subsidies that expanded college enrollment just swells the ranks of the University of Phoenix does that really pass cost benefit? Is there a marginal dollar better spent on this than on improving high school education? And are these schools actually improving human capital, or are they just a signal of ability that employers will pay a premium for? What matters for economic growth and for individuals is actually increasing human capital. I don’t think expanding the ranks of college students without first reforming the bottom rung of college education is likely to be the best way to do it, in fact I think some of the time and money many individuals and our government currently spend on college could better increase human capital and overall well-being by being put to use elsewhere. Postal workers with college degrees come to mind.

Ryan Avent does not share the skepticism of the value of a four year college degree that was expressed by experts in a recent New York Times article, and by many commenters on that article, including myself. While I think he offers a useful overall counterpoint to the skeptics that is worth reading, he does have a couple of points that I want to disagree with.

First, is his point that

…wage premiums indicate that markets are certainly interested in having a larger pool of university graduates from which to hire, and increasing that pool by shrinking the pool of non-graduates would help meet that need while also striking a blow against income inequality.

Ryan may be drawing on wider empirics here to support this, but I don’t think this particular data point by itself is very valuable. One reason is because the wage premium of college graduates is reflective of two things: innate ability, and the returns to a college education. Thus the gap by itself does not distinguish between the demand for innate ability and the demand returns to education. Also, it is the marginal wage premium, and not the average, that is of interest here. The average (meaning the wage premium  for the average college graduates) may be positive while the marginal (meaning the college wage premium for the student who is on the fence between attending and not attending) is zero or at the very least much much lower.

In addition, we would observe the wage gap growing over time if every year colleges lowered their bars to let in the highest ability of the non-college cohort, thus lowering the average overall ability of the non-college cohort relative to the college cohort. A growing wage gap driven by this phenomenon tells you nothing about the desirability of college.  Given the growth of University of Phoenix and it’s ilk, this story has some appeal to it.

Another point he makes is responding to the fact that 15% of postal workers have a college degree:

Of course, the Postal Service cut tens of thousands of jobs during the recession, and given changes in information technology, it’s unlikely that many of those jobs will be coming back. Who do you suppose is feeling better about job prospects now: the 85% of mail carriers without college degrees or the 15% with them? In a volatile labour market, the flexibility of a credential is of crucial importance.

I am a little surprised to read this from Ryan, who has argued very persuasively against homeownership on the grounds that it is a large, leveraged, illiquid, and speculative investment. For what is a college education but a large, leveraged, illiquid, and speculative investment? Banks can’t foreclose on a college education, but I would guess that given the option, many college graduates, both employed and unemployed, wish that they could erase their student loans in exchange for a hit on their credit score and having their diploma torn up and being legally prevented from claiming any college attendance.

Also, the question here is not just whether a newly laid off, or at risk of being laid off, worker with a college degree would be better off without that degree, but whether they would be better off with the money they spent on that degree. I think many people would be better off with the safety net and flexibility provided by a large savings account or other liquid investments than with a degree that they weren’t even using before they got fired and that may be in a field that has either completely dried up or they no longer want to work in. I suspect there are many individuals right now who find themselves in such a position, including some of those postal workers.

From Douthat:

If consolidation creates a crisis, the answer is further consolidation. If economic centralization has unintended consequences, then you need political centralization to clean up the mess. If a government conspicuously fails to prevent a terrorist attack or a real estate bubble, then obviously it needs to be given more powers to prevent the next one, or the one after that.

Sciences other than economics use game theory, but they are loathe to use rational agent assumptions frequently favored by economists:

The academic tribes, however, will hesitate to accept the gift of game theory from economists if they are told that it comes with the rational actor model. Not everyone wants to shoulder the obligations that model entails….Psychologists, for instance, analyze decisions in terms of (often unconscious) cues and heuristics, and are not likely to switch to the paradigm of Beliefs, Preferences, Constraints and Expected Utilities that underlies the rational actor model. Why should they? In evolutionary game theory, they can enjoy the full panoply of behavioral experiments without the restraints imposed by the loitering presence of the rational actor. Strategies (that is, programs of behavior) need not be the product of rational decisions. They can be copied, for instance, through learning or inheritance.

Of course non-rational behavior can always be explained rationally, if unsatisfactorily, simply by postulating that the individual prefers to act however they are acting:

Gintis embraces another approach, explaining cooperation by a human preference for what he terms character virtues (such as honesty, trustworthiness or fairness). But every behavior can be interpreted as a preference for some virtue.

