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I’ve had some ideas, but I am the first to admit they are no well hashed out and my political science knowledge is sorely lacking. However, this is more or less how I thought about the traditional American political system and its nice to have some back-up from Matt.

Historically, the United States has been dominated by an ideology of non-partisanship driven by precisely the suspicion that the interests of a party or faction are not those of the country. And for most of America’s history, when parties were largely non-ideological, this made a ton of sense. A non-ideological party, after all, is basically just an interlocking web of patronage networks and party machines. If a Democrat is in the White House, then Tammany Hall gets to reward its supporters by handing out federal jobs in New York City. The machine couldn’t care less what the president thinks about “the issues” (unless the issue is civil service reform) it just wants a president who recognizes his affiliation with the machine.

This is suggests that side payments or patronage was a key part of making the American political system function. If you look at it through my lense this makes sense. If you can milk the political system for profit it no longer becomes a zero sum game between incumbent participants.

Everyone who is in power has a strong interest in maintaining the existing power structure because it provides profit for them both. That is you are a Democrat and I am a Republican but we are both milking the same cow, so we might as well get along.

When cow milking no longer becomes acceptable then we are pure enemies locked in a zero sum battle. Hence, an inevitable descent into constant warfare.

As is often the case this deserves a better treatment than I am about to give it. Still, with several folks bringing up Ron Paul’s odd paleolibertarian positions I thought a few notes on this might be useful

1) As far as I can tell no one but the religious right gives this issue the significance that it deserves. It is a big deal any way we slice it. The ability to create new human beings/ new persons is the most powerful that we have. How we use it is of vital moral and practical importance.

2) The distinction between a human and a person is perhaps the most important question of the coming century. While today one could reasonably argue that almost all persons on earth are biological humans, such a suggestion will soon be ridiculous. How we treat persons vs. how we treat humans will matter a lot for how society is structured.

3) The only place in the current world where we get to really think this through in a practical way is with the process of human development. Most people readily concede that human haploids – sperm and eggs – are not persons (though I think it is silly to deny that they are humans). Most people readily concede that the overwhelming majority of adult diploid human beings are persons.

Somewhere along the line then personification must take place. How that happens is crucial to our understanding what we mean by person.

4) Do we really think that there are human rights? Rights that extend to all humans regardless of personhood and no non-human persons. How can this be anything but species prejudice?

5) Don’t all of our Kantian moral judgments depend on personhood, not humanness.

6) Is there any reason at all why utilitarian moral judgments should be confined to humans. Here its not even clear if personhood is the right characteristic or if it is merely the ability to experience suffering or joy.

7) We don’t actually behave as if babies have any rights at all. Perhaps, the right to life but even that is questionable. A list of baby’s rights that are violated without a second thought:

a) Liberty

b) Contract

c) Property

d) Freedom of Expression

e) Pursuit of Happiness / Self-determination

f) Blood and body

g) To be governed by mutual consent

And, given that babies are not allowed to refuse medical treatment its hard to say under what reasoning they are granted a right to life? A duty to life is imposed upon them, but even if the baby expressed a desire to allow natural processes to precipitate his or her death, that desire would be refused without a second thought.

If a baby can’t even allow nature to takes course on the baby’s own terms then in what sense does the baby have a “right.” None of its preferences or beliefs have to be respected by law.

It can be force fed. It can be forced medicine. It can have its blood taken against its will. It can be forcibly examined, prodded and even have instruments inserted into it. Its body can be cut open and operated on if the parents or state deem it in the baby’s best interest.

This individual has nothing that could be called a civil right in our society.

Gizmodo reports on Rob Spence (shown above), who had his prosthetic eye replaced with a video camera. He echoes a prediction I have long been making:

People say no one would ever cut off their arm and replace it. If the technology gets there, which it looks like it will, people will think about it. They might be what you’d call an early adopter -a really early adopter- but people are going to have the option of having superior limbs, superior eyes at some point. So I think a lot of people will do it.

Someday, the ethical and legal controversies over whether bionically enhanced individuals can compete in existing sports leagues may actually make paying attention to sports interesting. We’re going to see interesting John Henry type contests in the future, except instead of competing against a steam hammer, he will be competing against a man with a steam hammer bionic arm.

There is – at this point – a small but not unreasonable chance that Bank of America is headed for insolvency and illiquidity. As always solvency isn’t that big of a deal if no one is looking. However, it does seem that people are looking. And, importantly illiquidity is not materially distinguishable from death.

So what is to be done?

The Federal Reserve and the Treasury should coordinate a bailout of Bank of America, of course.

Will it happen? I can’t say that I am sure.

Apropos of my previous post, there is a very small but again not zero chance that we are be about to see democracy wreak havoc on the lives of billions of people.

Felix Salmon reports that despite the fact that it’s extremely easy to get around the New York Times paywall, many people are nevertheless paying for the online subscription:

But here’s the thing about freeloaders: if they value what they’re getting, a lot of them will end up paying anyway. What happened when the Indianapolis Museum of Art moved to a free-admission policy? Its paid membership increased by 3%. When the Minneapolis Institute of Arts did the same thing, paid membership increased by 33%.

Sales people and business-side executes tend to believe as a matter of faith that if people can get something for free, they won’t pay for it. But all they need to do is look at their own behavior to see how that isn’t true: when they go to a restaurant in a distant town that they’ll never visit again, they still leave a 20% tip…

At first glance one is tempted to celebrate what appears to be irrationality. Economists are fond of advocating rational behavior, but with the New York Times paywall we have behavior which is seems individually irrational, yet helps preserve a commons. With tipping, if you presume that it is the most effective system of encouraging efficient service, then again you have individually irrational behavior that preserves the commons (the commons here is the system itself). Of course behaviors like this aren’t actually irrational, because people value fairness, and the are willing to pay more in order to feel fair. Here our sense of fairness leads to welfare improving outcomes: people feel better because they are behaving in accordance with fairness, and a commons is preserved.

On the other hand, fairness and welfare can also be at odds. For instance, many people may find it unfair when businesses to not share quasi-rents with their employers, and may encourage, both through market and non-market means ranging from protests, to private demand for goods from “fair” goods, to demanding outright regulation or labor cartelization. However, those quasi-rents may be the incentives that businesses need in order to start up the business in the first place, so that the demand that businesses share them  (again, this can be market or non-market) may lead to less business creation in the long-run. Here, people’s sense of fairness produces inefficient outcomes: workers capturing quasi-rents may be made better off, but the business owners lose that transfer and future business owners and workers are hurt by less business creation. In short, wealth is destroyed.

With respect to intellectual property, fairness can cut both ways. It is possible for most people to circumvent music copyrights with very little effort. Yet, for many a sense of fairness prevents them from “stealing” music. Sometimes this is efficient and sometimes it isn’t. There are many small bands for whom small drops in album sales could lead them to produce less albums and perhaps leave the industry all together. When people pay for their music rather than illegally download it out of a sense of fairness, the outcome is efficient.  There are others who produce less output because the wealth that copyrights afford them means they don’t need to create as much. For example, I’ve argued you could possibly include Stephen Malkmus in this category. Thus buying his music out of a sense of fairness, rather than illegally downloading it, can lead to less efficient outcomes. Fairness can be good or bad in this context.

On the margin, the public’s demand for fairness in copyright laws is probably inefficient. Of course how much the current laws are a function of voter demand versus regulatory capture is a matter for debate. But even if left to popular vote without industry interference, I believe we’d end up with an inefficiently strict regime.

In the same industry, to give one more example, market demand for what is perceived to be fair ticket selling policies certainly leads to inefficient outcomes: scalpers are left with the surplus instead of the artists, thus no extra output is incentivized. The market outcome is of course bolstered by legal restrictions on resales, resulting in part from fairness.

Maybe this is a trivial point that only economists need to be reminded of, but I think it merits keeping in mind. Sometimes fairness leads us to more efficient outcomes, like preserving the commons, and sometimes it leads us to inefficient outcomes, like copyright laws. Be skeptical of fairness, but do not toss it aside completely.

Erica Grieder is frustrated by some of the discussion surrounding Rick Perry


Ironically I was penning a post on how I was excited about Perry’s entrance into the race when he came out with his anti-Bernanke statement. Lets leave that aside for the moment. What had me feeling up was one of Erica’s posts

The key lines

I was inclined to give some credence to the critics, and to see Perry as a guy who had fluked his way into the governor’s mansion and stayed there.

I soon came to see that I was wrong. And I think a lot of people, even in Texas and certainly around the country, continue to be wrong about Perry in just the same way. The governor himself is largely responsible for that; he hasn’t needed a majority of Texans to like him to get re-elected, and in a way, it suits his purposes when people discount him. But having watched Perry closely for four and a half years now, and interviewed him on several occasions, I am convinced that he’s actually quite smart about politics and that he’s not much of a far-right ideologue.

Right now, Obama is in the high-30s/low-40s on approval. There is a reasonable chance the economy will take a leg down in the next 12 months.  Thus, there is a fair likelihood that we will have a new president come 2013.

My primary concern as always, is that this President be able to govern. It would be nice if the President’s hopes and dreams for the country coincided with mine, but I don’t think it necessary.

What is necessary is that the Global Financial system is stable; that the geopolitical realm is as calm as can be managed; that both the Enlightenment and Global Capitalism continue to thrive. And, as a bonus that the First Republic of the United States still stands.

If we can have all that, I am going to call it a win.

Sadly, however, only three GOP candidates gave me confidence that they could contribute to this result. Those were Mitt Romney, Tim Pawlenty and Jon Huntsman. Tim Pawlenty dropped out. Jon Huntsman is going nowhere fast. That pretty much just left Mitt Romney.

That’s a lot riding on one man. A man who – despite his mannerisms – is a flesh and blood human being and subject to human weakness. He could have a heart attack. He could get hit by a bus. He could say something really really dumb. Then where would be?

Not in place I would be comfortable with.

So enter Rick Perry. A man who also seemed like he could meet the basic criteria. A man who also seemed like he could win the GOP nomination. This is great news.

Then of course, he goes and threatens the Fed Chairman and shakes my confidence in his ability to hold together the global financial system. He was already sketchy if tolerable on geopolitics, so this is not good. Not good at all.

Dave Wiegel tells me its all bluster and not to worry. If this is true I need more people telling me this. Another post from Erica Grieder might help.

Ross Douthat’s “Waiting for a Landslide” has received more than a few approving nods from the blogosphere. I am in general agreement with his core thesis except probably much more so. Ross says,

Thus the assumption, on the left and right alike, that every presidential election is the most important in our lifetime — except for the next one, which will be more important still.

Like most commentators, I’ve indulged in these kinds of sentiments myself. American politics really is riven by fundamental divisions. Our recent elections have had dramatic consequences. It will make a tremendous difference whether the next enduring majority owes more to Barack Obama’s liberalism, Tea Party conservatism, or some other worldview still.

