Month: October 2003

Cream Skimming

Glen Whitman at Agoraphilia has some comments on my debate with Tyler on vouchers. He notes that the public school system separates students according to ability with honors classes, AP classes, magnet schools and so forth. Yet, few people call this “cream skimming.” I think Glen’s point blows the peer-effects argument against school choice out of the water.

More generally, the argument in the peer-effects literature is that we shouldn’t let smart kids escape the public school system because their presence gives dumb kids a positive externality. I detest this argument. Children are not pawns to be moved about to satisfy the desires of some grand master. A decent school system treats children as ends in themselves. (In preparation, one might add, for life in a society that treats every individual as an end in themself.)

Climate Change Change

I took my kids to see the dinosaurs in the Smithsonian yesterday. As I was wandering around, I came across a surprising exhibit on the ice age that noted the following:

Initiation of glacial conditions may be triggered by surprisingly rapid climate changes. Therefore, the minor global cooling trend of recent decades…is being carefully watched and studied. Already the effects on food production are severe in many parts of the world….We are now in a relatively warm period (“interglacial”) following one of several major glacial periods. It is not certain when the present interglacial period will end but…imagine the impact of another full scale glacial advance like that just a few thousand years ago!

Clearly, the Smithsonian needs to update some of its exhibits but when they do so I hope they note that the “scientific consensus” on global climate change has been much more variable than the climate.

Is health care good for you?

Robin Hanson frequently tries to convince me that more health care, at the margin, doesn’t make us any healthier. A well-known Rand study found that 30 percent increases in health care consumption did not make people healthier. Nor does the international cross-sectional evidence drive the point home. Once you adjust for income, greater health care spending does not appear to make people healthier.

Robin now sends me this study, which shows that greater Medicare spending doesn’t make people any healthier. Areas with high Medicare spending don’t produce extra health, and yes, this result does adjust for the relevant variables. This, of course, would make Medicare reform a good deal easier, you cut cut spending without fearing catastrophe.

Why, then, do we spend so much on health care? Robin claims we do it to “show that we care” for our relatives. I’ve suggested we
do it simply to avoid the feeling of regret, should one of our loved ones die, and we then feel we “didn’t do enough.”

By the way, here is one of Robin’s essays, “Buy Health, Not Health Care,” he suggests that your doctor should lose a lot of money when you die.

My take: I never manage to win this debate with Robin. I don’t have much evidence to cite in favor of health care spending (email me if you know some). But I am suspicious when I hear the claim that health care does not matter at the margin. Which margin? The last unit you bought? The next unit you might buy? And how big a unit? No one wants to give up penicillin. And exactly which margin are these studies measuring?

On one hand, the economist in me would be happier if I had some evidence that all the extra American health care spending was bringing a concrete return. On the other hand, I hate going to the doctor, in fact I never go. If I could tell my wife that this was rational, well, that would be better than making the economist in me happy.

I’m moving to Switzerland!

Not only are taxes low in Switzerland, but according to Alvin Rabushka beginning in 2004 (not 1994 – earlier version had a typo) the Schaffhausen Canton will introduce an income tax with declining marginal tax rates. Beginning at 8% the marginal tax rate will peak at 11.5% and then decline so that the very highest income earners will face a marginal income tax (from the Canton) of just 6%. I like this not only because my income is relatively high but also because declining marginal tax rates are a property of optimal tax systems (see here for an introduction to optimal tax theory).

Is Austrian Business Cycle Theory Back?

Two new papers on ABC have been written recently by mainstream economists. The Great Depression as a credit boom gone wrong is by Barry Eichengreen and Kris Mitchener under the auspices of the Bank for International Settlements and The Austrian Theory of Business Cycles: Old Lessons for Modern Economic Policy? is by Stefan E. Oppers under the auspices of the IMF. Both links are courtesy of Bruce Bartlett’s Talking Points.

Behavioral economics

Michael, at www.2blowhards.com offers a useful post on behavioral economics, replete with useful links. For instance, this interview with Gary Becker offers Becker’s criticisms of this movement, scroll toward the end, if you don’t read the whole thing. You also can read about how Becker came upon the economics of crime and punishment while looking for a parking spot: “I started thinking about my chances of getting caught…”

More Bickering

Two quick notes on Tyler’s comment on my recent post on vouchers.

First, whether the school or the parent is sent the check is irrelevant (this is a basic theorem in economics). My point, however, was that parents cannot add-on to the voucher amount – i.e. the Chilean system has extensive price controls. Another way of saying this is that in the Chilean system parents never spend any of their own money on the private (subsidized) schools. I think a good voucher system requires that on at least some margins parents spend their own hard-earned dollars on their children’s education.

Second, Tyler thinks that the most convincing evidence is that Chileans did not improve on an international scale. Actually this is the least convincing evidence and it illustrates my point about the power of HU’s tests. The private schools in Chile increased by about 20 percentage points over the relevant time frame. Suppose that private schools were better than public schools by 10 percent then the aggregate gain at the national level would only be 2 percent. Small exogenous decreases in the quality of the public schools could easily swamp this gain.

