There is a new NBER Working Paper by Mark Duggan, Amanda Starc, and Boris Vabson, here is the abstract, with the bold emphasis added by me:

Governments contract with private firms to provide a wide range of services. While a large body of previous work has estimated the effects of that contracting, surprisingly little has investigated how those effects vary with the generosity of the contract. In this paper we examine this issue in the Medicare Advantage (MA) program, through which the federal government contracts with private insurers to coordinate and finance health care for more than 15 million Medicare recipients. To do this, we exploit a substantial policy-induced increase in MA reimbursement in metropolitan areas with a population of 250 thousand or more relative to MSAs just below this threshold. Our results demonstrate that the additional reimbursement leads more private firms to enter this market and to an increase in the share of Medicare recipients enrolled in MA plans. Our findings also reveal that only about one-fifth of the additional reimbursement is passed through to consumers in the form of better coverage. A somewhat larger share accrues to private insurers in the form of higher profits and we find suggestive evidence of a large impact on advertising expenditures. Our results have implications for a key feature of the Affordable Care Act that will reduce reimbursement to MA plans by $156 billion from 2013 to 2022.

There is an ungated version here (pdf).

One conclusion drawn by Kroll and his Princeton colleagues Ian Davey and Ed Felten is that those rules will have to be significantly changed if Bitcoin is to last. Their models predict that interest in “mining” for bitcoins, by downloading and running the Bitcoin software, will drop off as the number in circulation grows toward the cap of 21 million set by Nakamoto. This would be a problem because computers running the mining software also maintain the ledger of transactions, known as the blockchain, that records and guarantees bitcoin transactions (see “What Bitcoin Is and Why It Matters”).

Miners earn newly minted bitcoins for adding new sections to the blockchain. But the amount awarded for adding a section is periodically halved so that the total number of bitcoins in circulation never exceeds 21 million (the reward last halved in 2012 and is set to do so again in 2016). Transaction fees paid to miners for helping verify transfers are supposed to make up for that loss of income. But fees are currently negligible, and the Princeton analysis predicts that under the existing rules these fees won’t become significant enough to make mining worth doing in the absence of freshly minted bitcoins.

The only solution Kroll sees is to rewrite the rules of the currency. “It would need some kind of governance structure that agreed to have a kind of tax on transactions or not to limit the number of bitcoins created,” he says. “We expect both mechanisms to come into play.”

That kind of approach is common in established economies, which tame things like insider trading with laws and regulatory agencies and have central banks to shape economies. But many backers of Bitcoin prize the way it currently operates without centralized control, and would likely rebel at any suggestion of changing the rules.

The full article, which is here, has other points of interest.  I would put the problem this way.  It is easy to trust a non-proprietary network, and that is often cited as an advantage of Bitcoin, or for that matter as an advantage of a common language or a standard.  At the same time, the non-proprietary nature of the network makes the rules much harder to change because there is no authority to mandate such a change.  You will find related points in many papers of Joseph Farrell.

Hat tip goes to Andrea Castillo.

Still Burned by the FDA

by on March 21, 2014 at 7:30 am in Economics, Law, Medicine | Permalink

Excellent piece in the Washington Post on the FDA and sunscreen:

…American beachgoers will have to make do with sunscreens that dermatologists and cancer-research groups say are less effective and have changed little over the past decade.

That’s because applications for the newer sunscreen ingredients have languished for years in the bureaucracy of the Food and Drug Administration, which must approve the products before they reach consumers.

…The agency has not expanded its list of approved sunscreen ingredients since 1999. Eight ingredient applications are pending, some dating to 2003. Many of the ingredients are designed to provide broader protection from certain types of UV rays and were approved years ago in Europe, Asia, South America and elsewhere.

If you want to understand how dysfunctional regulation has become ponder this sentence:

“This is a very intractable problem. I think, if possible, we are more frustrated than the manufacturers and you all are about this situation,”

Who said it? Janet Woodcock, director of the FDA’s Center for Drug Evaluation and Research! Or how about this:

Eleven months ago, in a hearing on Capitol Hill, FDA Commissioner Margaret A. Hamburg told lawmakers that sorting out the sunscreen issue was “one of the highest priorities.”

If this is high priority what happens to all the “low priority” drugs and medical devices?

The whole piece in the Washington Post is very good, read it all. I first wrote about this issue last year.

Addendum: See for more on the FDA regulatory process and its reform.