I think such explanations tend to irritate non-economists interested in explaining behavior.

More on game theory with and without rationality in this review of Herb Gintis’ Bounds of Reason in American Scientist. Hat tip Arts and Letters Daily.

Presumably, the goal of financial regulation overhaul is to prevent future crisis. If so, then legislators certainly seem to be getting a little sidetracked lately. Case in point is a new amendment coming out of the House that takes detour into price controls, restricting the Visa and Mastercard fees that businesses pay to banks for debit card transactions:

Sixty-four senators, including 17 Republicans, agreed to impose price controls on debit transactions over the furious objections of the beleaguered banking industry…The Durbin amendment gives the Federal Reserve new authority to regulate and limit the fees that businesses pay to card companies. It specifically addresses payments processed through the Visa and MasterCard networks…The legislation directs the Fed to cap those fees at a level that is “reasonable and proportional” to the cost of processing transactions.

UPDATE: I’m going to write more about this later, but I just want to add that I think that we need a reason to mess with prices, the presumption being that prices are useful, whereas many commentators seem to think we need a reason not to mess with prices, the presumption being that prices are only tolerated when necessary.

Some facts:

Perhaps no more than half of those who began a four-year bachelor’s degree program in the fall of 2006 will get that degree within six years…

For college students who ranked among the bottom quarter of their high school classes, the numbers are even more stark: 80 percent will probably never get a bachelor’s degree or even a two-year associate’s degree.

Of the 30 jobs projected to grow at the fastest rate over the next decade in the United States, only seven typically require a bachelor’s degree…

And one thought provoking quote:

Professor Vedder likes to ask why 15 percent of mail carriers have bachelor’s degrees, according to a 1999 federal study. “Some of them could have bought a house for what they spent on their education,” he said.

There is much more in this article on increasing calls for alternatives to four-year colleges. This highlights the puzzle of why more alternative means of accreditation and training haven’t arisen. What’s the market failure? There are some obvious possibilities including informational problems. But the large degree of government intervention, especially in the low-end of the college market,  does suggest that part of the explanation may lie with policy and not market failure. After all, the large majority of revenues for poorly performing low-end schools like the University of Phoenix come from federal student loans.

In addition, these schools are by far the top recipients of Pell grants, with the University of Phoenix receiving $656.9 million in the 2008-2009 school year alone.

With this level of intervention, policy has a large degree of responsibility for the state of the market. And that state does not appear healthy.

Ryan Avent thinks we should start thinking about safety nets that are targeted at structural unemployment. Many of the safety nets we have in place are best suited for unemployment bouts resulting from aggregate demand shocks. Workers collecting unemployment and spend it, which makes them better off and supports aggregate GDP, but doesn’t really do anything for structural unemployment. There are retraining programs and such, but there’s not a lot of evidence that these are effective.  So what policies could we pass to make the unemployed better off and incentive them in a way that speeds up the structural unemployment adjustment process?

One idea is relocation vouchers. If you offer relocation vouchers to unemployed workers who move a minimum distance from their current residence, then you could incentivize labor to move where it is needed away from where it is no longer needed. The demand for this type of voucher can be seen in the piece from Catherine Rampell on structural unemployemt that Avent was commenting on:

Ms. Norton has sent out hundreds of résumés without luck….She has one prospect for part-time administrative work in Los Angeles — where she once had her own administrative support and secretarial services business, SilverKeys — but she does not have the money to relocate.

“If I had $3,000 in my pocket right now, I would pack up my S.U.V., grab my dog and go straight back,” she says. “That’s my only answer.”

This is someone who could clearly be made better of by a moving voucher. In contrast, unemployment payments for her would do nothing to incentivize or even allow her to move, which would mean she remains in the labor market for which her skills are not needed at a salary she will accept.

One way to pay for this program would be to allow workers to front load their unemployment. Take a full three months worth of unemployment at once instead of spreading it out as long as the person can verify that they are relocating a minimum number of miles away from their current residence.

One feature of both the Kerry-Lieberman and Cantwell-Collins cap and trade plans that I don’t understand is the so-called “hard collar”. This will put a price floor and ceiling in place. Here is how Yglesias describes it for Kerry-Leiberman:

The Senate bill modifies this idea by mandating that permit prices trade within a certain band. That starts as a floor of $12 and a ceiling of $25 per ton. The floor increases at 3%+CPI, the ceiling at 5%+CPI.

