Alex Tabarrok

Grading Modi

by on June 22, 2017 at 3:18 pm in Economics | Permalink

There have been a number of articles recently reviewing economic reform under India’s Prime Minister Narendra Modi. The best is this excellent report from the Economist:

FEW countries would see a tax requiring some businesses to file over 1,000 returns a year as an improvement. But India might. A nationwide Goods and Services Tax (GST) is set to come into force on July 1st. It will replace such a tangle of national and local levies and duties that even the prospect of 37 annual filings (three a month plus an annual return) for each of India’s 29 states in which a business operates is a relief by comparison.

By replacing domestic tariffs, the new tax should rid India of checkposts at internal borders, where lorries carrying goods typically languish for hours. Less red tape, however, comes with complications. Most countries with a value-added tax settle on a single rate for many goods and services. India has opted for six, ranging from zero to 28%. Officialdom decrees, for example, that shampoo, wallpaper and fizzy water are luxuries to be taxed at 28%; eyeliner, curry paste and plain water will attract an 18% levy. Restaurants will pay 12%, unless they are small (5%) or air-conditioned (18%).

Hopes that liberalising reforms would breathe new life into India’s economy have permeated the air since Narendra Modi swept to power as prime minister in May 2014. But the GST is perhaps the most obvious example of an opportunity wasted. Economists think a simple GST, which would have ensured businesses focus on goods and services that consumers want rather than those favoured by the tax code, might have added two percentage points to GDP growth. The complicated version will probably yield less than half that and only after a painful transition.

Read the whole thing.

The Return of the Jitney

by on June 20, 2017 at 7:27 am in Economics, Travel | Permalink

Lyft’s new service, Lyft Shuttle, works on a fixed route for a fixed fee during commute hours. Salon mocks this as a “glorified city bus with fewer poor people.” In fact, Lyft Shuttle and Uber Pool, which is moving in a similar direction, are an improved form of jitney. Jitneys were very popular in the early history of the automobile because they were cheaper, safer and more flexible than public transit but the transit companies lobbied to have them made illegal or burdened with heavy costs.

In many less developed economies, however, jitneys remain a popular form of transit. In New York City, jitneys never quite went away but have continued to operate, mostly illegally, under the name jitneys or shared taxis or dollar vans. Moreover, contrary to Salon, the jitney has always been a form of transit appreciated by the poor. Here’s wikipedia on New York City’s dollar vans:

Dollar vans are typically modified passenger van, and often operate in urban neighborhoods that are under-served by public mass transit or taxis. Some of the dollar vans are licensed and regulated, while others operate illegally. Passengers may board them at designated stops along their route or hail them as share taxis….Dollar vans are often owned and used by members of inner-city communities, such as African/Caribbean American, Latino, and Asian-American populations.

The transit companies did have a legitimate beef with the jitneys. The jitneys would often free-ride on the market making of the transit companies by swooping in just before a bus’s scheduled arrival. Without passengers the transit company wasn’t profitable but without a transit company to ease coordination the jitneys weren’t as profitable or as efficient as they might be–jitneys were subject to what Al Roth calls market unraveling which led in turn to market thinness.

Klein, Moore and Reja came up with a clever solution to the unraveling problem, curb rights (see also my book Entrepreneurial Economics). Curb rights are rights to pickup passengers allocated by curb location and hour.

Will the new form of jitneys be subject to unraveling? Will curb rights be necessary? Probably not. Lyft has moved the location of coordination from the unowned streets to owned cyberspace. Thus the privatization of coordination has solved a market thinning problem that has plagued jitneys for over a hundred years.

Public transit still has useful features, especially the economies of scale available with subways. Economies of scale also make subways, as of yet, a natural monopoly for which regulation may be useful. It’s difficult to see, however, what market failure exists in the market for road transit. We might want to subsidize people but there’s little reason to subsidize buses or other forms of road transit.

Efficient markets?

by on June 19, 2017 at 9:25 pm in Economics | Permalink

From Morgan Housel on twitter.

Digital to Biological Printer

by on June 16, 2017 at 12:14 pm in Science | Permalink

In Nature Biotechnology Gibson, Venter et al. describe a biologic printer that can take instructions from the web and without human intervention “print” a variety of biologics:

…DNA templates, RNA molecules, proteins and viral particles were produced in an automated fashion from digitally transmitted DNA sequences without human intervention.

Motherboard has a good writeup:

“If you had [a DBC] hooked up to your desktop computer, we could email you insulin or a vaccine, and the device would produce it for you ready-to-go,” Venter said. “If you think about all the protein-based drugs that are out there… If you can get those by email instead of getting them from the pharmacy, is conceptually going to be a very different world.”

And what is the ultimate goal?

Right now, it prints proteins. In the far future, it could print human babies on Mars.

Hat tip: Martin Laurence.

Indifference Curves!

by on June 14, 2017 at 10:54 am in Economics, Education | Permalink

The latest video in our Principles of Microeconomics course at MRUniversity is on indifference curves (earlier videos covered marginal utility and budget constraints). In at least one way this video is better than any we have previously done.

