Month: February 2005
According to a study by the Insurance Information Institute, expenditures on non-life insurance in 2003 amounted to only 0.83% of GDP in Indonesia, 1.19% of GDP in Thailand, and 0.62% of GDP in India, compared with 5.23% of GDP in the United States.
And his bottom line?
Foreign aid is no substitute for insurance. Charity inspires, reassuring us of our humanity, but it is often capricious. You wouldn’t want to rely on it. Indeed, when deciding how much disaster aid to offer, countries often seem to be influenced mainly by their leaders’ concerns about how others will view them. Charity responds to attention-grabbing events, often neglecting less sensational disasters. Insurance, on the other hand, is a reliable and venerable institution, its modern form dating back to the seventeenth century.
Could the micro-credit revolution be followed by a micro-insurance revolution? Shiller argues valiantly but I am not convinced. Economists miss one of the biggest problems with insurance. We are blinkered by adverse selection models, which imply that the dangerous prospects most want to buy insurance. The opposite is more often true. If you are an irresponsible driver, you are likely to be irresponsible in other spheres as well and not buy auto insurance. On the whole many insurance markets show positive rather than adverse selection. In a development context, this means that the people who most need insurance will be the least likely to buy it.
"Deutsche Wertarbeit" is becoming a thing of the past:
This anecdotal evidence, albeit from the heaviest users and sharpest
critics of cars, highlights the trouble in which Mercedes finds itself.
Its reputation for quality lies in tatters as it has been forced to
admit that its cars, which once set the industry standard for
reliability, are prone to breaking down.
Last week the Mercedes
Car Group, which includes the lossmaking Smart small-car brand,
reported its worst quarterly profit for 13 years and admitted that this
year might be more challenging still. It even suffered the ignominy of
seeing its profits overtaken by Chrysler, the previously struggling US
mass-market carmaker that merged with Daimler-Benz in 1998.
Germany’s taxi drivers, this comes as no surprise. "Opels [made by
General Motors of the US] are half the price of Mercedes and the
quality is now the same," says Anis Ahmad, a Frankfurt taxi driver with
an Opel Zafira.
…Mercedes has slipped in the past decade from first to 28th place in the respected JD Power reliability survey [emphasis added].
Here is the full story.
The French have their own means of addressing stagnation:
The French government yesterday signalled a new approach
to tackling the country’s unemployment crisis by stimulating the
creation of low-paid jobs in the domestic services market.
Borloo, the labour and social affairs minister, said the government
would spend €1.43bn ($1.9bn, Â£970m) over the next three years to boost
employment by up to 500,000 jobs in domestic services such as cleaning,
childcare, gardening and help for the elderly…
As part of the jobs creation package, Mr Borloo announced the formation
of a state agency to oversee the domestic services market. This agency
will help to bring black market workers into the formal economy by
offering them welfare benefits.
In relative terms, yes this is progress. But the simplest way to keep wages high is, in fact, to allow wages to fall. Counterintuitive, yes, but that is how we economists earn our keep.
Rachel Soloveichik writes:
I completely agree [with my earlier post] that parents aren’t perfectly altruistic toward their children, and parents are happier when their children are better behaved rather than happy. But if society shifts toward giving more power to children parents are much less likely to have children. The small effect on children’s utility from more toys may be hugely outweighed by fewer children being born. That’s probably part of the reason religious parents have more children, because they have a set of norms that justifying pushing their children to good behavior rather than being happy.
My question is where the limits lie, once we make this a moral question. Say you could cut a deal with a fetus or would-be fetus. You agree to raise a child, under the condition that it remain your slave for life. You also make sure that the life of that slave remains better than no life at all, although just barely. Should we, as believers in the Pareto principle, approve of such deals? I’ll say no, which is one reason why I don’t put much stock in Nozickian libertarian rights. But I find this view difficult to defend. After all, everyone is better off (forget about secondary consequences, if you wish to make the hypothetical example airtight). Should we allow parents, or corporations, for that matter, to make such deals? And would we need actual consent from the child-to-be, or is it enough to recognize that in expected value terms the child-to-be would likely prefer to be born, despite the onerous terms of the deal?