My question is, how to you set a price ceiling or floor in a market without getting a shortage or surplus? If Company A values a marginal pollution permit at $30 and Company B values it at $27, but the price ceiling is $25, how does this market allocate that marginal permit? I’m not sure how you make sure the permits are allocated efficiently without allowing the price to rise above the ceiling. Both bills may include very effective mechanisms that deal with this that I am just unaware of. If so I would be glad to be educated on this.

I am persuaded by Yglesias that the floor makes more sense as an insurance policy against the level of carbon permits being set too high, or the system being gamed by illegitimate carbon offsets:

What the floor does is let you assume the worst about the offsets—the regulation is super-lax, tons of stuff is offset, and much of it has little value—and still be left with essentially an escalating carbon tax in the event that the market price of permits crashes.

I do kind of agree with him here. But if this is a likely possibility for offsets, than should we allow them in the first place? My guess is that a whole lot of the rest of the meat in Kerry-Lieberman is designed to set the stage for just these sorts of wasteful offsets. Cantwell-Collins, while much simpler (the full bill is only around 40 pages long), seems to leave a lot of wiggle room for this type of stuff as well. Why not get offsets out of the bills altogether?

Maybe this is just me, but I was surprised by how old aspirin is:

Bayer A.G. of Germany had become one of the world’s leading producers of synthetic dyestuffs, created through the manipulation and synthesis of organic chemical molecules.  In 1896 Bayer established a laboratory to synthesize and test dyestuff formulations for medicinal effects in humans.  One of its candidates, acetylsalicylic acid, proved to be as effective against fever and headaches as its parent molecule, salicylic acid, but with far milder side effects.  The new formulation was named “aspirin,” which was patented, trademarked, licensed, and sold profitably by Bayer throughout the world.

This is from a sweeping paper on pharmaceutical innovation from F.M. Scherer.

No, it’s not an Exxon Mobil backed former tobacco lobbyist whose entire platform consists of removing corporate taxes and gutting the Clean Air Act.  It’s Pennsylvania gubernatorial candidate Anthony Harlan Williams; charter school and school choice proponent, centrist Philadelphia democrat, and state senator who helped create Philadelphia’s Gun Violence Task Force to prosecute illegal gun sales.

Williams entered the race late with money from a handful of wealthy backers, which was possible due to Pennsylvania’s lack of campaign contribution caps:

His campaign has received six-figure checks from as far away as Chicago, plus $1.5 million from three Bala Cynwyd businessmen who, like the Chicago donor, share Williams’ views on schools.

Notably, his campaign website says the state’s lack of contribution caps can give the impression “that lawmakers’ decisions can be bought.” He vows to bar donors of more than $1,000 from receiving no-bid state contracts.

The motivation for contribution caps in national elections is the worry that removing them would led to politicians being more influenced by interest groups. But Williams suggests to me that the system would produce at least some candidates who would be less influenced by interest groups. Someone would be hard pressed to read about this guy and conclude he was a partisan hack. Part of this is that I think it’s easier to find one altruistic billionaire to donate $10 million for a selfless cause than to find 10,000 altruistic people who will do the same with $1,000. It will also be easier to find a billionaire who will donate to a candidate willing to face up to the hard policy choices we face than to find 10,000 people who don’t have the usual distaste for swallowing bitter pills; for example, getting rid of the tax deductibility of health insurance.

So would repealing campaign contribution caps make our electoral system less democratic? Maybe. But maybe that’s just what we need.

From Radley Balko at Reason, adds context to the viral video of the drug raid that led to dogs being shot:

…we’ve seen about a 1,500 percent increase in SWAT deployments in this country since the early 1980s. The vast majority of that increase has been to serve search warrants on people suspected of nonviolent drug crimes. SWAT teams are inherently violent…When they’re used to serve drug warrants for consensual crimes, however, SWAT tactics create violence where no violence was present before. Even when everything goes right in such a raid, breaking into the home of someone merely suspected of a nonviolent, consensual crime is an inappropriate use of force in a free society.

He continues by calling for the anger that people feel as a result of that video to be channeled at the proper enemy: the War on Drugs.

It’s heartening that nearly a million people have now seen the Columbia video. But it needs some context. The officers in that video aren’t rogue cops. They’re no different than other SWAT teams across the country. The raid itself is no different from the tens of thousands of drug raids carried out each year in the U.S. If the video is going to effect any change, the Internet anger directed at the Columbia Police Department needs to be redirected to America’s drug policy in general. Calling for the heads of the Columbia SWAT team isn’t going to stop these raids. Calling for the heads of the politicians who defend these tactics and promote a “war on drugs” that’s become all too literal—that just might.