Crack cocaine estimate of the day

by on March 18, 2014 at 5:55 pm in Law, Medicine | Permalink

At present, no more than about 200 young people start using crack-cocaine each day. Ten years ago, the corresponding estimated daily rate was 1,000.

That is from this paper, via Kevin Lewis.

The NYTimes has a very bad article on Tesla and auto dealer franchise laws. The worst bit is this mind blowing contradiction:

…most states have some limits on direct sales by auto manufacturers…These rules are generally meant to ensure competition, so that buyers can shop around for discounts from independent dealers, and to protect car dealers and franchises from being undercut by the automakers.

So there you have it, limits on direct sales ensure competition and protect car dealers from being undercut by the automakers. Sorry, but you can’t have it both ways. Which view is correct? Let’s begin with some background (drawing on a great article by LaFontaine and Morton).

Franchising arose early on in the history of the auto industry because, as in other industries, franchising can take advantage of local knowledge and at the same time control agency costs. Franchising rules evolved in Coasean fashion so that manufacturers could not expropriate dealers and dealers could not expropriate manufacturers. To encourage dealers to invest in a knowledgeable sales and repair staff, for example, manufactures promised dealers exclusive franchise (i.e. they would not license a competitor next door). But with exclusive franchises dealers would have an incentive to take advantage of their monopoly power and increase profits by selling fewer units at higher profits. Selling fewer units, however, works to the detriment of the manufacturer and the public (ala the double marginalization problem (video)). Thus the manufactures required dealers buy and sell a minimum quantity of cars, so-called quantity forcing. Selling more units is exactly what we want a monopoly to do, so these restrictions benefited manufactures and consumers.

Politics, however, began to intrude into this Coasean world in the 1940s and 1950s. Auto sales accounts for some 20% of sales taxes and auto dealers employ a lot of people so when it came to a battle in the state legislatures the auto dealers trumped the manufacturers. The result was franchise laws that were increasingly biased towards dealers. In essence, exclusive franchises became locked into place, manufactures lost the right to add dealers even with population expansion, quantity forcing became illegal and dealer termination became all but impossible.

The result of dealer rent seeking has been higher auto prices for consumers, about 6% higher according to one (older) study by the FTC. Consumers have been stiffed in other ways as well. In some states, for example, manufacturers were required to reimburse dealers for a repair under warranty whatever amount the dealers would have charged consumers for the same repair not under warranty. As a result, dealers had an incentive to increase their price to consumers because that increased what they would be reimbursed for repairs under warranty. The franchise laws have also resulted in a highly inefficient distribution of dealers as populations have moved but dealers have been frozen into place. The inability to close, move or consolidate dealers has impacted the big-3 American firms especially because they have older networks. As a result, a typical GM dealer sells 377 cars a year while a typical Honda dealer sells 1,062 and a Toyota dealer 1,488.

Tesla wants to sell directly to the public but more generally what we need is to restore the Coasean balance, put dealers and manufacturers back on a equal footing and let the market decide the most efficient means of retailing and distributing automobiles.

Addendum: Dan Crane and Lynne Kiesling have further posts on this topic.

In Japan, the Yamaha Motor Company’s RMAX helicopter drones have been spraying crops for 20 years. The radio-controlled drones weighing 140 pounds are cheaper than hiring a plane and are able to more precisely apply fertilizers and pesticides. They fly closer to the ground and their backwash enables the spray to reach the underside of leaves.

The helicopters went into use five years ago in South Korea, and last year in Australia.

Television networks use drones to cover cricket matches in Australia. Zookal, a Sydney company that rents textbooks to college students, plans to begin delivering books via drones later this year. The United Arab Emirates has a project underway to see if government documents like driver’s licenses, identity cards and permits can be delivered using small drones.

In the United Kingdom, energy companies use drones to check the undersides of oil platforms for corrosion and repairs, and real estate agents use them to shoot videos of pricey properties. In a publicity stunt last June, a Domino’s Pizza franchise posted a YouTube video of a “DomiCopter” drone flying over fields, trees, and homes to deliver two pizzas.

But when Lakemaid Beer tried to use a drone to deliver six-packs to ice fishermen on a frozen lake in Minnesota, the FAA grounded the “brewskis.”

Andreas Raptopoulous, CEO of Matternet in Menlo Park, Calif., predicts that in the near term, there will be more extensive use of drones in impoverished countries than in wealthier nations such as the U.S.

He sees a market for drones to deliver medicines and other critical, small packaged goods to the 1 billion people around the globe who don’t have year-round access to roads.