Have they and will it? It doesn’t seem so to me.

Its not fashionable for economics bloggers to show their entire political hand but I think it helps to make my point to let you know who I supported for President since I started closely following politics. This is for both the Primary and the General. The letter indicates my personal party affiliation at the time.

In some cases I didn’t actually get to cast a vote for this person because either they didn’t make it far enough or I was not old enough to vote.


1992   Primary: George HW Bush (R)          General: George HW Bush (R)

1996   Primary: Richard Lugar (R)               General: Bob Dole (R)

2000   Primary: John McCain (R)                 General: Al Gore (R)

2004:  Primary: Anybody But Dean (I)        General: John Kerry (D)

2008:  Primary: Hillary Clinton (D)               General: Barack Obama (D)


I’ve backed the winning primary candidate once – twice if you consider Anyone But Dean – and that was an incumbent President. I backed the winning general election candidate once and that was a decidedly unusual election.

So, as you can see, I am always disappointed. My primary candidate has never won the general election. And, that’s to say nothing about the selection of candidates to begin with. The men and women I would most want to see in the White House have never even run.

Yet, with only one Commander-and-Chief and primarily during only one of his terms did I ever feel like the country was being poorly presided over.

This is made, perhaps, even more significant by the fact that I have almost always voted against the transformational candidate. I voted against the one who wanted to remake America. You’ll notice the change in support during the 2000 campaign. Al Gore had me at “lockbox.”

The only exception was Barack Obama, whose “change you can believe in”, I took to mean drawing down US troop levels in Iraq and ending the Bush Tax Cuts. That is to say changing things back to the way they were before they were changed the first time.

Still, I think we’ve had mostly decent administrations.  Unfortunate choices were made in the wake of 9/11. Given their permanence, however, I am not even sure how much of that can be laid at the feet of the President at the time.

So I am hard pressed to see how any of these elections could be confidently called the most important in our lifetime. Looking back, one will likely emerge – if only by weak comparison – as the most important. But, none are big enough to make that pronouncement now.

Last week speaking on the state of the national economy I was asked by conference attendees how they should prepare for a default by the United States. “Cross your figures” was my reply.

Yet, then I assured them that there would be no default. All posturing aside, at the end of the day the Republic would not be brought down by such things.

Ezra Klein has a nice post on the dynamics inside the room vs the dynamics outside the room.

It always feels different in the room. In the room, everyone wants a deal. They want their name on legislation, in history books. They want to do the big things and make the hard choices. Then they leave the room and they learn their supporters don’t want the choices made if they’re going to be hard. They learn their colleagues know their names won’t be in the history books, and so they’re more concerned with making sure their names are on their desks in the next congress.

This is certainly true. What I would tack on, however, are the outside-outside dynamics. The men and women who will ultimately vote on the debt ceiling are men and women. They are humans with human frailty and one of those is self-doubt.

Everyone has a different set of elites that they feel uneasy facing. For some it is Nobel prize winning economists. For some it is billionaire entrepreneurs. For some it is Wall Street titans. For some it is the grand-old men and women of the civil service and the military.

Yet, I am betting that just about every one of the 435 members of the House has someone from whom a stern dressing down would leave  a lump in his or her throat.

And, so when all of the elites line up to say that default is not an option, that’s an emotionally intimidating force that these men and women – most of whom are fairly ordinary outside of their positions as members of congress – must face.

When one of those elites is Grover Norquist, Grand Poobah of the small government movement, I find it hard to believe that the members will not yield.

Asked if Obama’s warnings that default would be a "disaster" were true, Norquist said that as far as he knows, they are. Via TPM

"Look I assume it’s a disaster, there’s no reason to assume otherwise. It’s gambling with the economics of the country to get that far," Norquist said. "We need to get to where first of all we can cut some spending, not raise taxes. As much as you can get is as much as we should fight for. But again: rather than close the government down or go into default, let’s take it to the American people, go into the next election and fix things then."

So I want to make this post as gentle as possible but it touches issues that are for some reason quite emotional with me. I feel the call of the shrill.

The more I here people talk about the issues surrounding first the financial crises, inflation and now the debt ceiling the more it makes sense to me why Wall Street pays such enormously high salaries.

For example, there is this meme going around in reference to the debt ceiling were folks are asking rhetorically: If you keep hitting your credit card limit should you always raise you limit?

Is this a serious question? Of course you should always raise your limit. If the Red Sox win the World Series you should raise your limit. If you dog takes a poop in the park you should raise your limit. If it rains on Tuesday in July you should raise your limit.


Because you should always raise your limit. The whole point of the limit is to protect the creditor against you. If he willing to forgo that, take it.

Trying to play games with your credit score aside, it is always but always better to have more liquidity than less.

It is always but always better to be playing with or have the potential to play with someone else’s money. It is always but always better to have more credit and to be more heavily leveraged.

The only question is the price you have to pay. The carry and the exposure.  However, the carry on a limit raise is zero, there is no exposure and the asset is pure liquid. You always take free liquidity.

Imagining a friend of mine saying, “Hey I was just offered a bunch of liquidity at zero carry, should I take it?”  is like having a single male friend ask me, “Hey Monica Bellucci just asked me to spend the weekend in Aspen with her, should I take it?”

Well, are you a crazy person? Do you make it habit of throwing away option value and weekends with iconicly beautiful women?

Maybe some people do.

Maybe some people do.

From the early days of the internet I always saw the goal as a type of virtual reality that allowed the agglomeration effect of cities to be felt on a global scale. For a heavy reader and lifetime hater of synchronous communication, like myself, even the old newsgroups and bulletin boards gave that feel. Obviously, however, they were the geek niche’s of geek niches.

The World Wide Web opened things up in a revolutionary way. However, its still didn’t quite seem to do it. The relationships that are so central to what human being are and what we as a species can do were missing.

Enter social media. Facebook bridged a lot of that gap, creating a space that map tightly enough to real world social networks that true friendships could be forged.

There are people I know on Facebook whom I have never spoken to in real life, much less been in the same physical room. There are some whom I knew primarily through social media and then finally meeting them in real life was seamless. They were exactly who I imagined them to be.

And of course, there are old friends with whom Facebook keeps the relationship alive and fresh.

One place where Facebook just doesn’t seem to work at all is working relationships. Those are still dominated by physical meetings, emails and interestingly enough, Gchat.

In part this is because, like most people I am reluctant to friend folks with whom I have a purely working relationship. Strangers I don’t mind at all. But, people who address me as Professor Smith, that’s a bit of a different matter.

The circles and the twitter like nature of Google+ helps with that significantly. The whole world can follow you public persona. Your colleagues your work persona and your friends can see the part of you that makes the word “friend” special.

Perhaps just as importantly its completely integrated into your work environment. For many people “going to work” starts with opening Microsoft Outlook. Your day is defined around your meetings and your email. Much of the rest of what you do probably is accomplished with a web browser, Excel, Powerpoint, Word and some specialty program related to your exact job.

From all of that Facebook is a distraction. You go to Facebook and away from work. With Google+ its built in. The black bar ties it all together. I can’t quite explain why that seems to make a difference but it seems to make all the difference in the world. Something about switching mental modes perhaps.

But, just as it made sense to Gchat a colleague about something from your email but not as much sense to Facebook message them, it seems much more natural to invite a few coworkers to an impromptu hangout – Google+’s group video chat – to discuss an idea than to Skype them.

This brings the concept of the virtual office much closer to reality.

Catherine Rampbell adds to Justin Wolfer’s argument that children are inferior goods. That is the richer we get the fewer we want.

Only a third of people with annual household incomes over $75,000 say they want families with three or more children. Of all Americans with income levels below $75,000, 44 percent say they want families with at least three children.

In Lake Wobegone all children may be above average, but across America, children appear to be inferior — at least economically speaking.

The basic argument goes like this: if we look across countries, across time and across families within any country at a given time, we see the same thing. Richer people have fewer children than poorer people. Moreover, richer people claim to want fewer children than poorer people.

Now, of course it could be that the causation is running the other way. People are richer because they want fewer children. However, that’s not really compelling to me. And, so I’ll ignore it here.

What makes me skeptical of the notion that children are inferior goods per se is that it runs afoul of what I might call my classic critique. First, it defies introspection and conversational empiricism.  Second, the underlying theoretical model is weak. Third, the data analysis is confounded.

Introspection and Conversational Empiricism

When people talk about there reasons for not having children they emphasize the constraints that they face. They don’t have enough time. They don’t have enough energy. They can’t afford it. They don’t have enough room. The ones they have are a handful, etc.

These sound like lack of income problems. Why it is that the rich face them, we’ll get to in a moment.

Also, think about situations in which you were given more resources. You have a great relationship with your mother in-law who decides to come over every day and help take care of the children in the most ideal way possible? You are given a staff who cooks and cleans and takes care of all the house work? One spouse gets a promotion so good – extra pay for no extra work – that the other can easily quit his or her job and stay at home.

If you were on the fence about having another child would these things make you more or less likely to have one? It seems to me that they would make you more likely.

That is to say, lessoning the resource constraint, which is what economists mean by the income effect, would push you towards having another kid.

Underlying Theory

So when we say that a good is an inferior good what are we saying? How does the math of that actually work out? I’ll get a bit nerdy for a second and then bring this back. There has to be some good that is a strong substitute for the good in question but whose marginal utility per dollar of good starts out much lower than the inferior good but declines much more slowly.

Meat and potatoes are a classic example. When you are very hungry a dollar of potatoes satisfies you much more quickly than a dollar of meat. However, as you become richer and can afford to eat more, the value of eating ever more potatoes quickly declines. However, the value of eating more meat stays strong. The thing is, the more meat you eat the less potatoes you want. So, you actually switch from potatoes to meat as you get richer. Potato consumption goes down.

What’s the good that we imagine being paired against children? It has to be a strong substitute. It has to do little to fulfill you at low levels of income but much more at high.  Presumably our good in question would be some form of high priced leisure but its hard to think of ones that make the really make cut.

Travel might do it, if travel really is worse when you have kids. Nights on the town might make sense but its not quite clear why babysitting doesn’t turn this back into a resource constraint rather than clear substitutes.

The best example I can think of is the ability to maintain large networks of friends. If high incomes allow us to keep our friend network larger and friends and children are substitutes then we could see this effect.  This could work but I am unconvinced that the effect is large enough to match what we see in the data.

Confounding Variables

The biggest problem with all of this, however, is that there is a clear substitution effect answer. It goes this way. Over time and space most people have not gotten richer because wealth has come down to them like manna from heaven. They have gotten richer because the price of labor has risen and the price of educated labor has risen even more.