This leads to the general topic of the difference between being ethical and feeling ethical. Much of what our moral intuitions tell us is in contradiction with what we think are worthy principles. We like to think life is worth a lot for instance, yet in practice life more than a few miles away is worth nothing unless we are personally acquainted with the potentially deceased. Even if we calculate that organ markets would benefit users, many of us feel bad about them. What do you do when feeling virtuous comes into conflict with doing good? Most people go with their feelings.

This underappreciated truth comes from an interview with the very wise Katja Grace, who also defends thinking over reading. In the spirit of this quote from Katja, I would just like to say to Bryan Caplan that even though it feels very wrong, I don’t mind if you have your clone.

According to an article in yesterday’s Philadelphia Inquirer, not all payday loans are taken out by poor people:

Carver W. Reed & Co. Inc. is not the stereotypical pawnshop where the walls are lined with guitars and the glass cases are filled with cameras.

Instead, Carver W. Reed, which celebrates its 150th anniversary Tuesday, specializes in loans that use diamond and gold jewelry exclusively as collateral.

Gordon said his business had catered to wealthier clients for decades. Even so, he said, in 2008 and 2009 he saw a huge increase in the number of business owners pawning the gold watches and diamond jewelry they had bought in better days.

The borrowers are often business owners, including building contractors, who take out loans to pay payrolls and buy supplies.  According to the article, in Pennsylvania they are subject to the same 3% monthly interest rate as all other payday lenders. This means that some borrowers who want to put up their gold watches or speedboats for a loan, whether to pay their employees or make an investment in their small business, will be pushed out of the market by this rate cap.

My question is, do supporters of strict regulation for payday loans think that these payday lenders should be subject to the same rules?

If people think that these lenders should not be subject to the rate cap but traditional payday lenders should, then what is the justification for differentiating between the two? I can understand someone making the case that these high-end payday borrowers are more financially savvy and less likely to be taken advantage of as a result of informational asymmetry than traditional payday borrowers. But that simply suggests payday lenders should be subject to transparency rules, not rate caps. So is the difference because poor borrowers are going to waste the money or spend it on something they don’t need? Because the evidence suggests that by and large they spend it on stuff they need. Then is it because unregulated lenders will charge high rates that are well above competitive level? That suggests that we should try to make payday lending more competitive, not less. This means getting traditional banks and companies like Walmart into the business.

Overall, I think this story illustrates that there is not a very good case for a rate cap on payday loans.

Matt Yglesias thinks it’s hypocritical for  a “right-winger” to hope that property rights turn out to be weak with respect to public sector pensions. He’s responding to Andrew Biggs, who was worrying that future pension benefits for public sector employees may be protected as property rights, which would prevent them from being cut. He finds this to be in contrast with usual “right-winger” behavior, and believes anti-union bias is to blame:

Since when do right-wing analysts “hope” that forecasts of weak property rights are correct, but find themselves “not feeling nearly so sanguine” once they realize that property rights have strong legal protections? It turns out that the answer is: When the property is union members’ pensions!

I don’t know Andrew Biggs, but I don’t think Matt’s charges stick with respect to libertarian “right-wingers”, since they obviously don’t take all property rights as sacred, or any extension of property rights to be an unmitigated good. This can be seen in another obvious case where many “right-wing analysts ‘hope’ that forecasts of weak property rights are correct, but find themselves “not feeling nearly so sanguine” once they realize that property rights have strong legal protections”: intellectual property rights.

To take a random example, here is a Cato Institute policy handbook on patents and copyrights that explicitly calls for weaker property rights:

The Constitution requires that copyrights be granted ‘‘for limited times,’’ but Congress has made a mockery of this requirement (and exacerbated the orphan works problem) by repeatedly and retroactively extending copyright terms. Retroactive extension of copyright terms violates the spirit of the ‘‘limited times’’ restriction. It also does nothing to encourage the creation of new works. Congress should dramatically reduce copyright terms, perhaps to a more traditional 14 or 28 years, which would be more than adequate to reward the production of new works.

The same article goes on to criticize and call for the repeal of portions of the Digital Millenium Copyright Act. It is worth noting that Cato is Biggs’ former employer.

So I think to accuse “right-wingers” of only wanting weaker property rights when the property is union pensions is incorrect.

WaPo has the transcript from a chat with Tea Party founder Judson Philips.

