Month: September 2004

Who Won the Debate?

The TradeSports contract for “Bush Reelected” at 8:36 p.m. last night was “Bid: 65.0 Ask: 66.0”. That is the price of a share that pays a dollar if Bush wins.

The debate started at 9 p.m., EST.

At 9:55 p.m. the contract was up to 67.0, 67.4.

At 10:30, at the close of the debates, Bush stood at 66.9, 67.4.

So at the time people thought Bush won handily. But Friday morning, at 7:26 a.m., Bush was down to 62.1, 63.6, apparently Bush lost the post-debate “spin”…

Addendum: There are at least two ways of reading these numbers. First, bettors realized that Bush was connecting with the American public. But then the “left-wing press” gave the debates a pro-Kerry spin, and voters now buy into this interpretation. Second, the press is better at reading the debates than are the bettors. The bettors got it wrong at first, but fell into line once the press spoke.

Second addendum: By 10:22 a.m., Friday morning, Bush was back to where he started before the debates. And by 11:19 a.m., Bush is at 65.5, 65.9, slightly up from before the debates.

Should we privatize Social Security?

Brad DeLong argues that we should privatize social security. His ingenious analysis suggests that privatization could help overcome market failures of insufficient savings and insufficient investment in equities (the “equity premium paradox”). Turning the usual debates on their head, he argues that market fans should have no reason to support privatization, but interventionists might. Note that Brad was replying to earlier posts by Matt Yglesias and Atrios, both worth reading in their own right on the issue.

I agree with most of Brad’s analysis (though the equity premium matter is complex and poorly understood), but I am less sanguine about the privatization idea. I wish to privatize many things, but forced savings is not one of them.

Most of all, I am worried about the fiscal implications of this privatization. Current plans need not, in the long run, cost us any money, as Arnold Kling reminds us. But they do require a big tax increase in the short to medium run. In essence the proposed reforms stop collecting “pay as you go” contributions and move everyone possible toward private accounts. But during the transition an influx of money is still needed to pay off the current elderly, therefore the tax increase. And we are talking trillions here, not just small change.

Of course these taxes must come sooner or later, given that privatization is simply shifting future claimants out of the public sector expenditure nexus. So if we raised taxes today, to finance a transition, and cut them twenty years from now, social security privatization would be revenue-neutral in this regard (of course it could influence revenues along other dimensions).

Now you can see my fear. If we move to privatize social security, I predict that higher taxes today will mean still higher taxes tomorrow, not an eventual tax cut. People would grow to tolerate the higher taxes, and our ever-diligent Congress would find new ways to spend the money (don’t trust any promises to the contrary — remember when they told us that social security numbers would never be used for purposes of personal identification?).

I think of social security as having two parts: a welfare system for old people, plus a regime of forced savings for the young. The Bush plan cuts back on the welfare angle, but also would put the forced savings in the private sector.

If we were starting from scratch, I could imagine that a fully vested system of private accounts could make sense. But given where we are, I would like to see social security evolve into a system of welfare for the elderly, and junk the forced savings aspect. Keep in mind those “private” accounts will be regulated rather than truly private in the libertarian sense. They will channel benefits to government-approved providers, thus leading to bureaucracy, regulation, and costly commissions. And if anyone’s account goes bust, do you really think there will be no secondary safety net to bail them out? What if the whole market went bust for about ten years’ time?

One of the original virtues of social security was its minimum administrative costs and its relatively “clean” fiscal nature. Let’s not lose their properties of the system just to privatize something — forced savings — that should be a matter of voluntary choice in the first place.

So let’s push for means-tested benefits, and hope that social security slowly but surely shrinks and evolves to a welfare system for the needy elderly. It should not be a stranglehold over every mainstream employment relationship.

It may sound like a strange world where Brad DeLong endorses social security privatization and I oppose it. But given the other views we hold, this is where we each ought to end up.

Charter Schools

Caroline Hoxby is mad, and rightly so. In August, the American Federation of Teachers released a study attacking charter schools because charter school students performed worse than their public school “peers.” The study got huge media attention, including a front page article and editiorial in the NYTimes, despite the fact that it is not a very good study – lagging far behind its peers in the academic literature.

