Month: November 2004

New York City fact of the day

1 out of 3 New Yorkers is on Medicaid:

…the states set the level of Medicaid spending, but the Feds match the states dollar for dollar. New York State decided that a good way to soak up extra Federal money was to require the local governments to match the state, dollar for dollar. Since the Feds match all state and local spending, this had the effect of doubling Medicare spending in the state of New York, at no cost to the state, other than the psychic anguish of its highly taxed citizens.

By the end of 2004 Medicaid spending will cost $1650 per person in New York City.

My Arnold Kling-like question: If every distortion of this kind were eliminated, how much would the price of medical care fall?

Thanks to Jane Galt for the fact (and here is a rare photo)…

Nature and Nurture Again

I want to comment on a common error in the discussion of my post Nature, Nuture, and Income.  (See for example the comments at Jane Galt, Kevin Drum and also the trackbacks).

Despite my warning, many people thought that graph was saying something important about the average income of adoptees versus that of biological children.  Hence many people argued that "the results" were explained by discrimination against Korean Americans, poor nutrition of the adoptees before being adopted, or low IQ of children given up for adoption.

For the record, Asian Americans in general and the children in this sample have higher income and more education than the average American.  More fundamentally, however, these comments have misunderstood what is to be explained.  It is true that the average income of the adoptees was lower than that of biological children but the adoptees are also younger.  Once you control for this and a few similar factors the mean income difference goes away (think of shifting the adoptee line up).  What remains, and this is the key point, is that the biological line is upward sloping and the adoptee line is flat.

What my post and the paper are all about is the difference in the slope of the two lines, i.e. why is it that child income increases with parental income for biological children but not for adopted children.

Addendum: Suppose we control for age and other factors which in effect will raise the adoptee line then we could phrase the results as ‘adoptees do better than biological children raised in poor households but worse than biological children raised in rich households.’  The explanation is simple from the genetic point of view – adoptees are drawn more or less randomly while high income parents tend to pass on high-income genes and low income parents tend to pass on low-income genes.  It’s going to be very difficult, however, to explain why poor parents treat their adopted children better than their biological children but rich parents treat their adopted children worse.

Alpaca Economics

Who wants to talk about economic armageddon?  Not me, I want to know,

What if the alpaca bubble bursts, as did the emu, ostrich and llama bubbles?

That’s from a front-page (!) article on alpacas in the New York Times.  But seriously, alpacas do make for an amusing illustration of bubble economics.

Alpaca fleece is very nice but five pounds, a year’s worth of production from one alpaca, is worth only $200 while alpacas sell for about $20,000.  The price of alpacas is supported not by their earnings but by the prospect of capital gain, specifically the hope that more people, "attracted by the lifestyle," will enter the alpaca business driving up demand.  A Ponzi scheme with a cute face.
The Ponzi scheme has some prospect of continuing a little while longer because export and import controls make it difficult to bring new alpacas into the country.  Furthermore, a breeding registry uses DNA analysis to prevent competition from "riff-raff."  Breeders like to think that the registery is about improving quality.  More likely it’s about holding down supply and creating a bubble focal point.

Why does the price of a highly valued art work by a famous artist plummet when it is revealed to be a forgery?  Can the aesthetic value drop by nearly as much as the price? I doubt it, despite what my art-loving co-blogger may argue.  The price drops because the artist’s name is a focal point for buyers – the buyers aren’t buying because of the aesthetic pleasure of the object so they can’t buy on taste alone.  Instead they must buy what they think others will buy.  Who knows how the intial craze begins?  But once it does the artist’s name is a focal point that brings on the inflating returns.  The alpaca registry does the same thing for alpaca buyers – it coordinates the buyers on the bubble object even if alpaca fleece from non-registered alpacas is just as soft.

My guess is that the alpaca bubble will burst quite soon.  Why?  Because when the rubes in the street know what an alpaca is, someone is about to be fleeced.    

The scholarly content of blogging

Now that Richard Posner and Gary Becker will start blogging, let us return to Eszther’s query of how blogging and academic scholarship fit together.  I see a few models:

1. A blog post can have a new idea.  It is like a very short journal article, with other bloggers/linkers as providing a citation index of sorts.  Plus you receive quick and useful feedback.

2. The blogosphere as a whole is the relevant unit of analysis.  Don’t think that a single post amounts to much of importance.  But the blogsophere as a spontaneous order (sometimes) spits out the truth.

3. Blogging is a way to publicize academic work and give it new readers.  I call this "blogging as loss leader."

4. Blogging is more like editing a journal or magazine than writing an article.   

5. A blog post is like a (very short) public lecture.

6. Blogging is a fundamentally new medium, akin to an epic in serial form, but combining the functions of editor and author.  Who doesn’t dream of writing an epic?