Some of the key issues revolve around the effect of the Reagan tax cuts. This is a source of constant mythology. Here is real GDP growth from Carter through Clinton on a log scale, where straight lines indicate constant growth rates.


Besides the recession notches do you see in major changes in the growth rate. There is a little bit of a slowdown since what seems to be the rapid growth of the 1970s but overall the slope during recoveries look pretty similar.

In fact, one the interesting facts about long run US economic growth is that it doesn’t seem to be overly affected by much at all. I’ll steal a graph from Ed Leamer’s Housing IS the Business Cycle as well as the fact that a lot of stuff happend between 1970 and 2006 but it none of it seems to do much to GDP.


Moreover there were some relatively bad things, from a growth perspective, going on in the 1950s: 90% marginal tax rates, heavy rates of unionization, educational and employment disenfranchisement of the majority of the population, etc. Yet, if anything growth seems to have slowed down since then.

Conventional Wisdom is that in the UKs much publicized election, that all three parties – Labour, Conservative (Tory) and the Liberal Democrats – lost. Labour say its majority collapse. The Tories failed to win a majority. And, the Lib Dems made actually lost ground after a huge publicity bonanza surrounding their leader Nick Clegg.

Perhaps, I am reading the wrong tea leaves, but I just don’t see it that way. The Lib Dems won and the Tories lost. The votes might say otherwise but the balance of power is what matters, and the balance has shifted towards Nick Clegg and perhaps away from the Tories as we know them, forever.

Britain, like the US, has a first-past-the-post, or winner take all voting system. Famously whoever gets the most votes in a given US state gets 100% of the electoral votes from that state. Similarly, in the British parliament, the whoever gets the most votes in a district (known as a constituency) wins that constituency.

Now suppose that the Tories got 40% of the vote in every constituency, Labour got 35% and the Lib Dems got 25%. In that case, the Tories would control every single seat in Parliament and no one else would have any say whatsoever. That is despite the fact that 60% of the voters did not vote Tory.

Now, because of regional differences the result will never be uniform. However, it is common that the party which wins the majority in parliament does not win a majority of the votes. Tony Blair swept to power with a huge majority in 1997 while winning only 35% of the vote nationally.

Now here is the rub. The Lib-Dems being the smallest party are consistently screwed over by the first-past-the-post system. So their number one objective is to change the electoral law to something more akin to proportional representation. Under proportional representation a party that receives 25% of the vote will receive 25% of the seats in parliament.

However, because neither Labour nor the Tories have a majority right now, each one needs the cooperation of the Lib-Dems to gain control of parliament. The Lib-Dems will naturally demand electoral reform as the price of cooperation. Win the for the Lib – Dems.

How do the Tories lose? Well, it turns out that in terms of platform the Lib-Dems are a lot closer to Labour than they are to the Tories. Because the three parties are relatively close in terms of the percentage of the vote they attract, the two parties which join forces will likely have the majority of the seats in parliament under a proportional system. That is much more likely to be the Lib Dems and Labour than either one and the Tories. Thus Tories loose.

Senator Tom Harkin has proposed an amendment to the financial reform bill that will set ATM fees at $0.50.  Many consumers may celebrate this law, but as they teach in econ 101, if you set a price ceiling, quantity will go down and there will be a shortage. This means banks will put in less ATMs, and people will have to travel farther to get to shorter supply of them. In the end, consumer welfare very well may go down if total travel costs are greater than the gains from lower fees.

The fact that regulated fees lead to a lower supply of ATMs is fairly obvious, and supported international comparisons. The UK and France regulate ATM fees, and have 968 and 761 ATMS per million inhabitants respectively. The US and Canada don’t, and have 1,335 and 1,630. In addition, ATM supply has grown faster since banks started charging surcharges to other bank’s customers to use their ATM 1996. The number of ATMS per capita in the US was growing at an annual rate of 9.2% from 1991 to 1996,  and then at 16.7% from 1996 to 2001. This paper provides empirical evidence that consumers in counties with high travel costs experienced welfare gains from these increased ATM fees, while the effect is negative for those in low travel cost counties. This paper, which the above statistics come from, argues that bank profits are lower and consumer surplus higher when banks can charge ATM fees.

To the extent that poorer areas tend to be underbanked, and are most likely to experience higher ATM growth in the future than wealthy areas, the impacts of this law will have the worst impacts on poor people.