However, both labor and education take time. Children also take time. So, as people have gotten richer the cost of having children has gone up. You have to sacrifice more valuable labor time and more valuable education time in order to have kids.

This also matches how people talk and behave. That it is career vs kids. Or getting a degree vs. having kids. This isn’t an income effect, however, it’s a substitution effect.

Presumably if you gave people more of the basic resource – time – they would have more kids and more education and more work. Imagine, for example if you took a pill that meant you only had to sleep 15 mins a day to be fully rested. This seems like the sort of thing that would encourage people to have more kids and advance their career. Because, of course, they know have much more time.

However, because time is the core resource and because giving you more of it, makes you want to buy more kids and more consumption (via work), kids count as a normal good.

What does it all mean

Now lets tie all of this back to the underlying debate which was over Bryan Caplan’s thesis that people would have more kids if they knew it was less work.

What Bryan claims to be offering is the equivalent of the magic no-sleep pill. You can have your cake and eat it too. You get more time and more energy by realizing that your kids will turn out just fine even if you don’t put as much effort into raising them.

As long as kids are a still a normal good this basic line of reasoning holds.

I think Bryans thesis has other issues. Dealing with the status dimension. Dealing with a feeling of loss of control if Bryan is correct.

And, of course the point I haven’t seen raised elsewhere that “bad kids” probably contribute negatively to parent’s utility. If you have no means of preventing bad kids this makes having children a riskier endeavor than some parents might believe.

I say utility and not happiness because I think the two are importantly different. We might all want to do things that makes us happy, but we do do things which increase our utility, regardless of whether they make us happy or not.

In Tyler Cowen’s The Great Stagnation, he points to three main types of low-hanging fruit that helped drive America’s earlier economic growth but are now drying up:

In a figurative sense, the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labor, or powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there.

Yet while real limiting factors may have caused free land and powerful new technologies to start disappearing over the past 40 years, the only thing that has made “lots of immigrant labor” go away is our political choice to let in less immigrants. I think Tyler is wrong to largely neglect more and better immigration as a way to reverse our Great Stagnation. One could argue that changing opinions about immigration is very difficult, but so too is his crusade to raise the status of scientists, one of his main recommendations for stagnation reversal. Read this quote from his book, for instance, and you decide whether it could just as easily apply to immigration:

That’s going to be hard to achieve, but it’s not a question of lacking the resources. We simply need to will it, and change our collective attitudes, for it to happen. It’s a potential free lunch sitting right in front of us.

I’ve sort of made this point somewhat before, but I think it bears repeating, especially given our current political debates.  If Tyler is right, and lots of immigrant labor was one of the most important drivers of our early growth, and a crucial low-hanging fruit, then our subsequent Great Stagnation should be regarded, at least in part, as a choice.

Lisa Belkin at the New York Times reports on paternalism aimed at making parents more paternalistic:

…other states have already enacted laws aimed at improving parenting. Alaska fines parents for a child’s truancy. In California, a misdemeanor charge can be brought against a parent if the truancy is flagrant enough. California is also the first state to allow judges to order parents to attend parenting classes if their child belongs to a gang.

I’m going to take the lazy route and sidestep the whole issue of whether these types of policy are a worth trying, and just say that probabilistically, I think Belkin is correct:

In the end, then, all these “punish the parents” paradigms will probably take their historical place as just one more shift of the pendulum in the sweep that already includes contradictory certainties like “children are being allowed to grow up too quickly” and “children are being infantilized too long.” Like every other new way of thinking, it will eventually be looked on as a well-intentioned but flawed reflection of a moment in time.

Aaron Carol, at The Incidental Economist, has a post showing that disease prevalence (including obesity) in the United States is a very, very small portion of what is driving health care costs:

Before you start in on me about how obesity is linked to other things and such, you should know that the overall McKinsey & Company analysis showed that the prevalences of disease in the US could account for perhaps an extra $25 billion in health care spending. Let me make a new chart for you:

Yes, obesity is more prevalent in the US, and yes, caring for it costs real money. But even if we get obesity down to the levels in other countries, it’s not going to magically erase the problem. We are spending two to three times per person what they are. There is no simple fix here. There is no one, and no thing, we can easily blame.

Everyone, always will look for a scapegoat. It is in our genes. The good vs. evil story is the oldest trope in existence. Look at the current outcry against “evil speculators” in oil markets (I wonder why Krugman doesn’t make a post about that?). Humans live through stories, humans respond strongly to in-group loyalty, humans have value preferences that lead them to view the world radically differently. I’ve often stated in debate that those who think that a single-payer health care system would somehow reduce our expenditures to a level consistent with other OECD countries are dreaming, at best, or delusional, at worst. And every single data point that passes by in the health care debate does nothing but strengthen the position that Robin Hanson articulated: health care altruism is a permutation of our evolutionary drive to “show we care”; or rather, make infrequent, and very large expenditures to show our loyalty to an alliance. The frequency has gotten greater as our society has gotten richer, but the underlying motive is still linked to our evolutionary roots.

Against this strain of thinking is the hypothesis that Matthew Yglesias articulated in his Bloggingheads diavlog with Karl, that people are stingy in the voting booth, but acquiescent in the doctor’s office. So separating payment and service would act as a brake on health care expenditure. I’m very skeptical of this argument. After all, health care expenditures have risen at a higher rate than GDP/per capita in many countries around the world.

A more interesting question, though, is why is the US different? My crude outline of a hypothesis is that people in the US have only recently come to “share a heritage” that is the United States. It’s only been around 100-ish years that people have really come to view themselves as “Americans”. In the absence of a shared heritage (which provides a built-in in-group), it has been especially important to engage in acts that show inter-tribal loyalty. The US spent a greater amount of money/life/time ending slavery, securing women’s right to vote, and ending segregation than a lot of other countries. We’ve also spent more money/ink/time securing a the minimal welfare state that we have, that is exceedingly expensive (relatively speaking). Not surprisingly, we also spend a ton of money/ink/time on health care that is of extremely dubious effectiveness. A cynic might say that this represents the greater wealth of the United States…but that doesn’t really provide an satisfactory explanation. We have low taxes, so we get away with a lot of inefficiency, but I don’t think that is the underlying driver of our proclivity to expend a lot of resources doing different things.

I think that history will show that Robin Hanson is right, and that whatever health care arrangement we devise, it will continue to be significantly more expensive than the world norm. That it has relatively little to do with the structure of the market (though I stand firmly behind a completely free market in primary care/pharmaceuticals [except antibiotics/microbials]), and a lot to do with our evolutionary drive as a “multi-tribal” society.

Karl has a fairly passionate defense of “muddling through”. The defense of this position is unquestionable. Any pundit who is actually serious realizes that, based on respectable projections, muddling through is not only a viable strategy, but can represent an optimal strategy (from a continuity perspective). Grand bargains are messy, and they usually mess up more than they fix, and (most devastatingly), they often reflect an overarching philosophy, rather than a solution to “problems on the ground”. Naive lefties and righties wish for grand bargains that destroy capitalism or entrench it…the ultimate in “uncertainty”. Muddling through seems to have actual welfare gains.

It is hard to avoid these ideological fights, and it is really (really) annoying to a utilitarian like me, who understands that if you give an inch in security, you could probably take a mile in uncertainty. Or to put the rubber to the road, if you provide a robust social safety net, you could get away with a vast array of socially-beneficial, free-market reforms that you couldn’t under a regime of uncertainty (in markets). Running off on a tangent here, a lot of right-leaning idiots pundits like to talk about uncertainty without recognizing that the government as an institution is a market-maker in the “certainty game”. Whoever thinks that deregulation would lead to some level of certainty is kidding themselves, and killing their argument. People are certain that agricultural subsidies will be around, and make plans based on that…if all of a sudden you remove them, they will be left to the decidedly uncertain whims of consumer demand. A more poignant example is environmental regulation, which has been a tried-and-true part of Federal legislation, and has had a more-or-less predictable path for the last 70 years. When was the last time you were “surprised” (not astonished, or discouraged) by environmental legislation? However, if you remove all environmental restrictions at the Federal level immediately, you create an entire world of uncertainty. To be honest, Ron Paul’s vision acted out on a quick timeline, relative to baseline (and that is ignoring his monetary proclivities), would introduce so much “uncertainty” into the world that we’d probably experience a really terrible “real business cycle”.

More to the point, the growth and evolution of “social technologies”, of which government is a prime example. Government institutions have not always had an eye toward efficiency, but they do have continuity, and it isn’t efficiency that creates “certainty”…after all, it’s not the most efficient for your mother to cook you breakfast, but if you’re used to it, a change to your breakfast habits represents a major shock (also, the macro assumption of monopolistic competition plays to this tune). The “uncertainty” canard is the imposition of a one-way street, in which the Federal government (in the popular debate, local governments are really good at turning as the wind blows) does nothing but create uncertainty. But the point is that the Federal government (no matter how misguided) shapes markets, and if the rules aren’t changing every “five minutes”, they create certainty…and even if they change laws in a way that is anticipated, they don’t move the dial of uncertainty…they just force the hand of efficiency (in their best days). There are thousands of regulations in the Federal Register. Most of them are probably welfare-reducing, but they aren’t “uncertainty” inducing. Federal law evolves along a fairly predictable path. Decimating Federal law, whether its welfare gains in the long run, would demolish the certainty in the short run.

A new working paper by Redzo Mujcic and Paul Frijters uses the question of “Who stops for whom in traffic?” to shed light on several important and interesting issues related to when, why, and for whom we exhibit altruism. Here is how they summarize their results:

We study social preferences in the form of altruism using data on 959 interactions between random commuters at selected traffic intersections in the city of Brisbane, Australia. By observing real decisions of individual commuters on whether to stop (give way) for others, we find evidence of (i) gender discrimination by both men and women, with women discriminating relatively more against the same sex than men, and men discriminating in favour of the opposite sex more than women; (ii) status-seeking and envy, with individuals who drive a more luxury motor vehicle having a 0.18 lower probability of receiving a kind  treatment from others of low status, however this result improves when the decision maker is  also of high status; (iii) strong peer effects, with those commuters accompanied by other  passengers being 25 percent more likely to sacrifice for others; and (iv) an age effect, with  mature-aged people eliciting a higher degree of altruism.

Matthew Yglesias has a post today, riffing off of Kevin Drum’s muted anger, calling for reviving the now defunct (in the United States) “postal savings system“. This system, which began in 1911, was designed to get money out from under mattresses, and encourage banking by immigrants (where postal banking was a common practice). The bank payed a flat 2% interest rate on deposits, which it then re-deposited in local banks at a rate of 2.5%. Upon deposit, customers were given certificates of deposit in $1, $2, $5, $10, $20, $50, and $100 increments. Minimum deposit was one dollar, and deposits were limited (by the end of the system) to $2,500. The system was slow on the pick-up, but really ballooned after 1929 (spiking to $1.2bn in the 30’s), for obvious reasons. However, during the 30’s, with local banking systems in shambles, the practical effect of postal banking was nearly the same as privately hoarding gold.