I suspect that yes, it is better for the deal to be made. More happy people is a good thing, all other things equal. But it is also better for the deal to be broken, ex post. Some ways of treating people are just wrong, even if they were agreed to ex ante.
Oddly, perhaps libertarians should welcome this conclusion. Arguably their ancestors consented to rule by the U.S. government when they moved to this country. Or perhaps you offer a kind of implicit consent from your consumption of public goods or from your dealings with broader society, nearly all of which favors the idea of government power. But libertarians still can object to their current treatment, no matter what explicit or implicit agreements were made in the past.
What if parents agreed to have kids, but only on the grounds that those kids would not freeze their social security benefits?
A Portland, Ore., man who put an Egyptian-themed tattoo on the right arm of Pistons forward Rasheed Wallace is suing to stop Wallace from displaying the art in ads for Nike basketball shoes. The man wants the ad taken off the air and seeks undisclosed damages, though he would settle for reclaiming the offensive pound of flesh.
No economics, but this apparently true story from the Globe and Mail just made me laugh and laugh.
An indignant Israeli is suing a pet shop that he says sold him a dying parrot, reports the Ma’ariv newspaper. Itzik Simowitz of the southern city of Beersheba contends the shop cheated him because the Galerita-type cockatoo not only failed to utter a word when he got it home, but was also extremely ill. Mr. Simowitz adds that the shop owner assured him the parrot was not ill but merely needed time to adjust to its new environment.
Thanks to the Eclectic Econoclast for the link.
Culture talk is not so very far from the race talk that it would supplant in liberal discourse…
No, that is not Larry Summers. Kwame Anthony Appiah, a Princeton professor, argues that culture is too often used as a not totally legitimate means of separating in-groups from out-groups. In his view we should sooner reform cultural identities — encourage more tolerance and polyglot interests — than respect current cultures and cultural views as a matter of legal or moral right.
That is from his new The Ethics of Identity, highly recommended.
Here is an interview with Appiah. This is one good bit:
Look, farming as a way of life is dying in the United States, but it’s not dying because people are shooting the children of farmers, or abusing them, or denying them food or loans or anything–in fact, we massively subsidize them. It’s just that people don’t want to be farmers. Do I think that it would be a great tragedy if the form of life of a Midwestern farmer disappeared? Well, I don’t want to sound un-American, but no, I don’t.
And the guy isn’t even an economist.
Matt Yglesias claims he is defective and asks:
Are there good reasons for young people to be designed as more risk-friendly than older people? …Is there some more general logic to this?
After all, teenagers can do some very stupid things, and for no apparent benefits. Why? I see a few major hypotheses:
1. The young take risks to signal they are strong and thus good potential mates. We are biologically programmed so that this motivation declines with age. This also helps explain why the young are most foolish amongst their peers. Note that under this hypothesis, the default setting must be that a non-risk-taker doesn’t reproduce very much (otherwise why take risks?). If polygamy was once common, this might explain why young men are more reckless than young women.
2. The young have greater need for some skill which is biochemically correlated with risk-taking behavior. The risk-taking itself performs no useful functional role. Read Randall Parker on this.
3. When it comes to the kind of risks that were most prevalent in early hunter-gatherer societies — such as facing hostile large animals — today’s young are still quite risk-averse.
4. The young have fewer commitments and thus less to live for. This is related to yesterday’s discussion of theism and risk-taking.
I view #4 as an underrated hypothesis, but I have turned on the comments function for your ideas. And here is my earlier post on risk-taking and life extension.
The blogosphere has been involved in a huge debate over the Baker-Krugman position that high stock returns are inconsistent with a low growth rate of the economy (thus either social security privatization won’t work or, if economic growth is high, it’s unnecessary).
Brad DeLong offers a useful summary laying out the possible scenarios. I think, however, that he and everyone else have missed one scenario which may be important (see also Tom Maguire and Andrew Samwick).
Everyone has assumed that economic growth and social security privatization are independent variables but suppose that social security privatization raises economic growth then one can consistently assume that economic growth will be low under the current system but stock market returns will be high if we privatize.
Can social security privatization raise economic growth? Certainly the answer is yes. It’s a big reform which (done right) can significantly increase savings and reduce labor market distortions.