Have you ever wondered why they would possibly still deliver white pages to every home when they are clearly most households would not be willing to pay the cost of producing them? Originally you could appeal to network effects. This means that you having a phonebook has value to me, because it means you can contact me, and I value people being able to contact me. Because there are  positive externalities to white pages, competitive free markets will not supply an efficient amount of them.  In this case it would make sense for a monopoly phone company or government to distribute white pages to everyone.

However, the internet now provides the majority of the country with free white pages, and for those few that don’t have the internet there is the free Google directory assistance. Given these alternatives, it seems fairly obvious that the social value of universal white page delivery now exceeds the cost of producing them. These costs are significant too. An article from today’s New York Times tell us that Verizon’s yearly white page distributions in New York alone takes 5,000 tons of paper.

The article also informs us why phone companies continue to distribute to everyone despite the total costs exceeding the social value:  regulators require them to do it. AT&T and Verizon are trying to get these rules repealed across the country, and are succeeding in some places:

Verizon hopes that regulators will waive the requirement that it deliver White Pages to all New Yorkers before the end of the year, said John Bonomo, a company spokesman… Verizon has a similar request before regulators in New Jersey, Mr. Bonomo said. In some states, including Florida, Ohio, Oklahoma and Georgia, AT&T has already received approval to stop delivering White Pages to all residents.

This offers an important caveat when considering government mandates for the sake of positive or negative externalities: at some point in the future, new technology may make the externality irrelevant, but the mandate will likely continue well beyond that point, and will have negative net social value. Consider regulations that mandate that states use a certain percentage of biofuel, solar, and wind energy. If at some point in the future a clean technology emerges that is cheaper than all of those, what are the odds that intrenched interests will prevent those mandates from being removed? Or more immediately, imagine a carbon tax is passed such that all externalities are priced into “dirty” energy use. At that point there is no longer an economic justification for these mandates. Will they go away then? I seriously doubt it. At this point they will have net negative social value.

It’s heartening to see how passionately people are reacting to the video of the dogs getting shot in the drug raid (I have not brought myself to watch it yet). This has presented an occasion for many bloggers to voice their opinions on the War on Drugs in general, and maybe it’s a selection problem, but from what I’m reading in blogosphere, there seems to be pretty much unanimous support for ending the War on Drugs, or at least the War on the Drug that is marijuana.

I don’t think it’s just the corner of the blogosphere that I read either. Public intellectuals overall appear to be largely in favor of legalizing pot. Here’s Rich Lowry, editor of the National Review a few years ago:

Marijuana is not harmless, and its use should be discouraged, but in the same way, say, smoking a pack of cigarettes a day should be discouraged. The criminal-justice system should stay out of it. Twelve states have decriminalized marijuana to varying degrees, fining instead of arresting people for possessing small amounts. They recognize that — as the authors of a new study for the conservative American Enterprise Institute argue — “the case for imposing criminal sanctions for possession of small amounts of marijuana is weak.”

And here is none other than Buckley himself:

We’re not going to find someone running for president who advocates reform of [marijuana] laws. What is required is a genuine republican groundswell. It is happening, but ever so gradually. Two of every five Americans, according to a 2003 Zogby poll cited by Dr. Nadelmann, believe “the government should treat marijuana more or less the same way it treats alcohol: It should regulate it, control it, tax it, and make it illegal only for children.”

Such reforms would hugely increase the use of the drug? Why? It is de facto legal in the Netherlands, and the percentage of users there is the same as here. The Dutch do odd things, but here they teach us a lesson.

My question is are there any bloggers or public intellectuals still defending keeping marijuana illegal? Is it just Rush Limbaugh and Rick Santorum left?

People are mourning the death of Newsweek with twitter meme roasting: the best Newsweek cover line that never was. Josh Green and Matt Cooper got it started with

“What Would Jesus Eat? The New Science of Biblical Diets Could Be The Secret to Weight Loss.”


“Jesus: Was He Gay? The New Science”

John Dickerson of Slate contributes

“The Jesus Twitter: How Social Networking Can Save Your Family (and your soul)”

These are great, but they are missing several features of a good Newsweek headline. I offer the following:

“Who Would Jesus Cyber-Bully? How Online Christianity Is Putting Our Nation’s High Schools At Risk, and How You Can Profit From It Big Time.”

…a homeowner who moves has a cross-location hedging opportunity against sale price risk if he buys a new home at another location. Instead, a homeowner who moves to a rental house may only have been intertemporally hedged against price changes. This paper investigates the quality of both hedging opportunities.