The main problem is that the study doesn’t do a very good job at comparing peers. The most credible studies look at the achievement differences between randomly assigned students (as did the study on private schools in Colombia I discussed earlier). When charter schools are over-subscribed (which often occurs – a sure sign that parents think they are superior to more traditional public schools) students are sometimes selected by lottery. Using data on randomly assigned students in Chicago, Hoxby and co-author Jonah Rockoff find significant achievement gains for the charter school students (paper, executive summary). (Surprise! When given the opportunity, parents can pick good schools.).

Another problem with the AFT study is that it uses a relatively small sample, about 3% of charter students in the fourth and eight grades. In another paper, Hoxby examined tests from 99% of 4th grade charter students. It’s not possible to use a randomized study when you look at nearly all charter school students so instead Hoxby compares charter students to students in the nearest regular public school and the nearest regular public school with a similar racial composition. For the latter comparison she found that charter students were 5% more likely to to be proficient in reading and 2.8% more likely to be proficient in math – small but meaningful improvements. And in places where the regular public schools are especially bad, like Washington DC, charter students were about 36% more likely than their peers to be proficient in reading and math!

Despite the fact that Hoxby’s studies are of far higher quality than those of the ATF and other groups you don’t see her work trumpeted across the front page of the NYTimes. And it’s not as if Hoxby isn’t well known, she is a Harvard professor whom several years ago The Economist listed as one of the best young economists in the world. As Brad DeLong might ask in another context, Why can’t we have a better media?

I have drawn from an op-ed by Hoxby in the Wall Street Journal from Wed. Sept. 29, 04 (sorry I don’t have the link).

Oh Berkeley!

At Colonial Williambsurg you can immerse yourself in a different time and place and see how people lived in the past; how they dressed, ate, worked and lived. It’s a wonderful and unique experience. That’s why I truly miss Berkeley, the Colonial Williamsburg of the 1960s. My friend Carl Close, who remains in the area, sends me this wonderful reminder of what makes Berkeley great (not entirely work safe). Thanks Carl!

Why is private health insurance such a disaster?

Why does private health insurance perform so badly in holding down costs? (Here is one story.) I can think of a few hypotheses:

1. Medical ideology portrays doctors as a priestly caste, accountable to no one.

2. The observed cost increases are driven primarily by government reimbursements and purchases.

3. The tax-free nature of employer-supplied insurance benefits encourages wantonness. (TC: Why? You can subsidize the purchase of apples, that doesn’t mean apples will be produced inefficiently or at “excess cost” for that level of apple output.)

4. The tax system discourages insurance policies with higher copayments. (TC: But if copayments are so great, companies today could offer higher-valued benefits along other dimensions, while increasing the copayment rate.)

5. Malpractice suits. This one is true for sure, but put it aside since the problem goes much further.

The most plausible answer is:

6. It is hard to contract in advance for which services should be covered. If you let everything be covered, costs skyrocket. If you allow for “outs,” insurance companies will use these loopholes to cut off high cost patients, thereby eliminating the benefits of insurance.

But why should this be such an insurmountable problem? Why can’t impartial third-party arbitrators arrive at a coverage solution that is reasonably efficient? After all arbitrators settle millions of legal disputes, issues where conflicts of interest could not be more pronounced. Or imagine third-parties that evaluates whether an insurance company covers reasonable expenses or instead screws over its customers?

Yes this does mean a cost-monitoring bureaucracy. But surely under all health care systems someone must decide which treatments are worthwhile or not. Why cannot markets allocate this function to the least cost decider? Why does the usual solution — intermediation — appear to be working so badly?

Inquiring minds wish to know. And simply citing the very large role for government in the American system does not do the trick. Here is one Cato account, you can agree with many of the points but it doesn’t answer my question. Here are some broader market-oriented links.

And this is why I find it so hard to come up with a good plan for health care reform. If we don’t understand why private health insurance functions so badly in our mixed system, we won’t understand how to fix things.

Subsidy Spam

Here is a piece of spam email that I received recently.

The new revised edition of the Canadian Subsidy Directory 2004 is now available. The new edition is the most complete and affordable reference for anyone looking for financial support. It is deemed to be the perfect tool for new or existing businesses, individual ventures, foundations and associations….