Don’t focus on the single post.  Rather a good blog provides you a whole vision of what a field is about, what the interesting questions are, and how you might answer them.  It is also a new window onto a mind.  And by packaging intellectual content with some personality, bloggers appeal to the biological instincts of blog readers.  Be as intellectual as you want, you still are programmed to find people more memorable than ideas.  The academic blogger faces the new challenge of tying these disparate functions together in a compelling product.  Intellectual substance, personality, writing, and editing, that is our juggling act.

This hypothesis suggests, by the way, that reading a blog many times will be more rewarding than just sampling it once.  Readers should "specialize" their blog reading to some degree, rather than jumping around and reading the best posts on a given day.

I’ve heard that if Posner were a law school, his citation index would put him in or close to the top ten.  And Becker just gave up his Business Week column a few months ago.  He is also the most widely cited living economist, not to mention that Nobel Prize.  So why are they blogging?  They must think there is something to number six, and are eager for a new challenge.

New blogs

A new blog on outsourcing just started here, courtesy of the group.  They have another new blog on globalization more generally, read here.

And there is a rumor that Richard Posner and Gary Becker will be starting a "Posner-Becker blog" sometime soon.  Here is an apparently confirming email from Posner, but I cannot vouch for the transmission chain of this information.

Addendum: The rumor seems to be true

Is economic Armageddon coming?

The eminent Stephen Roach says yes.  The nub of the argument is that foreigners will abandon the dollar, thereby ceasing to fund our dual deficits.  This will force interest rates to skyrocket and lead to a rash of U.S. bankruptcies.  Brad DeLong is less alarmist, but wonders why long bonds are not plummeting in price.

Before you sign up for space tourism, keep the following in mind:

1. Doomsayers usually compare one financial flow to another; today they are focusing on trade deficits, budget deficits, and U.S. savings rates.  It is easy to make measured flows appear unsustainable, because indeed they probably are.  However it is less common for a flow-based problem to be compared to the total stock of wealth.  One very rough estimate pegs the U.S. as worth well over $100 trillion net.  And don’t forget the recent increase in the future expected value of China and India.  Problems with flows are real, but they won’t, in general, bring us to our knees.

2. The late 1970s were a terrible time by many measures.  The prime rate approached 20 percent, gold was above $800 an ounce, inflation and unemployment were high at the same time, and the U.S. was seen as having lost world leadership.  By 1983 — a mere few years later — matters were running well once again.  If a collapse did come today, we might expect a comparably quick recovery.

3. The doomsayers are not obviously richer than the rest of us.  Many of them (they know who they are!) do not invest on the basis of their gloomy prognoses.  And no, buying a house is not enough, I want to see at least five percent of your net worth in puts on T-Bond futures.

4. Richard Cooper offers the best case for sustainability of the status quo.

The most likely outcome: We will limp along with a government that refuses to accept fiscal responsibility.  A ruling political party will not raise taxes and/or cut spending until the last possible moment.  It will always look toward the problem falling in someone else’s lap.  In the meantime, the wealth of the world, and the benefits of investing in the U.S., will bail us out.  (Didn’t Winston Churchill once say "The Americans always do the right thing, once they have exhausted all other options", or something to that effect?) 

A few decades from now the crunch will come, as growing Medicare and Social Security liabilities are matched against low levels of accumulated savings.  We will have Western European levels of taxation and growth for a good twenty years or more, unless we get lucky with productivity growth in the meantime.  The costs will be very real, but economic Armageddon does not appear to lie around the corner.

Nature, Nurture and Income

Some might suggest that parents treat their biological and adopted children differently and this is what accounts for the difference in incomes.  The interpretation is very uncharitable to the parents who have volunteered to raise an adopted child and I think it implausible.  Moreover, unless every adopted child is treated equally poorly in all families, then we would still expect the income of adoptees to increase with parental income but perhaps starting at a lower level.

The other proviso is that the Holt experiment is only informative for the experimental variation in environment.  In other words, we can tell from the Holt experiment that variation in parental income from around 25 thousand to 175 thousand doen’t have much impact on variation in adopted child income but all these children are raised in the United States so culture and other variables are roughly similar.  In other words, move a child from a poor country to a rich country and you would expect a much bigger treatment effect than moving a child from a poor family to a rich family. 

Which countries will lose from a falling dollar?

…none of the increase in U.S. GDP in the short term will come at the expense of China, Malaysia, or Taiwan.  Rather, the bulk of the adjustment to the lower value of the dollar will be borne by the euro area, Canada, Mexico, and Japan.

Read the whole thing, if you wish to feel better (for the U.S.) about the falling dollar.