That is from a new paper on the sales price risk of homeownership, and the value of homeownership as a hedging strategy against future price rises. The idea is that if you buy a home today and plan on selling it in the future and buying another home, you are facing two sources of risk: the risk in the uncertainty of the future sale price of the house you’re buying today, and the risk in the uncertainty of the future buying price of your next house. However, if you stay in the same neighborhood, or move into a neighborhood with correlated prices, then these risks may cancel out such that you are are hedged against this uncertainty. The authors use home sales data from the Netherlands to confirm the existence of this hedging opportunity.

This does suggest that if you are planning on buying a house in the future you are exposed to house price risk even if you don’t buy a home today. Heding against future price rises is a benefit of buying a home today.

However, the authors offer two words of caution for those who would seek to capitalize on this in today’s market. First, they note that

…the risk position of households may be aggravated, because income shocks and house price shocks are usually positively correlated.

And second, their empirical evidence shows that the ratio of risk to return is higher during periods of economic decline:

Hence, especially during an economic downturn the risk per unit of return is relatively high. In particular, one euro of return in 2000 was associated with between 0.6 and 1.6 euros spread in returns across types of houses. In 2003, this range was between 1.5 and 3.7 per euro return, and it was even higher in 2008 with the coefficient of variation ranging from 2.8 to 4.3. Hence, risk per unit of return may be between two or three times higher during an economic bust than during an economic boom.

Nevertheless, if you are certain you are going to buy a house in the future, than you are exposed to house price risk. Buying a house today can allow you to hedge against that risk.

One popular narrative of the subprime/foreclosure crisis is that many borrowers did not understand the loans they were getting into, and that subprime lenders took advantage of this by offering loans that were doomed to fail and difficult to understand.  A new study from the Atlanta Fed provides evidence in support of the borrower ignorance part of the narrative:

We find a large and statistically significant negative correlation between financial literacy and measures of mortgage delinquency and default, and the finding is robust to the inclusion of controls for income, education, risk aversion, and time preferences, thus ruling out a broad set of potential biases from omitted variables. The point estimates are remarkably robust, and quantitatively important: 20 percent of the borrowers in the bottom quartile of our financial literacy index have experienced foreclosure, compared to only 5 percent of those in the top quartile. Furthermore, borrowers in the bottom quartile of the index are behind on their mortgage payments 25 percent of the time, while those in the top quartile are behind approximately 10 percent of the time.

Concerns of a lack of basic financial literacy have led to calls for… well, more financial literacy. But this study suggests the problems go deeper than the inability to understand how to discount, or what an exploding balloon payment is, to a fundamental lack of numerical ability:

We include as control variables measures of other aspects of financial literacy and a general measure of cognitive ability, but find that the correlation is highly specific to one aspect of financial literacy: numerical ability.

Provocative question of the day: should mortgage applications come with a short IQ test, where potential borrowers receiving a score below a certain level are required to undergo extensive counseling to make sure they fully and completely understand the mortgage, payment schedule, and the all the issues it is assumed a borrower should understand?

Ezra Klein has some, to my mind, contentious ideas about how to fix Wall Street. He’s worried about the size, and power of big banks, both of which feed and are in turn fed by their profitability. Unless you can make them less profitable, he argues, they will be able to influence regulators and legislators; Wall Street is simply too profitable to exist in our corruptible democracy. He writes:

…I don’t believe you can effectively regulate the financial industry so long as it’s sucking up about a third of domestic profits. The incentives to take massive risks will just be too great. The power to bribe Washington to dismantle regulations and legislation will be irresistible over time.

His solution is that we need to take advantage of the brief moment of public interest in financial regulation to tax Wall Street profits down to a size at which they can’t buy as much regulatory influence. So if I understand him correctly, we can’t trust future regulators and legislators because

There’s money, expertise and interest on one side of the ledger, and the other side is likely to be spending its time on other things. How long till one party or the other needs to fund a tough reelection campaign and cuts a quiet deal with the financial sector?

And trying to hold Wall Street’s massive profits down via legislation and regulation will increase or decrease the amount of money, expertise, and interest that they are willing to commit to influencing legislators? Say you do manage to hold Wall Street’s profits down by $50 billion a year with $50 billion a year in taxes. You’ve just given Wall Street a $50 billion incentive to influence financial laws and regulations. They can now spend $5 billion a year trying to get that tax repealed and make a profit on that effort if it takes them less than 10 years.