There is more here, via Claire Morgan.

That is my latest NYT column and you will find it here.  Here is one excerpt:

Long before Malcolm Gladwell popularized the concept [of tipping points], Mr. Schelling created an elegant model of tipping points in his groundbreaking work “Micromotives and Macrobehavior.” The theory applies to war, as well as to marketing, neighborhood segregation and other domestic issues. In this case, the idea of negotiated settlements to political conflicts may be fraying, and the trouble in Crimea may disturb it further, moving the world toward a very dangerous tipping point.

First, some background: With notable exceptions in the former Yugoslavia and in disputed territories in parts of Russia and places like Georgia, the shift to new governments after the breakup of the Soviet Union was mostly peaceful. Borders were redrawn in an orderly way, and political deals were made by leaders assessing their rational self-interest.

In a recent blog post, Jay Ulfelder, a political scientist, noted that for the last 25 years the world has seen less violent conflict than might have been expected, given local conditions. Lately, though, peaceful settlements have been harder to find. This change may just reflect random noise in the data, but a more disturbing alternative is that conflict is now more likely.

Why? The point from game theory is this: The more peacefully that disputes are resolved, the more that peaceful resolution is expected. That expectation, in turn, makes peace easier to achieve and maintain. But the reverse is also true: As peaceful settlement becomes less common, trust declines, international norms shift and conflict becomes more likely. So there is an unfavorable tipping point.

In the formal terminology of game theory, there are “multiple equilibria” (peaceful expectations versus expectations of conflict), and each event in a conflict raises the risk that peaceful situations can unravel. We’ve seen this periodically in history, as in the time leading up to World War I. There is a significant possibility that we are seeing a tipping point away from peaceful conflict resolution now.

Do read the whole thing.

More generally, here is a new edited volume on the economics of peace and conflict, edited by Stergios Skaperdas and Michelle Garfinkel.

And here is the new forthcoming Robert Kaplan book Asia’s Cauldron: The South China Sea and the End of a Stable Pacific.  I have pre-ordered it.

Bill Gates on poverty

by on March 15, 2014 at 1:03 pm in Current Affairs, Economics, Law, Web/Tech | Permalink

Should the state be playing a greater role in helping people at the lowest end of the income scale? Poverty today looks very different than poverty in the past. The real thing you want to look at is consumption and use that as a metric and say, “Have you been worried about having enough to eat? Do you have enough warmth, shelter? Do you think of yourself as having a place to go?” The poor are better off than they were before, even though they’re still in the bottom group in terms of income.

The way we help the poor out today [is also a problem]. You have Section 8 housing, food stamps, fuel programs, very complex medical programs. It’s all high-overhead, capricious, not well-designed. Its ability to distinguish between somebody who has family that could take care of them versus someone who’s really out on their own is not very good, either. It’s a totally gameable system – not everybody games it, but lots of people do. Why aren’t the technocrats taking the poverty programs, looking at them as a whole, and then redesigning them? Well, they are afraid that if they do, their funding is going to be cut back, so they defend the thing that is absolutely horrific. Just look at low-cost housing and the various forms, the wait lists, things like that.

As you would expect, the interview is interesting throughout.  For the pointer I thank Samir Varma.

*The Once and Future King*

by on March 13, 2014 at 2:25 pm in Books, Law, Political Science | Permalink

The author is my colleague F.H. Buckley and the subtitle is The Rise of Crown Government in America.  I am very enthusiastic about this book, which is a comparative study of American and Canadian systems of government with respect to the abilities to produce varying degrees of tyranny, in the former case mostly through the executive branch.  Buckley is himself from Canada and overall favors that system of government.  Here are two excerpts:

That was why McGee and the other Fathers thought Canada the freest country in the world.  When they looked south, they saw a country with more of Constant’s liberty of the ancients, but with less (so it seemed to them) of the liberty of the moderns.  Moreoever, of the former, the right of self-government had been corrupted by political machines and trivialized by elections for dogcatchers.  The high ideals of the American Founders had been forgotten, and McGee thought that their republican virtue, in the era of Boss Tweed and Tammany Hall, was now little more than American braggadocio.


Presidential regimes are more likely than parliamentary ones to turn into dictatorships, and to rank lower on measures of public corruption.  Thus far we have examined two explanations for this: The president is the head of state and symbol of the nation; and he is relatively immunized from accountability to the legislature.  We now turn to a third possible explanation: The separation of powers creates inefficiencies in government that invite the president to step in and correct, and in so doing, to augment his powers and independence from congressional oversight.