Can the increase in economic growth be enough to solve the Baker-Krugman problem? I think not in the long run but I am not so sure about short-run dynamics, even a small increase in growth rates can increase prices significantly. I turn this one over to better macro-economists than I.
Last week I examined the ethics of gradually indexing social security benefits to prices rather than wages. It has never been obvious to me that the elderly are the deserving recipients of greater largesse. Don’t we have better ways of spending the money, such as on biomedical research, immigrants, or foreign aid abroad? Why might you think that the elderly deserve a greater share of resources in society? Here are some options:
1. We should be egalitarians, and evaluate individual well-being in a "time-slice" rather than lifetime sense. Yes the elderly have lived a long time, but right now they are the ones closest to death and often poor as well. We should transfer resources to those who are not so well off.
2. The relevant political alternative is lower marginal tax rates for the well-to-do. Transfer resources to anyone but them, whenever you can.
3. True, the relatively wealthy American elderly are not our highest priority, all things considered. But in political equilibrium taking care of the elderly is unlikely to prove a substitute for other forms of charity. By cementing our self-images as being caring people, it renders other forms of charity more likely, not less likely.
I suspect that some version of #2 is what motivates most liberals. But consider a few points. First, is this the relevant political trade-off today? Can we not imagine a Republican-led Congress, for better or worse, determined to make the Bush tax changes permanent? Alternatively, you might think the tax changes are headed for repeal in any case, bringing us back to no trade-off. Might the real policy trade-offs involve Medicaid, immigration reform, and discretionary spending, not to mention the looming fiscal disaster known as Medicare?
Second, marginal tax rates for the wealthy cannot be the relevant political trade-off forever. It would be quite simple to favor repealing the Bush tax changes, and also wanting to price index social security benefits. Note that price or wage indexing is supposed to continue for the indefinite future. So we could arrive at your ideal tax policy — whatever that is and whenever that happens — and still face the social security issue.
I actually find #3 to be the stronger argument. Note that the welfare-exorbitant Scandinavian states also spend relatively high amounts on foreign aid per capita. #3, however, does suggest that the cost of helping the truly deserving is much higher than we had thought. Not only do we have to spend the money, but we must invest significant resources in bringing around our social consciences.
Addendum: Here is more from Alex.
The ever-provocative Will Wilkinson opines:
In a fit of Beckerite rational choice reasoning, I decided that
theists ought to have higher rates of death by accident. If I believe
that heaven is infinite bliss, then I should be quite eager to join my
maker. Suicide is a disqualification for paradise, but dying in a car
accident isn’t. So, one should expect that theists who believe in
perpetual Miami would take more risks than those who do not so believe,
and that thus, death-by-accident ought to be higher among believer than
My guess is that there is no difference in rates of
death-by-accident among believers and non-believers. If my guess is
correct, then there’s another reason to believe that many people don’t
really believe in God, even though they think they do. Or, at least, there’s a reason for rational choice economists to believe meta-atheism.
My take: Most of all, theists should have stronger reasons to live. They have their own selfish reasons, plus whatever role they think they are supposed to be playing in God’s plan. So they ought to take fewer chances; indeed the data suggest that both religious belief and religious participation are correlated with longer lifespans. And even if theists believe death is paradise, that will come sooner or later in any case. In other words, heaven brings an "income effect," not a "substitution effect." We need of course two auxiliary assumptions. First, theists, given their perceived roles in God’s plan, do not feel a strong impatience to arrive in heaven. Second, the method of death under consideration should not affect the probability of heaven vs. hell.
That all being said, we don’t have a good theory of how to rank-order infinities (e.g., "infinity plus three" is not mathematically larger than "infinity"). So how can anyone who sees any chance of infinite utility satisfy standard choice axioms? Even Nick Bostrom can’t answer this question. (And should theists accept Tabarrok’s Offer?) But I won’t blame this problem on theism per se. As Nick argues, atheistic cosmologies can easily have problems with infinite expected values. And arguably theism could be used to define limits on time, physical space, or the scope of possible worlds. So both empirics and theory suggest that theists should be more eager to live, and less willing to die (now).
The political scientist James Payne argued that there is a culture of spending in Congress. Even people elected on a platform of cutting government become enured to higher spending as week after week they hear witnesses saying how much more money is needed and how many more problems could be solved if only you, the great Congressperson, would use your power to spend.