As always, these videos go great with our beautiful textbook Modern Principles of Economics.

Your Next Government

by on June 13, 2017 at 7:25 am in Books, Economics | Permalink

Private governments can learn from the commercial corporate world, where intense competition has driven the evolution of institutions capable of supporting large, complex, and consent-rich communities. Your next government might thus resemble a city-sized corporation, with you and other residents buying shares, electing the board of directors, and so forth. Think of it as residential co-op, upgraded for the big leagues.

Read Tom W. Bell for more, including his intriguing idea for “double democracy” and a generous appreciation of dominant assurance contracts.

At Cato Unbound I argue for libertarian social engineering:

The better markets work, the less the demand for the state. By improving markets and other voluntary organizations, libertarians can make their political vision more attractive while at the same time making people better off.

Modern libertarianism began after many of the market institutions that we take for granted had already been developed. Fee simple property, for example, dates to 1290. Could we have a libertarian society without fee simple property? In theory, yes. In practice, the free society is attractive because it generates wealth. Without fee simple property it is, at the very least, more difficult to create a rich, industrialized society. The limited liability company dates much later than fee simple property, to the 19th century.  Without the limited liability company, it would probably have been much more difficult to raise large amounts of capital. As a result, without limited liability, markets would be at a great disadvantage compared to the state in conducting economic activity on a large scale. Thus fee simple property and the limited liability company are among the technological/legal institutions that have made a free society possible, not because they are constitutive of a free society, but because they make a free society work better and compete better against statist alternatives.

So how can we improve markets? Public goods are one of the biggest challenges to markets and it was long thought that because of the free rider problem markets could not produce public goods. In Tabarrok (1998) I showed that such reasoning was wrong; a large class of public goods can be produced voluntarily using what today would be called a crowdfunding contract with a refund bonus or what I called at the time, the dominant assurance contract (DAC). My piece at Cato Unbound describes the DAC and also some other ideas for libertarian social engineering in more detail.

What’s important about dominant assurance contracts is not simply that they solve the public good problem but that:

Dominant assurance contracts open the provision of public goods to entrepreneurship, innovation, and the market discovery process.

An interesting test of what3Words, the location addressing system for the planet that I have blogged before. It’s not exactly an RCT to say the least but should motivate further testing.

what3words would be very useful in India where street addresses are less common and rigidly adhered to than in the US.

Hat tip: Samir Varma.

The Italian Job

by on May 29, 2017 at 7:37 am in Economics, Law | Permalink

Each year there are more bank robberies in Italy (approximately 3,000) than in the rest of Europe combined, with a 10 percent chance of victimization on average.

…The average robbery lasts 4.27 minutes and leads to a haul of approximately 16,000 euros. Given that more than half of all bank robberies involve two or more perpetrators, the average haul per criminal is approximately equal to 8,700 euros.

…only about 40 percent of all bank robbers disguise themselves when robbing a bank.

Those are a few interesting facts from a bold new paper, Optimizing Criminal Behavior and the Disutility of Prison. The authors, Mastrobuoni and Rivers, use extensive data on bank robberies to model bank robbery as a second by second optimization problem:

The key insight of our model is that bank robbers face a trade-off when deciding how long to stay in the bank. By staying an extra minute, the robbers can collect more money, but they also run the risk of getting caught and sent to prison. The cost of being apprehended is a function of the disutility each individual places on going to prison. By equating the marginal benefit with the marginal cost of time spent in the bank, we can back out the unobserved disutility that robbers assign to prison.

The authors create a sophisticated model of optimizing behavior which they estimate using extensive data. In their conclusion, they focus attention on their finding that higher ability bank robbers have a higher disutility of prison. Thus higher ability offenders can be (especially) deterred by longer sentences. The authors focus attention on high-ability offenders because those are the offenders most likely to fit the assumptions of their rational-actor model. I think it’s actually better to focus on the contra-positive conclusion: its hard to deter idiots.

Moreover, there are plenty of idiots:

Not surprisingly, traveling to the robbery by foot and targeting a bank with a security guard are both consistent with lower ability offenders….

The existence of idiots, however, calls into question the optimizing assumptions of the model. As I argue in What was Gary Becker’s Biggest Mistake? the poorly-socialized-child theory of crime can suggest other approaches to combatting crime (e.g. cognitive behavioral therapy):

Here’s a simple test for whether crime is in a person’s rational interest. In the economic theory if you give people more time to think carefully about their actions you will on average get no change in crime (sometimes careful thinking will cause people to do less crime but sometimes it will cause them to do more). In the criminal as poorly-socialized-child theory, in contrast, crime is often not in a person’s interest but instead is a spur of the moment mistake. Thus, even a small opportunity to reflect and consider will result in less crime.

The guy who robs a bank that has a security guard and then attempts to run away seems like a poor fit for a rational actor model. Perhaps more thinking would have led a better planned bank robbery but more plausibly it would have led to no robbery at all. Thus, I’d frame the author’s contributions in this path-breaking paper as telling us not just about rational bank robbery but about the limits and bounds of rational bank robbery. the 10 years from 1999 to 2009, India’s workforce increased by 63m. “Of these, 44 million joined the unorganized sector, 22 million became informal workers in the organized sector, and the number of formal workers in the organized sector fell by 3 million.” This is a social catastrophe. It is due not only to labour-market distortions, but to a host of constraints on the creation, operation and, not least, closure of organised and large-scale businesses.