My guess is that giving Wall Street maximum incentive to focus on changing whatever FinReg laws are passed this year isn’t going to make it easier for future legislators to leave those laws in place; it’s going to make it impossibly hard. I know it would feel great to pass a law that Wall Street hated by trying to maximize the damage to their profits, but laws designed to cost Wall Street money are laws designed to face a rough future.

In addition, an even worse possibility than future banks simply getting the massive profit tax laws repealed, is the threat that they manage to use the massive profit tax laws to their advantage; carving out loopholes for themselves, using the tax to erect barriers to entry, turning it into a protectionist policy that taxes foreign banks more than domestic banks… these things could all help Wall Street become less competitive, more centralized, and thus more dangerous.

This whole idea strikes me as unprecedented, highly speculative, politically costly, and more likely to make things worse than better for future regulators, legislators, consumers, and taxpayers. So no, you can’t tax Wall Street into submission.

Retail clinics have traditionally been locations to get treated quickly for a short list of simple medical issues. A new program called “Monitoring Made Easy” from CVS’s Minute Clinics will now focus on helping customer/patients manage long-term health problems like asthma, hypertension, diabetes, and high cholesterol. CVS spokespeople are careful in their statements to say that they are not intending on replacing primary care providers, but rather “support patients between visits to their primary care provider or to provide assistance to patients who may not receive regular care.” They also assure that part of the program will be recommending patients to a primary care provider.

Their internal company research shows that 60% of Minute Clinic patients do not have access to a primary care provider, and to the extent that clinics can reduce search costs this program could conceivably increase the usage of primary care services. The president of Minute Clinic offers support for that notion, arguing that:

“Our practitioners are therefore in a unique position to help patients identify a primary care provider and create a path of care that includes monitoring at MinuteClinic to stay on top of their condition,”

However,  as a continuing encroachment into services they have typically provided PCPs have to view this as a competitive threat; if clinics can provide these services for people who don’t have primary care providers, they can just as easily provide them for those who do. At least the American Association of Family Practitioners seems to think so, as they have recently begun opposing retail clinics because of expansions into other services just like this.

More competition is almost always a good thing. And with 32 million recently insured under Obamacare, there will almost certainly be areas experiencing a shortage of primary care providers. But there are places I can imagine clinics making consumers worse. For instance, if PCPs were overcoming fixed costs by price discriminating on services that they now have to compete with clinics on, then lower profits there may cause market exit or prevent market entry. This could mean consumers have less access to other services PCPs provide.

I don’t have any empirical reason to believe this is the case. And in general, more competition on this front is a good thing for consumers.

Alex Tabarrok posts a graph on organ donors by country that shows the U.S. doing pretty well.

But is population the most accurate denominator? Donations are going to be a function of perceived need, so a very healthy country that needs 100 organs per million people and gets 99 is going to look worse on this graph than a country with the same population that needs 1,000 but gets 100. I suspect a large need is why the U.S. appears to do so well.  A more appropriate denominator might be the number of organs donated plus the number of people on the waiting list.

There was a longish piece in the New York Times yesterday about the quality of charter schools across the country. The crux of the article was that charters vary greatly in policy, and running a successful charter is harder than it looks. Matt Yglesias’ takeaway is this:

…educating poor children is a difficult task. What some people don’t get, however, is that while demographics matters a great deal so does school quality. You can see this in traditional public schools where poor kids in New York and Boston do much better than poor kids in Washington, DC. And you also see it in charter schools, where a minority are excellent but most are not excellent.

Dana Goldstein comments as well.

When people say that charters do worse nationally on average than regular schools they are talking about the CREDO study. My question is -and maybe someday I’ll have time to dig in answer it myself- what do the national results say when you exclude Texas and Ohio? I’ve written before about how you would expect Texas and Ohio to perform poorly, since the former’s original charter law encouraged the establishment of charters for disadvantaged children , and the latter has a large number of “Virtual Schools” that are essentially online schools. Thus I would argue it is unfair to pool these states in with traditional charters.

These states, along with Arizona, Florida, Minnesota, New Mexico, are two of six where charters perform worse than public schools. Given that they likely make up a decent chunk of the underperforming charters, I think it’s a good guess that the national numbers would improve greatly if they were left out.

Another thing worth noting is that while charter school critics are quick to cite the results of the CREDO study that reflect poorly on charters, they are not so quick to support the study’s findings that a cap on the number of charter schools appears to decrease student performance. If you believe their empirical model is good, then shouldn’t you be calling for states to remove this cap?

All this said, the article does an overall admirable job of attempting to grapple with the issues and is worth reading, but read Goldstein and Yglesias as well.

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