Overall, the more scare stories you read about a falling dollar, the less you should worry.  The Major Media aren’t exactly ahead of the curve on an issue like this.  Their scare-mongering means that the real dangers have already been capitalized and digested.  It is when you read blog posts like this one that you should fear the worst…

Addendum: Here is a new blog about the global economy, with much on the falling dollar, thanks to Dan Drezner for the pointer.  Dan, by the way, is the place to go for analysis and updates on the Ukraine.

It is enough if he thinks this is true…

"Anybody who thinks borrowing money for the transition to personal accounts is going to solve the problem of the long-term solvency of Social Security doesn’t understand the size of the problem," said Senator Charles E. Grassley, Republican of Iowa, the chairman of the Senate Finance Committee, which has jurisdiction over the retirement system.

Here is the full story, NYT password required but invaluable reading, or try the archive link.

Addendum: Read Brad DeLong for more.

Science and arts update

1. What did ancient Greek statues really look like?  Here is one answer, courtesy of Michael at

2. "[Researchers] found that English had more of a swing than French, a rhythm produced by a tendency in English to cut some vowels short while stressing others. The melodies of the two languages also differed, with pitch varying far more in spoken English than French.

The team then did the same kind of analysis on music, comparing the rhythm and melody of English classical music from composers such as Elgar, Holst and Vaughan Williams, with that of French composers including Debussy, Fauré and Roussel. "The music differs in just the same way as the languages," said Dr Patel. "It is as if the music carries an imprint of the composer’s language.""

Here is the full story.

3. Digital analysis may provide a new and near-certain means of distinguishing real artworks from fakes, story here.

4. The UK music industry is seeing record sales performance; downloads, legal and illegal, do not seem to be hurting the sector.  Sales of music DVDs are especially strong.

5. France is putting on a show of Pakistani truck art.

Argentina and social security transitions

I vow to stop calling these programs "privatizations."

The Argentine government must continue to provide benefits to workers who have retired under the old pay-as-you-go system. Meanwhile, payroll taxes are being diverted to personal retirement accounts. The government must also find some way to recognize contributions to the old system made by workers now participating in the new system. Argentina has chosen to recognize those contributions with the compensatory pension. Some analysts estimate that it will take 75 years or more to pay off the transitional obligations.

Might this soon be coming to an American screen near you?  Here is the whole Argentine story.  Here are other international examples.  Here is an essay on how social security transition problems worsened Argentina’s fiscal crisis.  Here is a summary of the lessons from international experience.  No one — even among countries with weaker "welfare state" traditions — has done away with an underlying safety net, behind the private accounts.  No one has avoided real and significant fiscal costs, no matter how the transition plan was structured.

Ah, but will the U.S. do it better?  Unlikely.

Chile, of course, had a dictatorship and instituted some radical market-oriented reforms.  How did their scheme proceed?

In Chile, that [revenue] shortfall was partly financed by fiscal tightening through a reformed tax system, including a new consumption tax, prereform cuts in spending, and the sale of some government enterprises. 

The U.S. "privatization" plans, whatever their merits or demerits in absolute terms, have no chance of going well without comparable domestic reforms up front

Howl’s Moving Castle

The new Hayao Miyazaki movie, Howl’s Moving Castle, debuted in Japan this week, even though the director had ostensibly retired.  Here is the official website.  I love every one of his films.  The best-known, Spirited Away, is in my view the least compelling; here is my favorite, Heisei Tanuki Ponpoko. In theory the entire set will be put out by Disney over the next few years, keep an eye out for them.  Here is one short essay on the director and his work.

Mexican mole sauce

16 mulato chiles

5 ancho chiles

6 pasilla chiles (all the chiles should be dried, of course)

one white onion, chopped

two cloves garlic, chopped

one cinnamon stick

one teaspoon coriander seeds

one third cup raisins

one stale tortilla, and perhaps some crumbs of stale white bread

one tomato, chopped

one teaspoon anise seed

four cloves

two ounces unsweetened chocolate

Now toast the chiles over medium heat for a few minutes, and soak them in water for an hour.  Pull off the stems and deseed them.  Puree them in a blender.  Toast the rest of the stuff, except the chocolate, over medium heat for a few minutes, puree as well.  You can do all the pureeing together, if your blender is big and strong enough.  Mix the whole thing together, and let it simmer over low heat for fifteen minutes.  Add water (or very mild stock) to thin as needed.  During the simmering, stir in the chocolate so it melts evenly. 

Set it aside, preferably for a day, but even an hour will do.  The flavor will change as the spices blend and settle.  Reheat as needed.  This is best with turkey (today!) or chicken on the bone.