Here is a great illustrative graphic (click to expand) from The New York Times. It shows proposed spending in 1995-96 and 2004-05 from the 30 of the 75 freshmen Republicans elected to the House in the Gingrich revolution of 1994 who remain in the house. Almost all proposed big spending cuts in 1995 but today only 1 (Sue Myrick of NC) continues to propose big cuts. (Yeah Sue!). Almost all of the rest are now big spenders.
It’s somewhat unclear whether Payne’s hypothesis of a culture of spending explains the pattern. It could be that more senior members spend more and thus as the freshmen gain power they increase their spending (thus term limits, for example, would not solve this problem). It could also be a selection effect, perhaps only those who become big spenders are reelected. I tend to favor the latter explanation. We get the government we deserve, unfortunately.
Many of you have written back in defense of cryogenics (be sure to read Robin Hanson’s appended response). But reader Michael Goodfellow offers a more negative view:
Robin Hanson’s comment implies cryonics will continue to be used even after the first set of people is revived. This is unlikely.
There are few diseases (including aging) that could damage your brain more than having your head cut from your body and frozen. The ability to repair this huge damage implies the ability to repair nearly any damage in a living person. So no one will be frozen after the point where revival becomes possible (because no one will die!) In fact, since repair of lesser injuries would be possible before
that, cryonics would already be an unused technology (no new brains frozen) long before revival is possible.
This has some consequences — if you are revived, it will be to a society of immortals. Second, cryonics will stop being used before it has been proven to work, even if it does work (because no one dies and is frozen.) So only a limited number of people will ever be frozen, and they will all have to take on faith that the technology can work.
My take: I’ll stick with my original pessimism, albeit for simpler reasons. Despite recent efforts, it remains hard to buy insurance against the price of your home falling five years from now. And how many companies issue fifty-year bonds? Can I expect that anyone will maintain my web page long after I die? How much capitalization is needed to insure that an organization lasts even as little as fifty years?
In reality the series should be called "Spot Markets in Everything."
As a matter of economic principle (and I think social justice as well), Medicare should be abolished. Then the principal government medical-payment program would be Medicaid, a means-based system of social insurance that is part of the safety net for the indigent. Were Medicare abolished, the nonpoor would finance health care in their old age by buying health insurance when they were young. Insurance companies would sell policies with generous deductible and copayment provisions in order to discourage frivolous expenditures on health care and induce careful shopping among health-care providers. The nonpoor could be required to purchase health insurance in order to prevent them from free riding on family or charitable institutions in the event they needed a medical treatment that they could not afford to pay for. People who had chronic illnesses or other conditions that would deter medical insurers from writing insurance for them at affordable rates might be placed in “assigned risk” pools, as in the case of high-risk drivers, and allowed to buy insurance at rates only moderately higher than those charged healthy people; this would amount to a modest subsidy of the unhealthy by the healthy. Economists are puzzled by the very low deductibles in Medicare (including the prescription-drug benefit–the annual deductible is only $250). Almost everyone can pay the first few hundred dollars of a medical bill; it is the huge bills that people need insurance against in order to preserve their standard of living in the face of such a bill. But government will not tolerate high deductibles when it is paying for medical care, because the higher the deductible the fewer the claims, and the fewer the claims the less sense people have that they are benefiting from the system. They pay in taxes and premiums but rarely get a return and so rarely are reminded of the government’s generosity to them. People are quite happy to pay fire-insurance premiums their whole life without ever filing a claim, but politicians believe that the public will not support a government insurance program–and be grateful to the politicians for it–unless the program produces frequent payouts. If Medicare were abolished, the insurance that replaced it would be cheaper because it probably would feature higher deductibles…
My take: I should defer to my epistemic superiors, and I do not have a better reform idea. My main worry is that a means-tested system for health care aid will imply significantly higher real marginal tax rates. My second worry is that people who didn’t buy health insurance would end up on the public dole in any case.
Martha Bayles is one of my favorite cultural critics. She is always to the point, writes for consumers rather than for other critics, and is intrigued rather than repelled by commercial culture. I am pleased to see she has started a new cinema blog. And while we are on the topic, here is Larry Ribstein’s blog on how business and capitalism are portrayed in the movies.