Business Regulation

Andrei Shleifer and colleagues have engaged in a massive collection of data on legal regimes around the world. The World Bank has now released a major report written by the same group called Doing Business 2004 (summary here). In addition, the data from their project is available on the World Bank website Doing Business. This is a major resource for economists.

Here’s a nice graph from the report (click to expand).

regulation.JPG

Siberian facts

1. Oil and gas account for about a quarter of Russian gdp, about half of the export earnings, and about a third of government revenues.

2. Much of the Russian energy supply goes toward heating very cold places.

3. Almost 40 million Russians work and live in cities where the average January temperatures range from minus 15 Centigrade to minus 45 Centigrade.

4. Costs of living in Siberia are about four times higher than in the rest of Russia.

5. The average wage in Siberia is about 1/12 that of Moscow, and most Siberians cannot pay their energy bills.

6. There are restrictions on settlement in Moscow, and a general difficulty of finding jobs.

7. Many of the Siberian cities would never have been developed, had it not been for communist planning.

From today’s Financial Times.

Apparently this is why Russia cannot so easily deregulate its energy market and allow prices to rise to world market levels. Siberia would move further into bankruptcy.

The doctor drain from Canada

Unlike most libertarian-oriented economists, I find persuasive the left-wing arguments that individuals have a positive right to medical care. The problem is, most governmental systems are proving unsustainable in the long run. They are affordable only by rationing, which frustrates doctors and patients alike. The Canadian system is (barely) tolerable, only because so many Canadians come to this country for their care.

Read this article from The New York Times.

Here is one money quote:

Forced to compete for operating room time with other surgeons, he said that he and his colleague could complete only one or two operations on some days, meaning that patients whose cases were not emergencies could go months or even years before completing necessary treatment.

“Scarce resources are simply not being spent properly,” Dr. Sriharan concluded, citing a shortage of nurses and anesthesiologists in the hospital where the single microscope available is old and breaking down.

The two surgeons are sharply critical of Canada’s health care system, which is driven by government-financed insurance for all but increasingly rations service because of various technological and personnel shortages. Both doctors said they were fed up with a two-tier medical system in which those with connections go to the head of the line for surgery.

Here is another:

There was a net migration of 49 neurosurgeons from Canada from 1996 to 2002, according to the Canadian Institute for Health Information, a large loss given that there are only 241 neurosurgeons in the country.

My take: It is only going to get worse.

Tightening the border?

Barriers to entering Mexicans simply encourage them to stay in this country longer, and make them less likely to return home for long visits. On net, the number of illegal immigrants appears to go up. For more, read the always stimulating Virginia Postrel.

My take: I know some of these people (the Mexican immigrants), and I can tell you, this is absolutely true. Given border crackdowns, they make a conscious calculation to stay longer in the United States, rather than migrating seasonally.

What is in a voter’s self-interest?

Alan Krueger reports on survey research that shows that people do not vote according to their self-interest. In particular, he bemoans the fact that a majority of the poor want to get rid of the estate tax. This and other odd results are due to “ignorance and uncertainty” says Larry Bartels, a Princeton political scientist. If only the poor were better informed they would vote against tax cuts for the rich. Moreover, a better informed electorate would be a good thing. I take issue with both of these positions.

Take the normative position first. Assuming that voters voted self-interestedly, would a more informed electorate be a good thing? Doubtful. If everyone voted their “interest,” as Krueger and Bartels conceive it, every bureaucrat, welfare recipient and old person living on social security would vote for more government. Naturally, I think this would be a disaster but even those who think this would be a good thing ought to give pause when they consider how much more polarized our society would become were it not for the fact that ideology cuts across class lines.

Moreover, isn’t it interesting that when the poor vote against their “self-interest” they are labeled “uninformed” – Bartels compares them to Homer Simpson. But when Hollywood liberals like Barbara Streisand or rich philanthropists like Bill Gates Sr. vote against their “self-interest” they are called enlightened. What Krueger and Bartels refer to as self-interest is actually masking an ideology.

Is it true that informed voters would vote differently? (Krueger cites some evidence suggesting that in fact this is not the case – at least not as much as one would expect – but he doesn’t offer an explanation.) To understand this one should first realize that voters are uninformed because it doesn’t pay to be informed. The probability that one vote sways the election is infinitesimal so voters are rationally ignorant. Does this imply that voting is random? Not at all. Voters who care about ideas even a little are free to vote their ideology at low cost. Thus, in my view, the fact that votes don’t matter gives us hope. It’s only because votes don’t matter that libertarianism has a chance of success. Of course, I recognize that the same facts gives socialism a chance at the polls but I hope good ideas will win out.

Addendum: I’ve been influenced on these issues by our colleague, Bryan Caplan – although I give the ideas a more positive spin than he does. I recommend his paper Libertarianism Against Economism: How Economists Misunderstand Voters, and Why Libertarians Should Care from The Independent Review and his other papers on rational irrationality which you can find on his web page.