I would argue that, for better or worse, a big part of the differences is driven, not only by constitutions but also by the much more active foreign policy of the United States.  I wonder what a true parliamentary discussion of nuclear weapons use would look like.

I don’t feel I have an original or substantive point to make on this matter, but it is worthy of note nonetheless.  I was favorably impressed with Dana Milbank’s opinion piece today.  This is a Richard Nixon-kind of scandal, the CIA does report to the Executive Branch, and so far I haven’t seen the attempt to set things right or even clarify what has happened.  Milbank writes:

If the White House wishes to repair the damage, it would declassify without further delay the report done by Feinstein’s committee — along with the Panetta Review. If the White House won’t, Feinstein’s panel and others would be justified in holding up CIA funding and nominations and conducting public hearings.

Obama also should remove those people involved in spying on the Senate panel and in harassing Senate staffers. First out should be Robert Eatinger, the CIA’s acting general counsel. Previously, Eatinger had been a lawyer in the unit that conducted the interrogation program at the heart of the Senate’s probe. Eatinger, Feinstein said, filed a “crimes report” with the Justice Department suggesting that congressional staffers had stolen the Panetta Review.

If somehow you haven’t been following the issue, here is what is up:

California Democrat Dianne Feinstein, chairwoman of the Senate intelligence committee, has been an ally of Obama and a staunch defender of the administration during the controversy over the National Security Agency’s surveillance programs. So her credibility could not be questioned when she went public, reluctantly, to accuse Obama’s CIA of illegal and unconstitutional actions: violating the separation of powers by searching the committee’s computers and intimidating congressional staffers with bogus legal threats.

The subtitle of his book is Truman, American Jews, and the Origins of the Arab-Israeli Conflict.  I am finding this book interesting, here is one good bit:

The call for a greater Syria reflected the prevailing sentiment among Palestine’s Arab intellectuals.  Some notables who were active in the Muslim-Christian Associations wanted an Arab Palestine within the British Empire, but many of the activists and intellectuals, inspired by Faisal’s success, envisaged Palestine as “Southern Syria.”

…There was a good geographical as well as political argument for greater Syria.  As subsequent events would reveal, Palestine lacked natural boundaries, especially in the north and south.  There were looming disputes over water rights that could be avoided by combining Palestine and Syria.

…The British, fearful that the movement for a greater Syria would undercut their hold over Palestine, encouraged Palestine’s Arabs to think of themselves as Palestinian.

Overall the text offers a strongly non-sentimental account, does not whitewash any of the participants in the disputes, and it communicates how much early American policymakers , including Truman, were skeptical about what ended up happening.  Today’s often-unquestioned assumptions were very often historically quite contingent.  You can buy the book here.

Here is one part of it:

There is something else we could do to promote universal health insurance: We could allow everyone — regardless of income — to enroll in Medicaid, and at the same time allow everyone on Medicaid to leave the program, claim the tax credit, and buy private insurance. This, of course, is the “public option” that the Left has been clamoring for. It’s hard to understand why conservatives are so resistant to it: If a private insurer can’t outperform Medicaid, it doesn’t deserve to be in the market.

The specific tax-credit levels I am proposing are the Congressional Budget Office estimates of the cost of enrolling new people in Medicaid. Under my proposal, people who are already eligible could use their tax credit to buy in, no questions asked, but people with higher incomes might have to pay a premium on top of their tax credit if they have higher-than-average expected costs. Health status wouldn’t be considered, but age and other factors would be. To prevent gaming of the system, no one would be able to move from one plan to another at a premium that is way below his total expected costs. (See below.)

This proposal may appear to be unconservative, but in fact it is consistent with minimizing the role of government. Medicaid would be an insurer of last resort, but, beyond their uniform tax credit, people who are not poor but enroll in Medicaid would not be getting an entitlement. They would have to pay their own way.

The full post is here.

There was a brief symposium, here are the results:

Larry Summers

President Emeritus of Harvard University, Former Chief Economist of the World Bank

My sense is that cap and trade is not the route to the future. It did not make it politically in the US at a moment of great opportunity in 2009. And European carbon markets have been plagued by constant problems. And globally it’s even harder. My sense is that the right strategy has three major elements. First, as the G20 vowed in 2009, there needs to be a concerted phase out of fossil fuel subsidies. This would help government budgets, drive increases in economic efficiency and substantially reduce global emissions. Second, there needs to be assurance of adequate funding for all areas of basic energy research. As a practical matter my guess is the world will produce non fossil fuel power in the next 25 years at today s fossil fuel prices or it will fail with respect to global climate change. Third, there is a strong case for concerted carbon taxes to further discourage greenhouse gas emissions. But this is a follow-on step for after the elimination of fossil fuel subsidies.