The draw of the postal banking system, of course, was the “full faith and credit of the United States government”, a guarantee that didn’t exist for private sector banks. Coincidentally, with the passage of FDIC, and after WWII (when it payed an astronomical interest rate relative to the “market” rate), interest in postal banking severely waned, and by 1967, the system was absolved by an Act of Congress. Mildly interestingly, at the time of its dissolution, there was around $50 million unclaimed on deposit, which individuals could claim up until 1985, when payment of any claims were stopped by law. Long before then, however, the system stopped paying interest on deposits.

Now, I’m on the record somewhere (though I can’t find it at the moment?) claiming that the FDIC nearly single-handedly killed financial architecture. By that I mean, banks are ugly now, and the FDIC made them so. Apparently the FDIC also had a hand in killing off the postal banking system. But I still have a lingering question about why it was so unpopular in the US to begin with, and no convincing answers really come to mind at the moment. Many countries (including Germany and Japan) still operate a public postal bank, although many are in the midst of being privatized (along with postal delivery in many countries!).

I think postal banks in the current era would be a magnet for small and very short-term demand deposits, and not much more. Those types of deposits are, of course, the type that people have trouble with (as far as ‘vanilla banking’ goes). Thus, the bank would likely be relatively costly, as I’m assuming that “we” would be subsidizing smaller explicit fees. This would undoubtedly help people who don’t manage their accounts very well (or don’t even have an account, as many poorer people don’t), but doesn’t do much by way of preventing that from happening. Pair it with a savings lottery, and you have a nice idea to help poor people build intergenerational wealth (a bigger problem). And of course the “payday lending” industry is ever-unpopular, so it’s an easy political solution.

Finally, you have a question of what is done with the deposits. Direct loans (of course to ‘small business’)? T-bills? Muni’s? Redeposit in other lending institutions? I would, of course, warn that a public savings bank given a broad enough mandate would be a nearly irresistible vehicle for highly subsidized (and politically directed) lending. I don’t think that we’re headed this way; but the history is not exciting, nor are the possibilities — so it is a natural subject for me to think about.

A recent paper from Skarbek, Skarbek, Skarbek, and Skarbek (that’s right) interview 31 sweatshop workers in El Salvador to find out how they perceive they job and their next best opportunities. Here are their results:

Field interviews reveal that subjects perceive their alternatives, including agricultural work and street vending, as less desirable when compared to sweatshop labor. Non-monetary benefits are an important part of this appraisal. The interviews provide information about the margins along which subjects’ compensation improves and identifies factory employment as one means of improving intergenerational mobility, educational attainment, and improved economic opportunities for women.

This is, of course, a very small sample. But the study does echo  a similar sentiment expressed by  Paul Krugmen in an excellent piece from Slate days:

 You may say that the wretched of the earth should not be forced to serve as hewers of wood, drawers of water, and sewers of sneakers for the affluent. But what is the alternative? Should they be helped with foreign aid? Maybe–although the historical record of regions like southern Italy suggests that such aid has a tendency to promote perpetual dependence. Anyway, there isn’t the slightest prospect of significant aid materializing. Should their own governments provide more social justice? Of course–but they won’t, or at least not because we tell them to. And as long as you have no realistic alternative to industrialization based on low wages, to oppose it means that you are willing to deny desperately poor people the best chance they have of progress for the sake of what amounts to an aesthetic standard–that is, the fact that you don’t like the idea of workers being paid a pittance to supply rich Westerners with fashion items.

On Twitter tonight, in reaction to recent metric modeling I have been doing (for free, for a college lab), I mused about the vast hypocrisy surrounding our societal views on employment, and asked about the signaling model that would produce them. Robin Hanson has asked the same question. The basic thrust of my Tweet was this:

If you are a student working for a lab, you pay for the ability to work. If you are an intern working for free, then you are selling your labor at less than marginal cost. If you are volunteering for charity, then you are selling your labor for nothing. How do each of these fit into a model of signalling?

The reason I ask about signalling is because you can’t assume such drastic asymmetric information that an unpaid internship (or a PhD in a school lab) has simply been hoodwinked by the cost…and charity is completely voluntary. But so is employment. Why is there a dichotomy in the choices offered?

Soon after, I was responded to by @nuveendhingra:

@cheapseatsecon Under CA law, unpaid internships must be educational and can’t give immediate benefits for the employer

And it turns out, he is right, but the law in California is actually worse than he describes:

  1. The training, even though it includes actual operation of the employer’s facilities, is similar to that which would be given in a vocational school.
  2. The training is for the benefit of the trainees or students.
  3. The trainees or students do not displace regular employees, but work under their close observation.
  4. The employer derives no immediate advantage from the activities of the trainees or students, and, on occasion, the employer’s operations actually may be impeded.
  5. The trainees or students are not necessarily entitled to a job at the conclusion of the training period.
  6. The employer and the trainees or students understand that the latter are not entitled to wages for the time spent in training.

This seems patently ridiculous to me. IF you are looking for training that is “like a vocational school”, then go to a vocational school. If you can’t afford it, then let the government give you cash. If you can’t hack it, then too bad. Training is always to the benefit of the trainee. The regular employees thing is an obvious rent-seeking attempt…but is unnecessary. The fourth criterion is the most baffling to me. The employer should be impeded by instructing someone? At this point, are we in second grade? Do we really not understand the theory of firms? Does anyone engaging in an unpaid internship expect their “deep theoretical insight” to be compensated? And if it should be, then why are the selling it at a zero price? Is there such a deep-seated asymmetry that we need to protect people from their own decisions?


The impetus for these type of laws (making their rounds around the country!) comes from the fact that unpaid internships are highly valued, thus those who can pay for them, will pay lavishly. As evidenced by blogging. You better believe that I put that I’ve been quoted in Atlantic, and linked to by the NYT and Financial Times on my resume, not to mention linked to by economic professors from George Mason to UC Berkeley. It’s all there (and yes, “costly”).

Robin Hanson didn’t really “get it” when he posted the his first inquiry on Facebook in regards to Girl Scouts selling cookies outside a (say) WalMart. My response was, “Do the girls not need the money, or do they not get the money?” But we seem to be blurring that line for “formal work”.

Girls probably get something out of Girl Scouts. Being a guy, I have no idea what…but Cub Scouts is a status game among parents (even if it teaches you rudimentary skills). I assume that Girl Scouts is the same. But again, this is an echo-chamber where middle-class people reaffirm their middle-class-ness among other middle-classers. Rich people don’t do ‘scouts, and poor people can’t afford it.

So why the rules on unpaid internships? Well, because unpaid internships are the providence of rich people. They are a status symbol, not so much a learning experience (although if you view it differently, you reveal just where you stand)…the problem is that now “middle class” and poorer people are more and more sacrificing to (maybe) swallow the loss in wages. In response to the growing demand, the law is trying to turn the experience into a rote learning experience. The law can’t do that, because the value of an unpaid internship is (nearly) strictly status. If you dilute that, then rich people will just devise another plan to show status. After all, way back in the day ‘apprentice’ was a status symbol.

The model seems to be: When rich people have their own status game, it’s fine. When middle class people break into that status game, they need an upper hand through transfers. But when poor people enter, they need explicit protection.


P.S. I’m sure that Robin Hanson understood the situation perfectly well, he just asked the question so idiots like me could write meandering posts like the one I just wrote.

P.P.S. “Idiots like me” is code for “making me think, but I don’t do it as well”.

Today, Barney Frank introduced legislation in committee to remove regional Fed presidents from the FOMC:

U.S. Rep. Barney Frank (D., Mass) Tuesday introduced a bill that would let interest rates be set only by Federal Reserve officials picked by the government, a new attempt to move power away from regional Fed officials chosen by the private sector.

The bill would remove from the 12-member policy-setting Federal Open Market Committee the five members who represent regional Fed banks. Only the seven-member board in Washington, which currently has two vacant seats, would get to vote on interest rates. The congressman said this would make the Fed more democratic and increase “transparency and accountability on the FOMC” by eliminating those officials who are effectively picked by business executives

Now, I have never been a fan of Barney Frank, but I do see merits in this legislation. However, first a contrary opinion, courtesy of Mark Thoma:

I can support – and have advocated — reforming the way in which regional bank presidents are selected. But this proposal, which removes geographical representation even though recessions do not hit each area of the country equally, is a bad idea (the Board of Governors can already veto the appointment of a regional bank president, though I don’t know of any instances where this power has been used). It takes us further away from the populist roots of the Fed’s structure, a structure that tried hard to represent all interests in policy. It also furthers the concentration of power in Washington that has been occurring slowly but surely ever since the Bank Reform Acts in the wake of the recession established the Fed’s current structure. In addition, it takes another step toward increasing the power of Congress over day to day monetary policy…I hate to even imagine how bad things would be if Congress had been in charge of monetary policy.

…reform the selection process for regional bank presidents, but don’t increase the concentration of power in Washington…I would like to see, at a minimum, less representation of business so that the public interest generally can take center stage.

While I can stand broadly stand behind the anti-concentration of power sentiment, if you have regions of a country which fluctuate so wildly from baseline that their performance creates a necessity for special accommodation from monetary policy in general, that is an OCA argument against having a single currency area. David Beckworth has argued that the “rust belt” in the US could have possibly benefited from its own currency over the last decade, and I agree!

Do we need regional Fed presidents at the table? After all, in the Great Contraction of 2008, and the ensuing recession, it has been the regional presidents that have provided the voice of hawkishness, even through tumultuous 2009! So when the chips are down, and adequate monetary policymaking is at its highest stakes, these guys were wrong…and being that they largely represent banking interests, they are likely biased against inflation at all costs. This certainly hasn’t been any help to our recovery!

Thoma is worried about Congressional power eroding sound monetary policy decision-making…but our current Fed structure doesn’t prevent that, indeed, it probably enhances it!* After all, Bernanke held the first press conference amid rising populist fears stoking an encroaching Congress’ ire regarding monetary policy. When Mark hopes that public interest would take center stage — and I do as well — but I don’t see how reforming the Fed presidents’ selection process is superior to having a board that is wholly selected by the President, and approved by Congress. If you want to do 12 members that way, so be it!

However, while Barney Frank’s motivation is mostly suspect, sometimes even then you stumble upon a good idea…but this idea isn’t good enough. If you are in a position where your legislation has little chance of making it out of committee, my play would be to lay all of my cards on the table: rewrite the Fed charter such that it requires the Fed to set one nominal target, and keep it on a level growth path. I would prefer NGDP, as I believe that targeting nominal spending is far superior to targeting inflation. This is obviously not Frank’s goal, and it would likely go against Franks (poor) instincts as it removes the unemployment portion of the mandate…but the level of employment in an economy is a real variable.