The Canadian Subsidy Directory is the most comprehensive tool to start up a business, improve existent activities, set up a business plan, or obtain assistance from experts in fields such as: Industry, transport, agriculture, communications, municipal infrastructure, education, import-export, labor, construction and renovation, the service sector, hi-tech industries, research and development, joint ventures, arts, cinema, theatre, music and recording industry, the self employed, contests, and new talents.

Sadly, I have no doubt that this all true. (I am also sure a similar product exists for the U.S.)

What’s in a Name?

Once, Mrs Joan Robinson, my radical teacher at Cambridge University, and Professor Gus Ranis of Yale University, a ‘neo-liberal’ economist, were observed agreeing with each other that Korea had been a great success.

The paradox was resolved when it turned out that Mrs Robinson was talking about North Korea and Professor Ranis about South Korea!

That is taken from an interview with Jagdish Bhagwati, who I might add is another plausible contender for an economics Nobel Prize.

Thanks to for the link.

Compact discs are overpriced, installment #421

The DVD format is taking over the classical music world, especially opera:

Sales regularly hit 5,000 units, the standard break-even figure for classical CDs, and go as high as 40,000 worldwide, says Klaus Heymann, the Hong Kong-based head of Naxos International. Also, the hard-core classical community doesn’t have to wait around for the video companies to finish issuing meaningless Luciano Pavarotti galas before going on to the real stuff.

Major classical labels initially hesitated to jump into DVD, so smaller, specialized concerns took the medium directly into niche marketing. Upfront “authoring costs” (translating video to the small disc) were as low as $2,000 a few years ago, says Gilbert, and are now half that.

Once a nightmare of regional formats, DVDs are increasingly universal (look for the “0” in the code box), though savvy consumers still need a specially doctored player to read all codes on discs available on European Web sites. Disc prices, which range from $10 to $35, are still unstandardized. The Deutsche Oper’s Die Meistersinger is $39, but the Australian Opera’s better cast sells for as little as $25.

Whatever the reason, even the most expensive DVD operas cost less than sound-only, full-price CD sets (emphasis added).

Here is the full story.

Brian Leiter attacks economics (and me)

A philosopher has levied another attack on economics:

…a lot of the credibility of economics depends precisely on its claim to be a science, in the precise sense of generating successful predictions. (Predictive power may be neither a necessary nor sufficient condition for science, but economists generally view it as what makes their discipline “scientific.”) Indeed, many economists and lawyer/economists have emphasized the putatively “scientific” character of economic theory. Friedman’s classic paper on “The Methodology of Positive Economics” is predicated on the idea that economics is “a positive science [whose] generalizations about economic phenomena. . .can be used to predict the consequences of changes in circumstances.”

All of these scientistic sentiments about economics co-exist, of course, with a very different picture of the discipline as essentially a pseudo-science. It is better, perhaps, than astrology, but not much more predictively successful than common-sense psychology. It parlays a set of implausible and utterly unrealistic assumptions into tidy, mathematically-expressible theories that have little or no connection to reality. A recent article in The New Yorker captures this sentiment well. “[A] good deal of modern economic theory,” says the author, “even the kind that wins Nobel Prizes, simply doesn’t matter much.” (“The Decline of Economics,” Dec. 2, 1996, p. 50)

The attack goes on at length.

The simplest defense of economics (or philosophy, I might add) is biographical rather than methodological. Just spend some time talking to a person who knows little economics (philosophy) and you will be impressed at how much understanding the discipline brings.

Economics in particular does two things. First, it provides “existence theorems” as to what can possibly happen, and how. This may not sound very ambitious, but in fact many of the mechanisms (e.g., time consistency or principal-agent problems) are rich in their implications and applications. Second, economics gives you a good idea of the conditions under which various results can come about.

Milton Friedman overemphasized prediction as a justification for economic science. That being said, plenty of propositions are abandoned because would-be proponents cannot cite convincing evidence on their behalf. How many people today still wish to target monetary aggregates?

I might add that Leiter is the first person ever to attack me for being a Popperian falsificationist. Oddly he mentions my name and then characterizes my views by quoting someone else; by that time he is off and running and never looks back.