Bjorn Lomborg

Director of the Copenhagen Consensus Center and adjunct professor at Copenhagen Business School

The only way to move towards a long-term reduction in emissions is if green energy becomes much cheaper. If it cost less than fossil fuels, everyone would switch, including the Chinese. This, of course, requires breakthroughs in green technologies and much more innovation.

At the Copenhagen Consensus on Climate (, a panel of economists, including three Nobel laureates, found that the best long-term strategy to tackle global warming was to increase dramatically investment in green research and development. They suggested doing so 10-fold to $100bn a year globally. This would equal 0.2% of global GDP. Compare this to the EU’s climate policies, which cost $280 billion a year but reduce temperatures by a trivial 0.1 degrees Fahrenheit by the end of the century.

Alex Tabarrok

Bartley J. Madden Chair in Economics at the Mercatus Center, George Mason University

Neither the developed nor the developing world will accept large reductions in their standard of living. As a result, the only solution to global climate change is innovations in green technology. A carbon tax will induce innovation as people demand a way to avoid the tax. A carbon tax, however, will be more politically acceptable if technologies to avoid the tax are in existence before the tax is put into place. Prizes for green innovations can blaze a path down a road that must be traveled, making the trip easier. The L-prize successfully induced innovation in LED technologies, the X-Prize put a spacecraft into near space twice within two weeks and Google’s Lunar X prize for putting a robot on the moon is close to being awarded. Prizes have proven their worth. To speed both the creation and diffusion of green technology, green prizes should be awarded at the rate of $100-$200 million annually.

Tyler Cowen

Professor of Economics, George Mason University

This is a problem we are failing to solve. Keep in mind it is not just about getting the wealthy countries to switch to greener technologies, but we also desire that emerging economies will find green technology more profitable than dirty coal. A carbon tax is one way forward but the odds are that will not be enough and besides many countries are unlikely to adopt one anytime soon. Subsidies for technology could occur at a very basic level and we could make a gamble that nuclear fusion will finally pay off. We also need a version of green technology that will fit into existing energy infrastructures and into countries which do not have the most reliable institutions. The most likely scenario is that we will find out just how bad the climate change problem is slated to be.

There are further responses at the link.

Addendum: Ashok Rao adds comments.

The Comparative Constitutions Project has collected data from 720 of the 800 or so constitutions written since 1789. The shortest constitution, for example, is that of Jordan at 2,270 words while the longest is that of India which at 146,385 words is more than twice as long as the next longest constitution and considerable longer than the US File:Magna charta cum statutis angliae p1.jpgconstitution at 7,762 words. The New Zealand constitution grants the fewest rights, namely zero, while the Bolivian constitution grants the most rights at 88.

Among the rights in the Bolivian constitution are “Every person has the right to health.” That does seem ambitious, although I cannot guarantee the translation perhaps it says health care in the original? There are also rights to homes, sewers, and telecommunication services. I cannot go along with those but I do think this is an advance:

Neither the public authority, nor any person or body may intercept private conversations or communications by an installation that monitors or centralized them.

Venezuela offers almost as many rights in its constitution as Bolivia, 81 according to the data. Nevertheless, I think I would feel more secure in my rights living in New Zealand than Bolivia or Venezuela. A constitution with a long list of rights is a bit like a prenup with a long list of rights, looks good on parchment but parchment does not a marriage or a constitution make.

Your porn is not Canadian enough

by on March 8, 2014 at 6:10 am in Film, Law, Television | Permalink

For failing to broadcast sufficient levels of Canadian-made pornography — and failing to close-caption said pornography properly — a trio of Toronto-based erotica channels has earned a reprimand from the Canadian Radio-television & Telecommunications Commission.

Wednesday, the CRTC issued a broadcast notice saying AOV Adult Movie Channel, XXX Action Clips and the gay-oriented Maleflixxx were all failing to reach the required 35% threshold for Canadian content.

Based on a 24-hour broadcast schedule, that translates to about 8.5 hours of Canadian erotica a day.

There is more here, and for the pointer I thank TH.