So what if trend NGDP was perfectly on target, but unemployment remained uncomfortably high. Is that a reason for monetary policy to act? Well, it could be…but there are other questions to ask of other policymakers. What are the structural problems? If there are supply side rigidities, look at removing them (not just removing specific laws, but increasing education, etc.). If you are uncomfortable with removing them, then live with higher joblessness. If there happened to have been an extremely productivity-enhancing technological development (like mass teleportation?) that is causing persistent unemployment because it significantly increases the return on capital investment vs labor investment, then perhaps the long-run growth potential of the economy has been increased — if that is the case, monetary policy may need to target a higher growth path for NGDP.

So, to sum it up, I think removing regional Presidents does make the board more accountable, and it would probably also improve the decision-making process. And if you really wanted to reform the Fed with an eye toward independence, remove the dual mandate and institute a explicit nominal target.

*Imagine a Congressional hearing under an NGDP targeting rule. What would it consist of?

Congressman: “Is NGDP on target”?
Fed Chair: “Yeop”.
Congressman: “Lets get lunch”.

That is obviously a joke, but it is the wiggle room created by the confusing dual mandate that allows Congress to leverage nearly all of its power against the bank.

Jim Manzi writes on the Krugmanesque Nostalgia

I’m somewhat younger than Krugman, but as they say, the future arrives unevenly. I grew up in a small town with an experience not unlike this. I’m very sympathetic to Krugman’s choking nostalgia. It’s difficult to convey the almost unbearable sweetness of this kind of American childhood to anybody who didn’t live it.

The safety and freedom that Krugman describe are rare now even for the wealthiest Americans – by age 9, I would typically leave the house on a Saturday morning on my bike, tell my parents I was “going out to play,” and not return until dinner; at age 10, would go down to the ocean to swim with friends without supervision all day; and at age 11 would play flashlight tag across dozens of yards for hours after dark. And the sense of equality was real, too. Some people definitely had bigger houses and more things than others, but our lives were remarkably similar. We all went to the same schools together, played on the same teams together, and watched the same TV shows. The idea of having, or being, “help” seemed like something from old movies about another time.

Almost anybody who experienced it this way (and of course, not everybody did), intuitively wants something like it for his own children. The tragedy, in my view, is that, though we all thought of this as the baseline of normality, this really was an exceptional moment in our nation’s history.

To but a negative spin on it: what both Paul and Jim hate is freedom.

I say this because I want people to understand why so many people around the world hate freedom and why they probably do to.

A free society is one where these is enormous opportunity for expression and technological advancement, but is that anywhere in these descriptions of childhood Eden? Or is Eden comprised of shared experienced, certainty, stability, safety and a feeling of commonality with your fellow man.

Is this version of Eden in an Iphone, a Prius, a 200 mph train? Is it in modern art or spoken word? Is it found on the pages of the Nation or the National Review? Can you get it on 500 channels of cable TV? Is it more deeply felt when you believe the President is an honest hero or when you find out that like all men, he lies when he feels he can get away with it.

Is Eden in the constant dynamism of an economy in which you make make twice the median income one year, but may be unemployed the next. Is it Eden when criminals you though were guilty go free or when murders are swiftly brought to justice. When DNA evidence leaves you wondering where the real killer might be, does Eden feel more or less real.

What this highlights and what’s so important about our modern world is that people often have more intense preferences over their beliefs about reality than reality itself.  A society that constrains them, that lies to them, that oppresses them in so many tangible ways but leaves their cherished beliefs untouched may be a society that they love.

We are quick to assume that men would rather trade al of this away for their freedoms, economic and social. Yet, how many bemoan the crushing poverty we all experience in relation to what most humans are likely to experience.

Unless things go wrong before even I suspect, the vast majority of people will live lives much wealthier than ours with cultural and social opportunities we can scarcely imagine. Yet, few begrudge them.

While there are always a few tortured souls, constrained by society and the state, most people do not know what they do not know. They are a reflection of what they see in their family and friends.

The ever widening diversity of human experience and our ability to connect to people everywhere will mean that that reflection is more and more tailored to what makes you, you.. The fetish that you didn’t even know you were repressing will become your great great granddaughter’s afternoon diversion.

Every part of the human experience is set to expand. Yet, where in that is Eden? Are, the inhabitants of Jim’s small town or Krugman’s Long Island sad that they will never know such things? Or are they happy in their world, infinitely smaller than what stretches out before a dynamic human race.

I have always been a stranger in strange land. My childhood is not full of the happy memories that Jim and Paul express. It is full of bullies and taunts and neither teachers nor parents who understood. Some of my best memories are of an escape into the world of ideas and freedom from the incomprehensible world of other people.

I am sure there has been some more serious work on this but I am toying with the idea that Government generally and public policy in particular is for the most part a reflection of social ethos. Where government’s in policy and in structure differ is in their “response function.” Are they swift or slow to respond to respond to changing ethos? Do they respond in violent fits and starts or in calm reform, etc.

In its most radical of forms this would say that the average treatment effect of absolute dictatorship or direct democracy on the lives of the typical citizen is zero. Dictatorships have a different response function than democracies and this leads to wider variance, but not to different average outcomes over the long run.

In addition, the consistent differences between life under the two forms of government represent selection effects rather than treatment effects. Societies with rapidly changing ethos will tend to “snap” more rigid forms of government.

Rapid growth in technology, particularly transportation and communication technology will tend to create more ethotic churn. Rigid governments in these places will snap. Since, democracies tend to be less rigid there will be  – at least in the short term – an evolution towards democracy.

Thus when we observe the world we see that rich, pluralistic countries are democratic. We may mistakenly believe that democracy then leads to wealth and pluralism. However, it is that democracy is more “evolutionarily fit” to withstand the ethotic churn associated with wealth and pluralism.

I don’t know where this fits in the canon of political theory and if its all been said before, and better.

To the extent there is something here though, there are some implications.

For example, focusing on the regimes and policy in a government in order to change the lives of the people over which the government rules is extremely limited in its effectiveness. At most you can change the response function. This might have some important short term implications but because (a) governments over the long run are a veil and (b) governments must be “evolutionarily fit” to survive, these strategies cannot make a huge difference.

Real differences come from changing the ethos. In a practical sense this means religious or quasi-religious movements. The fact that religion does the heavy lifting in a society and that church and state have rarely been separated in history, also explains some of the over focus on government itself.

In this reading Communism, to the extent it had as large of an effect as it did, did so not because it was a new form of government but because it had the structure of a religious movement. People came to Communism as they would come Christianity or Islam.

This is why Marxism emerged as the strain of communist/socialist thought that was able to have such sweeping effects. Marxism was much more amenable to becoming a quasi-religion.

Because I didn’t want to register with the UK government site on which Leigh Caldwell posted his ideas for behavioral analysis in the structure and deployment of services, I’ll comment here.

The rationale for Leigh’s wild and irresponsible proposals*:

While some behavioural interventions are being explored through the Cabinet Office’s Behavioural Insight Team (with some success) these tend to be relatively simple adjustments to framing of specific choices available to citizens. A deeper re-examination of the economic assumptions used in public service contracting and forecasting could lead to real improvements in outcomes and efficiency.

Some specific sectors that Leigh targets:

  • Health care, where behavioral modelling of the consumption of health services may lead to more efficient deployment and use of resources.
  • Education, where behavioral analysis could help bring incentives and signalling in line with cost savings in order to reduce spending while maintaining quality.
  • Welfare and social security, where structuring incentives could help raise people out of poverty by building productivity, and encouraging formation of savings. Thus, reducing dependence on the state in the long run.

Now, I’m only a smidgen a behavior economist (having read varied works from the Santa Fe institute), but I’ve always been at least cautiously optimistic about the prospect of what Richard Thaler refers to as “libertarian paternalism“. Leigh is a crazy lefty*, but I trust that he believes in choice, and understands that choice is often not the problem in and of itself. Choice sets often are given various cognitive biases. Thus, choice architecture can preserve the ability of the individual to make a choice, but incentivize choices that are in the best interest of the decision maker.

I’m not too familiar with the first two categories Leigh lists, but I am broadly familiar with the third (which is the most “popular”). There are several ways in which the government could better structure incentives to produce superior long-run results, but I want to focus on one real-world example. The Oportunidades program, an the anti-poverty program in Mexico. The program is centered around providing cash transfers that are linked to incentive goals:

Oportunidades is the principal anti-poverty program of the Mexican government. (The original name of the program was Progresa; the name was changed in 2002.) Oportunidades focuses on helping poor families in rural and urban communities invest in human capital—improving the education, health, and nutrition of their children—leading to the long-term improvement of their economic future and the consequent reduction of poverty in Mexico. By providing cash transfers to households (linked to regular school attendance and health clinic visits), the program also fulfills the aim of alleviating current poverty.

The Oportunidades program has by many measures been very successful in reducing extreme poverty in Mexico. In the long run, these types of behavioral-influenced programs can lead to considerable long-run gain in productivity, health, and personal finance.

I think that the British government would do well to invest in research of this type. While I doubt that behavioral economics will revolutionize the field of economics as a whole (at least until highly useful simulations are commonplace, right now we have variants of sugarscape and the game of life/prisoner’s dilemma), behavioral analysis can be extremely useful at the margin.

As an aside, I am curious whether this web interaction between the government and private citizens/businesses is a Conservative thing, or just something the British government does?

*Just kidding. I consider Leigh a good friend.

There is a lot of talk about health care in terms of giving consumers of medical services choice in a marketplace. The basic cost-control measure that the Ryan Plan hopes for is that a market in health insurance will lower prices. Well, it likely won’t. The mechanism that will control prices is the willingness of people to make up the difference between Medicare vouchers and the actual costs. But brushing that aside, Paul Krugman takes ultimate offense to the characterization of “patients as consumers“:

Medical care is an area in which crucial decisions — life and death decisions — must be made; yet making those decisions intelligently requires a vast amount of specialized knowledge; and often those decisions must also be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping.


The idea that all this can be reduced to money — that doctors are just people selling services to consumers of health care — is, well, sickening. And the prevalence of this kind of language is a sign that something has gone very wrong not just with this discussion, but with our society’s values.