An additional mistake of philosophers is to believe that economics rests on the idea of “instrumental rationality,” I have written on this elsewhere.

Jane Galt on smart growth

The ever-effervescent Jane Galt has some smart remarks on “smart growth.” Like Jane, I believe that the world’s future lies in sprawl, not in concentrated central cities. Even Paris (can you imagine a nicer, more livable city?) has been losing population over the last fifty years.

Here is one good bit:

Smart growth is great if you are an upscale professional, preferably without children, who can score a relatively large apartment fairly close to work. It’s a lot less fun for the majority trying to cram your family into four or five rooms. Smart growth is great if you are savvy enough to manipulate an urban school system into keeping your children away from the poor kids; it is not so nice for the majority who must make do. Smart growth is great if you can afford to have everything you buy delivered, or are in excellent physical condition with a physically undemanding job; it is not so great if you have to come home from your shift at the nursing home to lug groceries a quarter-mile down the street, and then up three flights of stairs. Smart growth is great if you can afford to eat in the plethora of restaurants; it is not so enjoyable if you have to scrape up an extra 20% for the ingredients in tuna casserole. Smart growth is great if you have a nanny to take the kids to the park during the day; it is not so terrific if you have to choose between wasting several precious hours standing around the playground, or letting your kids languish inside. Smart growth is great if you can afford taxis when you need them; it is not so good if you are forced to take three busses to get somewhere you really need to be. Smart growth is great if your family members are all affluent enough to take care of themselves; it is not so fulfilling when you have to shove your ailing mother into the kids room when her resources fail.

Smart growth, in other words, is wonderful for those with the werewithal to smooth over its little rough spots. But ask the priced out secretaries commuting 2 hours a day from Yonkers how “liveable” New York is.

Also read the attached New York Times article, a brilliant defense of the automobile by James Tierney. Now if we could only get Jane to move to the suburbs…

What Colombia can Teach Us

Long-time readers will recall my discussion of Vouchers for Private Schooling in Colombia by Angrist, Bettinger, Bloom, King and Kremer in the Dec. 2002 AER. The paper is especially important because it uses data from a randomized experiment.

Angrist et al. estimate that attending private school increased the probability of finishing eighth grade by 13-15 percentage points or 25 percent. Test scores increased by .29 standard deviations which is equivalent to about an extra year’s worth of schooling which has been estimated to increase yearly wages by 10 percent. Other markers such as teen cohabitation also improved.

Angrist, Bettiner and Kremer are back with a follow-up study that looks at high-school graduation rates and test scores on college-entrance exams.

The results of our follow-up study point to lasting benefits for voucher winners, with substantially higher high school graduation rates and, after adjusting for selection bias, higher test scores among those who took the ICFES exam [a college entrance test, Alex]….The size and persistence of the impact suggests PACES was a cost-effective intervention … there is substantial economic return to high school graduation in Colombia.

Manna from China

If cheap goods from China are bad for the United States then surely zero-priced Manna from Heaven must have been terrible for the Israelites. Cecil Bohanon and T. Norman Van Cott, two of my former colleagues at Ball State University, know better.

Manna wasn’t a “sky is falling” catastrophe for the Israelites. Quite the contrary, wealth was being showered on them. Lower-cost production alternatives always expand consumption alternatives. Regardless of whether these alternatives trace to manna-like acts of God, new production technologies, foreigners willing to sell their products to us at less-than-prevailing prices, or even immigrants willing to work at less-than-prevailing wages, the result is the same. Consumption alternatives for the natives expand…..

Fortunately for the Israelites, Moses didn’t order them to shun manna in order to preserve good jobs in food production. Manna meant those good jobs weren’t so good after all. Indeed, manna meant that jobs connected with finding water and protecting sheep became the better jobs. The result was that the Israelites reached the Promised Land a stronger nation.

Prediction markets: Need we fear price variance?

A few days ago Alex applied his usual wisdom to prediction markets, a perennial topic here at MR. A key question, handled by Alex and Daniel Davies, is how effectively prediction markets convert scattered information into a useful signal.

I am a fan of prediction markets, but I do have a few concerns. However they revolve around the variances of the forecasts rather than the means.