White defendants in Winnebago County, Wisconsin were nearly twice as likely as non-whites to enter diversion programs instead of going to jail. A straightforward example of judicial racism? Surprisingly, no. The study, which was looking at people with no previous records who had committed non-violent misdemeanors, found that

… judges were offering white and non-white defendants the option to enter diversion programs such as drug rehabilitation at equal rates. But non-white defendants opted for jail time more often. And choosing jail means opting for a criminal record, which can mean opting for a life in which everything from jobs to loans become much tougher to get.

Does the rehabilitation program cost the defendants more? Do non-whites feel they are guiltier? Is there a lack of trust? Are there deeper structural issues that can account for these different choices? And why are we “privileging” the white decision? Could it be that whites are making the wrong decision? WIRED doesn’t offer a solution but discusses the new Zuckerberg financed dataset, Measures for Justice, which led to the discovery of the discrepancy.

The latest video in our Principles of Macroeconomics course at MRUniversity covers Understanding the Great Depression. I like this video a lot. It starts by illustrating the great fall in aggregate demand using the AD-AS model but also looks at the dust bowl, the Smoot-Hawley tariff and the National Industrial Recovery Act (NRA). The section on the tariff beautifully illustrates the argument that trade is like a technology that allows us to almost-magically transform one good into another. And the final section on the awful NRA has some great visuals.

If pharmaceutical reciprocity is a good idea for the United States, it’s a great idea for smaller countries. Indeed, this is mostly what happens in practice, even if not by law, since smaller countries can’t afford or justify the expensive US process. Fred Roeder of the Montreal Economic Institute makes the case for reciprocity in Canada:

…reciprocal recognition of drug approval authorities on both sides of the Atlantic would incentivize Canadian, European and American authorities to spend less time and money conducting parallel reviews. If the HPFB, the FDA or the EMA approved a drug, patients in Canada, Europe and America would have immediate access to it — increasing consumers’ choice as new drugs are offered to patients faster and more affordably, with less red tape driving up costs.

A reduction in approval time can be a win-win for patients and firms because a decrease in approval time is an increase in effective patent length without an actual increase in patent length. The numbers below are optimistic, but the idea that streamlining approval can increase profits and stimulate investment is correct:

These market-oriented reforms would not benefit not only consumers, but the pharmaceutical companies as well, expanding the timespan of the patents. On average, new drugs have a mere 10 to 14 years of patent protection remaining by the time they are sold to consumers after they have successfully jumped over all the government hurdles. Streamlining the drug approval process would increase the timespan of patented drugs on the market by 50 to 70 per cent.

Roeder also mentions Bart Madden’s important book Free to Choose Medicine. (For those who don’t know, I am proud to be the Bartley J. Madden chair in economics at Mercatus at GMU.)

It’s taken some time but owner’s equity in real estate is rising and getting close to its 2006 peak.* The wealth of most households is in the family home so household balance sheets look to be in good shape.

See this video on the importance of owner’s equity and Vernon Smith’s book with Steven Gjerstad, Rethinking Housing Bubbles.

Hat tip: Vernon Smith.

*The graph is now corrected for inflation. My bad. Fortunately FRED makes it easy to fix. You can make your own changes by clicking customize.

BMJ: In a national sample of elderly Medicare beneficiaries admitted to hospital with medical conditions, we found that patients treated by older physicians had higher 30 day mortality than those cared for by younger physicians, despite similar patient characteristics. These associations were found among physicians with low and medium volumes of patients but not among those with high volumes.

…Our findings suggest that within the same hospital, patients treated by physicians aged <40 have 0.85 times the odds of dying (1.00/1.17) or an 11% lower probability of dying (10.8/12.1), compared with patients cared for by physicians aged ≥60 (table 2⇑). This difference in mortality is comparable with the impact of statins for the primary prevention of cardiovascular mortality on all cause mortality (odds ratio of 0.86)39 or the impact of β blockers on mortality among patients with myocardial infarction (incidence rate ratio of 0.86),40 indicating that our observed difference in mortality is not only statistically significant but arguably clinically significant. In addition, if our results are causal, an adjusted risk difference of 1.3 percentage points suggests that for every 77 patients treated by doctors aged ≥60, one fewer patient would die within 30 days of admission if those patients were cared for by physicians aged <40.

The paper has data on over 700,000 Medicare admissions and over 18 thousand hospitalist physicians. Physicians are assigned to patients more or less randomly depending on admission time so there are no significant differences between patients assigned to younger and older physicians. Older physicians are more likely to be male and, of course, to be trained during a different time period so the paper can’t fully distinguish age effects from cohort effects. The authors do find that older physicians who work a lot perform well–perhaps these physicians update their training or perhaps they are a self-selected vigorous sample. Continuing medical education and assessment requirements are probably very valuable.

Hat tip: Eric Topol.