Of course it is very true that life and death situations are made in the field of medicine…probably every day if not at a single hospital, at hospitals as a whole. But the actual truth of the matter is that the bulk of medical spending of the average person does not involve death at all…just nagging, often temporary, quality of life issues. In fact, outpatient care (which includes routine and sick visits to the doctor and same-day hospital visits), drugs and non-durables (which includes things like wheelchairs and other medical supplies), and administration account for ~2/3rds of all medical spending in the US.*

In this aspect of medical care, patients are consumers, and would benefit from price competition in a less-regulated market. Having strep throat doesn’t so much require “specialized knowledge”, as it requires a signed piece of paper so that you can get specialized drugs. Most moderately bad cuts are treated with the highly technical, and extremely specialized skill…applying super-glue.** Same thing with pain management, which in the name of the “War on Drugs”, we severely limit and police. This is why I think that leftist-liberals get it exactly backward when they want to push people into insurance markets, and then use a lot of administrative tricks in order to control costs. What you want to do is push people into a market for these services, perhaps by subsidizing price competition.

Then we can discuss the extent to which the government should intervene as a single payer for the remaining 1/3 of medical spending; which includes inpatient care (plus some emergency outpatient procedures from the previous category), long-term care, and end-of-life services, among a few other things. The point is you can’t just wrap the blanket of “life and death” and “specialized information” around every single medical service, and then claim that markets don’t work.

As an aside, is it really wise to base regulation on perceptions of different groups of people? Seriously?

*The information is a little dated, but it hasn’t changed much if at all:
**I pride myself on the fact that I’ve super-glued many a cut of my own! Also, I have some odd illness that is STILL untreated, and it is naggingly annoying…however it’s hasn’t proven “life or death”. I would have much preferred shopping on price for services (like my CT scan for instance, which was $1,500) to having my insurance company pay tens of thousands of dollars in tests and visits — all which have yielded no results.

I sense that a bit of the blogosphere is warming up to the idea that there are not enough homes in America, but now they are saying: we have the wrong kind of homes. They admit there are not enough apartments in NYC but think that the rest of America is flush with homes.

This would make a lot of sense if you have a core belief that urbanism is the future and that the big cities are set to boom even bigger. For my money urbanism is a potential future but I am starting to take the possibility of radical ex-urbanism more seriously.

Nonetheless, getting into the weeds of “which are the right types of homes” is too much for me to do when I am in forecasting mode. Its enough to just try and read the trends and see which ones match up. Trying to forecast where people will want to live and what types of urban arrangements the market will reward is like throwing bones – that is to say pure blogging.

Right now I am in forecasting mode, and I want to reiterate that whatever you might think about the distribution of new homes, the total amount of units coming online was more about a shift away from mulit-family and manufactured homes towards single family homes than about an unsustainable increase in the total number of homes.

As always Calculated Risk has great charts

Even as the US added millions of new residents over the last decade, mutli-family construction stalled before falling off a cliff and manufactured homes have been on a steady downward trend.

Population growth was matched – and mildly exceeded – by growth in single family homes. Now that single family has fallen of a cliff as well, we simply are not producing homes at the rate we are adding people.

Unless living patterns shift dramatically, something has to give. That means a ramp up in construction. The longer home building is suppressed the larger the imbalance will become.

Noah Smith graciously responded to my post regarding education, pointing out a very interesting fact that I had overlooked:

Niklas Blanchard at Modeled Behavior basically agrees. But there is one point of mine that I think he doesn’t quite get. He asks: “But why would there be a supply shortage at such high tuition rates?” His answer is that universities require such huge initial investments, and take so long to pay off, that building them is not feasible for the private sector. I think that although this is true, the main reason for the supply shortage is that schools don’t “pay off” in the traditional sense, ever. Colleges just seem to only work well as nonprofits. And the only people who are willing to invest huge amounts of money in nonprofits are the government and rich private individuals (e.g. Leland Stanford). We have a supply shortage because governments make the decision whether or not to build new public-school campuses (and recently they have not done so), while colleges themselves can only respond to skyrocketing demand by raising price.

I agree, and this adds to the discussion…but this fact also raises even further questions.

First, what makes universities “work” as nonprofits and not for-profits? I suspect that there is a tiny bit of bias in the datasets between state universities and for-profit colleges as far as outcome, but still, for-profit institutions have a very large dropout rate*, and generally don’t have the prestige of even a poor state-sponsored institution. For example, I live in Council Bluffs, IA, where graduating from Iowa Western Community College is something of a badge of honor, and graduating from ITT Tech is sort of a joke. Still, seems like a value (aka signalling) judgement.

Bottom line: if the fact of reality is that you need a piece of paper marked by calligraphy (as network theory would suggest), then institutional capital plays a large role in differentiation.

Second: We are more wealthy now than we have ever been as human species. However, in the 18th/19th centuries the mark of a successful philanthropist was to start a university (i.e. Leland Stanford). Where are the philanthropists today? Today, the mark of a successful philanthropist is starting a fund for children in Africa. I don’t begrudge this development (although I do begrudge the deployment of much philanthropy), but it bears investigation. The closest analogy I can think of is live-performed classical music, which survives almost solely on government subsidy. There is an interesting story here. The marginal productivity of performing Beethoven’s 9th is not changed since the 19th century. In fact, more people know it more perfectly today than ever before in history. We can reproduce it in multiple mediums, at higher quality than any single person watching Beethoven conduct his symphony ever dreamed. Yet, many countries see it fit to heavily subsidize the live performance of the opera.

I doubt a for-profit company would structure themselves around playing the Classicals. But back to the issue at hand. The dichotomy between the highly wealthy and the common man was astronomically higher in previous times than it is today. One would say that it is like the wealthy today vs. the poor in Africa. And that would explain the trends in philanthropy. People in rich countries have risen to a level of affluence such that class is not about income in America, it is more about various measures of signalling in a large echo chamber. I would point out that the initiative for universal education has made the world this way, but that seems redundant. The point is that the “theory of second best” would say is that since increasing levels of wealth, and previous government distortions provided us with a landscape where it is incredibly hard to build institutional capital for a new university, then the government should step in an provide for the deficit.

My reading: There was a market for education, and then the market was destroyed by productivity, and subsequently subsidized.

I’d be eager to hear your take (and what Noah has to say)!

P.S. If you buy this analysis, it points to either a structural deficiency in the way humans acquire skills, or a structural deficiency in the way certain groups perceive humans acquire skills. I tend to lean toward the latter.

*Note, that many of these comparisons are not “apples-to-apples”. I work for a university that caters to the armed services, adults, minorities, and foreign exchange students. One cannot expect that we would have the graduation rates of a typical four year institution.

I was an opening nighter for the movie version of Atlas Shrugged. Actually the movie simply presents Book I, known as Non-contradiction for Ubernerds. There two more books within the novel.  I went in with modestly low expectations. They were not meet.

First, there is the obvious fact that they rushed through the entire material. Even though this movie only convers the first of three books, its far far too short. This movie was a little over an hour and a half. I think three hours would have been the minimum to make it work.

Yet, three hours of stilted dialogue and bad acting would have been too much even with a storyline more true to form. There wasn’t much to like in this adaptation. Its one saving grace perhaps was that it abandoned any sense of being set in the early 20th century and is instead set in the near future. This allowed the directors to give us a sleek cool feeling environment without having to flex too much artistic muscle.

Worst of all, as Megan McArdle notes, the core motivations of the movie are stripped right out.

The worst part is that the movie is a bad caricature of what people think that libertarians believe.  The genius of capitalism is nowhere to be found–in this movie, “business” mostly consists of shuffling papers around a desk, telling your fellow capitalists how great they are, and instantly promising to deliver metal for a railroad bridge without probing trivial matters like how much metal will be required, when and where the bridge will be built, and how much the customer might be willing to pay. This makes the capitalists who go on strike seem very little different from the “looters” in Washington who they are supposed to be fighting: they’re all a bunch of pompous windbags delivering prim little lectures to each other.  The only real difference is that in the middle of the movie, the capitalists get to ride a cool CGI train.

In the book, one of the arch-capitalists is Hank Rearden a steel magnate. A key element of the story is Rearden’s obsession with creating a new form of metal. According to Rand this new metal, Rearden Metal, is to steel what steel is to iron. The movie correctly gets that Rearden Metal is blue, but unfortunately stamps it “Rearden Steel.” Just as well, they provide few other clues to its revolutionary nature anyway.

You certainly don’t get that Rearden put much of himself into its creation. The devotion of the creator to his creation comes across merely as a few scenes with Rearden staring bleary eyed at his foundry. Why is not really clear.

As such the entire emotional core is missing. The love of achievement, that if nothing else is the heart of Rand’s sermon, is entirely missing.

Given the skyrocketing costs of higher education in the United States, it is worth asking whether there is a supply side deficiency in higher education, or is education a bubble that might or might not be particularly hard to pop? Especially given that student debt has surpassed credit card debt for the first time ever. Noah Smith raises this question on his blog in response to a Matt Yglesias post regarding human capital stagnation. I am intending this as simply raising questions about the subject. As you will note by the end of the post, I offer a hypothesis that broadly agrees with Noah.

Yglesias is, of course, completely right. In fact, human capital stagnation seems to me a much likelier culprit for a “Great Stagnation” than the dubious hypothesis of a slowdown in technological innovation. People can’t spend their whole life in school, so education really is “low-hanging fruit”.

The buildup of Noah’s post pretty much screams his conclusion: supply shortage. But why would there be a supply shortage at such high tuition rates?

The skyrocketing prices you see after 2000 does not reflect skyrocketing enrollment. If you look at his previous graph, enrollment in four-year programs has had a fairly uniform increase throughout the last half of the last millennium. Enrollment in two-year programs is essentially flat. If I showed you similar graphs regarding the housing boom vis-a-vis population (which Karl, in fact, has done!), you would likely immediately assume that there is a bubble. Enrollment, just like population, has grown fairly predictably. At least predictably enough for investment in educational capacity.

So no, I don’t really buy the supply story as a full explanation. But it is useful to ask why supply hasn’t expanded roughly congruent to the increases in price? One (I think powerful) explanation is that the fixed costs to education (the buildings, the teachers, etc.) is expensive, and that half (or more) of the battle is building institutional reputation. Private schools (like DeVry and Kaplan) have overcome the first barrier, but have largely failed to overcome the second. This is where the idea of the government (at least initially) funding a national university system actually has a lot of merit. The government is likely the only institution that can hemorrhage money at the rate it would take to build the institutional capital a successful, and respected post-secondary institution would need. As Noah notes, there is no shortage of Ph.D’s out there looking for work (but this isn’t, in-and-of itself a reason to hire them).

Another useful question to ask is, why don’t universities price based on demand for classes? Almost every university has a fixed tuition rate for every class, and then we try and shoehorn people into a financing option that satisfies said price. Our university certainly does, and it’s not at at clear that is the best use of resources. We often cancel classes that don’t attract enough students…but why? The professors don’t get allocated any differently, they just have one less class that semester. The marginal cost of educating a student is very, very low. Why not advertise a discount special, and fill those desks? You’re still paying the professor, and you already have the building (or online classroom, for that matter). It would be a golden opportunity for disadvantaged kids to snag education on the cheap. You may say that this would lead to many people putting off enrolling in classes until specials arise. It might (but excellent, consumer surplus and all), but that isn’t the experience of car dealerships trying to move inventory to make room for new inventory.

The answer to the second question, I suspect, has a lot to do with signalling…which could also be the driver of the inflation of education in a more broad sense. No one wants to have the status “discount school”.

Addendum: An alternative (and compelling) explanation has to do with the wage transmission mechanism between the financial sector, and finance/math/physics/econ professors. Their marginal productivity is literally based on enrollment, and largely fixed…and certainly hasn’t grown at an extreme pace. What has grown at an extreme pace? The salaries of their alternative options in the finance sector.

David Frum explains how his views on social safety net have changed. In the process he notes

Yet that same conservative sensibility is also properly distrustful of the fantasy that society can be remade according to a preconceived plan. We have to start from where we are, and we have to take people as we find them. Ronald Reagan liked to quote a line of Tom Paine’s, “We have it in our power to make the world new again.” George Will – although a great Reagan admirer – correctly complained at the time, “No, we don’t.”

Karl has a post earlier today where he makes the case that the “love hypothesis” broadly explains trends we see in k-12 education. Specifically, that we school children in ways that show we care, rather than ways that maximally benefit children. However, he then brings up that this wouldn’t explain rising student debt:

What the love hypothesis doesn’t explain is rising student debt. Why are the students themselves taking on ever larger burdens. Is it so they can prove that they love themselves? That’s not totally implausible, but out the gate it doesn’t seem very compelling.

Fortunately, we don’t have to shoehorn the love hypothesis to fit. This is a kind of a form of the principal-agent problem…although not so much a “problem” per se. When children are the agents, and parents are the principals, then parents spend money in the ways that they see fit, which explains how the love hypothesis would provide a transmission mechanism from what parents spend into the type and amount of schooling that children receive, even if children (agents) aren’t really getting much out of it at the margin.

However, student loans are an example of the principal and the agent being the same person. Students are largely mortgaging their own futures in order to increase their marginal productivity. Thus they don’t need to love themselves, that explains why people spend money on other people’s education (indeed, it explains the skyrocketing tuition at ivy league schools, where parents do pay the bills many times).

I like to explain rising student debt (and thus, greater consumption of higher education) using education as a network good. Network goods are characterized by two concepts that would illuminate this: knock-on and tipping points. Put simply, if no one had a bachelor’s degree, no one would need a bachelor’s degree. On the other side of the coin, if everyone has a bachelor’s degree, then you are locked out unless you get one. The more people that have bachelor’s degrees, the more useful they are to those who possess them, until the network reaches a tipping point where employers begin preferring bachelor’s degrees, on to a point where employers require a bachelor’s degree. That pushes people into the market for master’s degrees, rinse and repeat. This could likely go on forever in an with infinitely-lived agents, and infinite degree successions.

Or maybe I’m just too dead tired to reason well today.

I have been reading Jason Brennan’s recent Philosophical Quarterly (.doc) article, per recommendation from Bryan Caplan. In the interest of full disclosure, I should note that I have an inclination toward policy preferences that limit the electorate based on something akin to the Competence Principle, which you can read about in Brennan’s paper. Basically, it states that anyone who wields the power of violence against another individual’s life, liberty, or property should do so in a competent and morally just manner. Thus, a jury should not convict a person based on irrelevant attributes (race, religion, etc.), on a whim, or at random. The jury should, at the very least, be attentive to the case, and have the ability to adjudicate on the merits of the case as presented.

This seems like a pretty straightforward principle. However, David Estlund has leveled two criticisms of basing a theory of epistocracy on the Competence Principle. The first, which I believe is easily (and handily) disposed of by Dr. Brennan is the expert/boss fallacy:

Estlund thinks we should accept the truth and knowledge tenets. Some democratic theorists reject these tenets, but their reasons for doing so are deeply implausible. Instead, Estlund says, we should reject the authority tenet. The authority tenet commits what he calls the ‘expert/boss fallacy’. One commits the expert/boss fallacy when one thinks that being an expert is sufficient reason for a person to hold power over others. But possessing superior knowledge is not sufficient to justify having any power, let alone greater power, than others. We can always say to the experts, ‘You may know better, but who made you boss?’ For example, a nutritionist may not compel me to conform to a diet, even if she knows that the diet would be good for me. You may not force me to listen to newest Celine Dion album, even if you have indisputable proof that I would love it. And so on.

Note, however, my argument I am making for epistocracy does not rest upon the authority tenet, but instead on an anti-authority tenet.

3*. The Anti-Authority Tenet: When some citizens are morally unreasonable, ignorant, or incompetent about politics, this justifies not granting them political authority over others.

The Competence Principle is a version of this anti-authority tenet. While the authority tenet specifies qualifications for holding power, the anti-authority tenet specifies disqualifications. By saddling epistocrats with the authority tenet, Estlund makes the case for epistocracy seem more difficult than it really is. Epistocrats need not argue that experts should be bosses—they need only argue that those with little expertise should not be bosses.

However, the much more substantial criticism (and the one on which I believe that Dr. Brennan wavers) is on the Qualified Acceptability Requirement principle. This principle states that it is either impossible or not inherently just to base the competency requirements for voting on the condition of qualification. The two reasons being (in the case of an exam); who defines the exam? And “what if competency isn’t normally distributed, such that a certain race/class/etc. becomes over-represented, and then invokes its own interests on those who didn’t win”?

Brennan takes to the philosophical divide by essentially accepting this principle, surveying which justice may be worse, and then making the case for the Competence Principle. However, there need not be a morally problematic test. This is where economics comes in.

The demand for voting may be relatively elastic, indeed, I imagine that it is (i.e. if you could sit in your armchair and vote as opposed to leaving your house and incurring a very negligible cost, there would be many, many more voters). The key to avoiding the Qualified Acceptability Requirement is to exclude, but not by any design. Thus, we introduce the welfare maximizing arbiter: price. Because voting is nominally free, more people than otherwise would vote. What if we raised the price of voting? We would expect to get less voters.

Now, there are three ways (short of moving polling places unrealistic distances) you can raise the price of voting:

  1. Charge people to hand them a ballot.
  2. Pay people not to vote.
  3. Buy/Sell your vote. (Not going to talk much about this one)

All three of these options are explicitly illegal currently, but it is rather dubious as to why. The first option is obviously immoral from Brennan’s moral perspective. It is an a priori exclusion principle. In other words, you are denying a right based on a pre-existing distinction. In this case, $10, or whatever. It is the same way in which a jury would find a defendant guilty based on race.

However, the other two (to the extent that the decisions are voluntary) escape this distinction. If you were to offer people $10 at the polling place not to walk in and cast a ballot, you are not denying someone’s life, liberty, or property. You are simply increasing the price of voting in a completely voluntary way. It stands to reason that those most passionate about voting are also those who judge their competency to be high. This method would self-select for people who really care about voting. The actually dollar figure is of fairly little consequence. At a point on the demand curve, raising the price of voting will reduce the amount of voters. I think that the elasticity is high enough that a small payment is all that is needed.

There is a problem that this is may not be a judge of actual competency. Ideologically charged voters may gladly give up monetary compensation to vote. Radical collectivists and libertarian objectivists may be glad to forgo any (to possibly an unreasonable point) amount of monetary compensation to cast a ballot. However, taking the median voter theorem seriously, on average, this would end up moving the country toward more rational and just policy.

Economists take revealed preference seriously, and arbitrate that preference based on price. Thus, if 1,000 out of 5,000 people claim to want an iPad, but 100 people buy an iPad at $800, then 4,900 people value $800 more than an iPad. That is a revealed preference for $800 in your bank account (or on your credit card). That changes when an iPad hits $400. However, every one of 5,000 people will demand an iPad at $0. In the same way, every person who is likely to vote demands a vote at $0. Voting is already mildly costly (at the very least, you have to find a polling place and make it there), so only ~52% of the electorate votes currently. That is likely to diminish quickly as you further increase the costs of voting. If you do so in voluntary way, then you avoid exclusion principles.

However, you may also induce more people to simply show up at the polls. You would have to weigh that cost against the outcome of possibly better policy.

Note: This is based on a very simple model of the elasticity of supply and demand for voting. I have in no way investigated the actual elasticities. I invite criticism of the model. I readily admit that it doesn’t de facto satisfy the Competence Principle…but it may be a meaningful compromise. However, I do believe that it provides one solution to the Qualified Acceptability Requirement. If you allow people to self-select, there is no expert/subject fallacy.

Paul Krugman is upset about Obama’s appeasement of the right

The Post says that Obama is going to more or less endorse Bowles-Simpson in his Wednesday talk.


Matt Yglesias joins

Once the President of the United States accepts the premise that it’s reasonable to ask him to make concessions in exchange for an increase in the debt ceiling that both John Boehner and Eric Cantor have conceded is necessary, he’s giving away the game.

Mike Konczal has general disapproval

At the end of last year I wrote a post about how President Obama is bad at losing. I like that conceptual model because the idea that President Obama is bad at losing – that he loses in a way that conflicts his base, concedes too much to his opponents and doesn’t leave liberalism in a better position to fight next round  – is robust to many different ideas about the current state of Democratic Party.

I’ll offer some amateur outside the beltway strategery analysis. Given the behavior of the Obama White House, it looks to me like their primary objective is to secure an expansion in the scope of government funded health care by avoiding conflict on all other issues.

This explains the steady even if bloody push to pass the PPACA. It explains the seeming disinterest in meaningful shifts in policy in other areas. It explains why Obama was for the stimulus when it seemed popular and conceded to austerity when it seemed popular.

This is a classic Fabian approach. Avoid engaging the enemy when time is on your side. This also seems like an accurate description of the progressive movements position. While at the moment Progressivism may lose a head-on confrontation, time is indeed on its side. Its opposition is older and grounded in institutions which are losing power. The intellectual base of the right is eroding. Political opinion is solidifying around the notion that there will be some form of universal health care.

As always the Fabian defense is unpopular with hawks, who would prefer that the enemy be engaged and crushed. However, it is successful.

Now as always I think the politics of these big issues is not that important. I suspect that in the end the equilibrium will be determined by fundamentals. However, if you were going to play a pro-progressive political strategy this doesn’t seem like a bad one.

I just got around to watching Robin’s diavlog with Brian Christian, on Christian’s book The Most Human Human. I find the comments section fascinating.

Here is one quote

Seems to me Brian raises a valid concern. Don’t act like an animal, and don’t act like a machine. Robin seems to have a hard time understanding the concept, maybe it would help if he’d read EF Schumacher’s book with the very telling (to Brian’s argument) "Small is Beautiful– Economics as if people mattered."

It seemed to me that Christian’s point was that shallow people suck and deep people rock, and that Robin attacked this immediately.

The core split between Christian’s perspective and that of economists is that Christian implicitly assumes that good systems elevate “good people”.

So for example, if the system of an agrarian economy was so good then why did the Kings and Queens of that world spend their time playing like they were hunter-gathers. 

Further, scripts whether in sales, dating or politics cannot be good if they allow people who are fundamentally shallow to rise to prominence.

We can go on to analogize that systems which allow computes – which are lessor – to fake at being human are not good because they are elevating the lessor.

Of course, the reply is that makes sense if you have all of the qualities that make a person good. But, what if you don’t?  What if you are a less human, human?

Then this entire philosophy is demeaning.

In short don’t act like an animal or a machine is a nice sentiment if you are the type of person who is very different from an animal or a machine. If you are the type of person who is more like an animal or a machine or enjoys being more like an animal or a machine then it is just telling you that you suck.

Here is a chart of Federal revenue as a share of GDP in Canada, posted by Livio De Matteo, one of the newer bloggers at Worthwhile Canadian Initiative:

Many a contemporary American libertarian dreams of the day when US Federal spending is confined to ~15% of GDP. However, in the real world this happens in a country that has a fairly robust single-payer basic health care system*, early-childhood-on education initiatives (a previous Conservative government even passed a fairly robust school choice plan that was subsequently killed by a Liberal government after 2 years), and a generally higher level of simple transfers. Some transfers don’t make a whole lot of sense, and kind of get caught in backflips, but nevertheless, there it is. Canada seems to take in ~15% of GDP in taxes, although there is a fit about the budget deficit, which is measured in the happy-go-lucky millions.

I think this lends some credence to the notion that I know Matt Yglesias and Kevin Drum are partial to. That is, ‘largely release people from sources of grave uncertainty (like spells of unemployment, extreme health care and education bills, etc., which can be done at a relatively cheap cost), and sensible market reforms become much more popular’. I can see Canada leading the way in replacing their income tax with a revenue-neutral carbon tax.

But there is a chicken-and-egg story here, as noted by Joseph Heath**:

…it is important to observe that this lack of a correlation [between redistribution and long-term growth of GDP per-capita per Peter Linder’s work] does not show that economic theory is false, that incentives don’t matter, and that government cna do whatever it wants. The lesson to be learned is exactly the opposite. One of the major reasons that big-spending governments tend not to be penalized by the market is that, due to their very bigness, they need to operate more efficiently, and they need to work harder to get incentives right.

The US government, by contrast, has a tax code that is seemingly designed, from the ground up, to keep tax accountants and attorneys employed. Our institutional structure is to blame for most of this, but our relatively low individual tax rates (compared to other rich democracies) enable it.

This is an important story since we’re wading into a battle between spending cuts and raising revenue. As I think about the issue more, I notice that few of my complains come from the entitlement state at all, and the ones that do are about the structure of programs, not the programs themselves. In contrast, I have major complaints about the revenue side of government, and still more major complains about the regulatory side of government (at the local, state, and Federal levels). I think a lot of self-styled libertarians or people who lean that way feel the same way. I don’t think that utilitarian redistribution is a bad trade for some of my other goals (which would likely uncomfortably expose certain segments of the population to the cold whims of the marketplace). How about you?

Note: Provincial spending in Canada pushes government/gdp up to ~32% vs ~28% in the US.

*With the option of pursuing private insurance above and beyond. Not my preferred plan, but it seems work on average.
**Filthy Lucre, pp57-61

And offers 40 pieces of wisdom.

My first foray into blogging was as a graduate intern at the Institute for Emerging Issues. I didn’t even know what blogs were but my boss Roland Stephen was convinced that they were the future and so insisted that I contribute to Institute’s blog. I contributed a bit, but I read more and in the early days I mostly read Bryan.

Everyone should.

If you find his point of view shocking and distasteful, all the better. Bryan’s writing is not a place where you get to hear a clever person weave together elegant rhetoric defending things you already thought were true.

It’s a place where your most basic notions are repeatedly challenged and where your intellectual sacred cows are gleefully dined upon before your very eyes.

Ultimately you may find some of his arguments compelling. You may find some of them thought provoking and you may find some of them flat out wrong. But, in all cases you will find argument, which if you take seriously will stretch your understanding of your own beliefs. If you do nothing but carefully convince yourself why Bryan is – as you suspected – out of his mind, you will have done yourself a favor.

So today, read Bryan’s 40 points and tell the world, in grave detail, why at least one of them is absolutely wrong.

Derek Thompson did a good write-up on private currencies for The Atlantic, and even included a sidebar on the Fureai Kippu currency of Japan! I am quoted as saying, in regard to the question of where money gets it’s value:

“Imagine that we are on a gold standard and a severe drought hits,” economist Nick Blanchard explained to me in a useful example. “Suddenly water is in extremely high demand relative to gold, and everyone would be happy to rid themselves of bullion for water. Would you say that the dollar derives its value from gold, or the fact that people will accept it to buy water? The gold price of water is a floating exchange rate as much as is the dollar price of yen.”

“The real value of any currency comes from the reasonable assumption that when you demand goods and services, the paper/metal/lint/whatever in your pocket will be accepted in exchange for that thing,” he continued. “Currency loses all its value when people no longer want it in exchange for what you want.”

Indeed, I focus very heavily on money as a medium of exchange. It’s pretty common that people get the price of money and the value of money confused, and switch between thinking of (and talking about) money as a medium of exchange and unit of account willy-nilly. I almost never think of money as a store of value. The fact that we store value in dollars is an artifact of our currency featuring positive interest rates.

A little more on Fureai Kippu: It is an all-electronic currency, and has two central clearing houses, one in northern and southern Japan. FK credits are easily transferable, and many younger people transfer their credits to older relatives so that they can pay for care. The biggest thing (other than health care) to spend FK credits on is education. Private teachers are very popular in Japan, and many of them accept the credits as partial payment of tuition. And finally, a survey of elderly in Japan found that they preferred workers who were paid in Fureai Kippu to those paid in Yen, because the care was better (or more “authentic”). The absence of interest rates is what creates this effect — different currencies foster different relationships between people. Bernard Lietaer is fond of referring to this as “Yang money”, and “Yin money”.

Though I profess a deep and abiding pessimism I am often accused of being an optimist. Part of this is because I laugh and smile a lot. There is no rule that pessimists must be grumpy folks.

However there is a quip that explains this duality much better and it has the fortunate side effect of also being almost true.

An optimist thinks this is the best of all possible worlds. A pessimist knows that it is.

A few on my friends on the right have publically and many more privately, suggested that egalitarian efforts were foolish or unwarranted because income distribution is pretty much all genetic.

Poor parents have poor children because they pass on genes for irresponsibility, violence, promiscuity, impulsiveness, etc.

The empirical truth of this statement aside, it seems to me that this is overwhelmingly an argument for egalitarian measures.

No one asks to be born. And, certainly no one asks to be born with impulsive genes. To the extent those genes strongly predispose them to a life of misery this is something that was done to them without their consent.

I argue that miserable lives can be worse than no life at all. Some suggest that this is impossible since you can always kill yourself if things are that bad. Yet, as I’ve said before, ending your life is not free. At a minimum people who care about you will be sad, and to the extent you have any concern for what happens after you are gone there are costs to shuffling yourself off this mortal coil.

Still even if you are not willing to accept that some lives are worse than never having lived the belief in genetic poverty is a strong argument for egalitarian measures.

If we could we would like buy insurance against having been born with bad genes. However, bad genes are the ultimate pre-existing condition. By definition there was never a moment in your life were you didn’t have them and thus could have had the opportunity to buy fairly priced insurance against them.

So purely for the sake of economic efficiency it makes sense society at large to insure you against risks for which the free market cannot possibly create insurance.

From research done the Inon Inon Pricing Research Centre, and Leigh Caldwell:

Everyone knows – or thinks they know – that prices such as £1.99, £5.99 or £9.99 are optimal price points for retail goods. Customers read the first digit first, and the last two are ignored – or at least, they have much less cognitive impact. In general, consumers were thought to put a subjective value estimate of about ten per cent less on an item priced at £3.99, than one at £4.00.

This has been a fairly robust result in the past, and is intuitive for a number of reasons, “but WAIT!” say Leigh:

[And] the results were a surprise. At first we thought that the effect we have discovered was just a previously unnoticed artefact, hidden by the fact that no proper experiment has been published before. But after further exploration, we think it is also an effect of changing consumer preferences. As customers become more aware of marketing tactics and more cynical about any communication from companies, their psychology and behaviour inevitably changes.

So, to the results. The summary points are:

  1. Prices ending in .99 no longer have any advantage in consumer value perception, and do not lead to higher sales.
  2. The optimal penny value varies by country. In the United States, it is .01. So, instead of $3.99, companies should charge $4.01. In European countries, the optimal price point is different for different product categories, but there is a peak at .04 for many products. So, British or European retailers currently charging, say, £0.99 should increase the price to £1.04.
  3. By switching in this way to a “dollar-plus” price instead of “dollar-minus”, retailers can increase sales volume by an average of 8% and increase profit margins by 1-3% (depending on the exact price point).
  4. Consumers, when presented with the new price point, report an increased level of trust and affinity with the brands of the retailer and manufacturer. We believe this arises from the “honesty signal” that comes from abandoning a discredited and manipulative sales practice.

This is indeed very interesting, and I eagerly await reading the full study (which Leigh is offering as a pre-print!). Head over to Leigh’s blog for more rather counter-intuitive findings from his new research!

Update: If not a bit late, April fools!

Ezra Klein has a post where he calls the balanced budged constitutional amendment Republicans are pushing and calls it both terrible policy and dangerous. I haven’t read the actual amendment or taken a close look at it, but based on Ezra’s description I’m tempted to agree with him. But that’s not why I’m writing. I’m writing because I want to disagree with this statement of his:

But the problem isn’t simply that the proposed amendment is extreme. It’s also unworkable. The baby boomers are retiring and health costs are rising. Unless you have a way to stop one or the other from happening — and no one does — spending as a percentage of GDP is going to have to rise.

While economists may disagree about the fiscal impacts of past immigration, there is a general agreement that higher skilled immigrants have a positive impact on government budgets.  Part of our long-term budget problem is demographic, so, as Rick Santorum so usefully implied, we should be letting in more immigrants who are on average younger in order to counteract our country’s aging (that was Santorum’s intended point, right?). Also, more immigrants also allow us to spread the fixed defense costs over a more people, and lower defense spending as a percent of GDP. Illegal immigrants are even better from a budgetary standpoint, since they frequently contribute to social security but don’t take out of it, and have thus put around $120 to $240 billion into the system. So what we really need is a massive influx of highly skilled illegal immigrants.

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