Month: April 2007

Volatility isn’t rising

So says the excellent David Leonhardt.  Excerpt:

“There have always been a lot of mass layoffs,” said Lawrence F. Katz, a labor economist at Harvard. “We didn’t count them before.”  In fact, research by Henry S. Farber, an economist at Princeton, has found that job loss rates have followed a cyclical pattern since the early 80s, peaking around the same highs during recessions and falling to similar lows during expansions. (The rate has risen for workers who went to college and fallen a bit who those who didn’t.)

Americans, looking at their own jobs, realize that there hasn’t been a big change: in a recent Gallup Poll, 12 percent of respondents said it was very or fairly likely they would be laid off in the coming year. In the 1970s, 80s and 90s, at similar points in the business cycle, the percentage was virtually identical.

Read the whole thing; Leonhardt agrees with my view that the recent CBO report effectively counters Jacob Hacker on "the great risk shift."  Until we see further evidence to the contrary, that thesis belongs in the "simply isn’t true" pile.

The Annals of Tacitus

This book has an implicit public choice theory, which I read as follows.  Division of powers is ultimately impossible, so there is either rule by one man or rule by the crowd, or as it will turn out, both at the same time.  Augustus represented the perfect fulfillment of the Roman ideal of statehood, and thus his reign heralded the beginning of the end.  Augustus had replaced all institutions with his perfect yet ultimately destructive personhood.  Given the importance of fortune, rule by a single man then meant an eventual downward ratchet in the quality of rule.  Tiberius, Caligula, and Nero were successively worse, but even a lucky break in the genetic lottery would only have put off this trend; there is more downside than upside in the weak-institutions version of this game.  The insane Nero plays all the different Roman roles on the stage and metaphorically Nero becomes Rome.  He plays to the crowd, and the suicide of Nero is the suicide of Rome itself.  Hope lies in the civilizations of the less historically conscious barbarians, who live on the fringe of the story, never becoming memorable but the modern reader knows they will allow Europe to one day live again.

For related points, I am grateful to fellow participants at a Liberty Fund conference this last weekend. 

Jordan fact of the day

The combined earnings of the world’s top 25 hedge fund managers of more than $14bn (£7.49bn) exceeded the national income of Jordan last year and three individuals took home more than $1bn, according to the biggest annual industry survey.

Here is the article, which illustrates the role of powerful capital markets in promoting income inequality.  Here is an NYT piece.

What we see are the fearless super-rich having the resources and the liquidity to bid away the equity price premium, plus grab extra profits on the side.  Why should they worry about risk?  The result is improved resource allocation.  The losers are future investors, who now, if they buy, pay higher prices.  That means people like me, wealthy enough to be buying equities but not fancy enough to do anything but buy and hold.  The investment question is whether the price run-up is mostly over, or whether it has just begun to take off.

Jeff Sach’s Millennium Village project

There are two current pieces on Jeff Sach’s Millennium Village project; the first is in Harper’s, the second and far superior, by Sam Rich, is in The Wilson Quarterly (I don’t see the article on-line yet).  Rich reports the following about the village of Sauri, Kenya:

1. Every year the project invests about $100 for each of the 5000 village inhabitants.

2. The villagers are much healthier now and the schools are better.

3. Some babies in the village have been named "Millennium."

4. The subsidies of the project have pushed villagers into high-risk crops and possibly depleted the soil.

5. Many of the giveaways, such as fertilizer, are simply resold on external markets.

6. The creation of a committee for allocating project resources has weakened the village’s government and in effect created a more powerful shadow government in the village.

7. People who live or work in the village have financial incentives not to speak honestly about what is going on there.

8. Witchcraft still plays a major role in village elections and decisions.

9. It is not clear what will happen when the project ends in three years’ time.  Or should I say it is clear?

In my view Sach’s work is admirable and will do much to improve the lives of a small percentage of Africans.  But I do not think it is scalable.  First, I believe the candidate villages are cherry-picked for possible improvement.  Armed conflict remains a huge problem on the continent.  Second, one key non-scalable ingredient is Sachs himself.  His reputation is worth a great deal to him, and these projects will receive scrutiny and study; he has strong incentives to make sure everything goes as well and as honestly as possible.  That incentive vanishes once we implement such ideas on a bigger scale and through other institutions.  File this one under "Wonderful but oversold."

Let the Taxpayers Take Care of It

A new GAO Report tells us that unlike private insurers government insurers are not planning for the risks of climate change.

Major private and federal insurers are both exposed to the effects of climate change over coming decades, but are responding differently. Many large private insurers are incorporating climate change into their annual risk management practices, and some are addressing it strategically by assessing its potential long-term industry-wide impacts. The two major federal insurance programs, however, have done little to develop comparable information.

This would seem to put some of my free market friends who continue to believe that global warming is a leftist hoax in something of a bind.  Is climate change real or are government regulators wise and farsighted? 

The Ultimate Resource – Tonight

Bob Chitester who produced Milton Friedman’s Free to Choose series has a new show airing tonight on HDNet at 10pm EST, The Ultimate Resource.  The show covers the world and features Muhammad Yunus, Hernando de Soto, and James Tooley among many others.  HDNet has limited distribution but the show looks to be of very hgh quality and teachers can get the first episode for free at

Thanks to Lance at ASecondHandConjecture for the pointer.

Harry Potter and the Mystery of Inequality

J.K. Rowling is the first author in the history of the world to earn a billion dollars.  I do not disparage Rowling when I say that talent is not the explanation for her monetary success.  Homer, Shakespeare and Tolkien all earned much less.  Why?  Consider Homer, he told great stories but he could earn no more in a night than say 50 people might pay for an evening’s entertainment.  Shakespeare did a little better.  The Globe theater could hold 3000 and unlike Homer, Shakespeare didn’t have to be at the theater to earn.  Shakespeare’s words were leveraged.

Tolkien’s words were leveraged further. By selling books Tolkien could sell to hundreds of thousands, even millions of buyers in a year – more than have ever seen a Shakespeare play in 400 years.  And books were cheaper to produce than actors which meant that Tolkien could earn a greater share of the revenues than did Shakespeare (Shakespeare incidentally also owned shares in the Globe.)

Rowling has the leverage of the book but also the movie, the video game, and the toy.  And globalization, both economic and cultural, means that Rowling’s words, images, and products are translated, transmitted and transported everywhere – this is the real magic of Ha-li Bo-te.

Rowling’s success brings with it inequality.  Time is limited and people want to read the same books that their friends are reading so book publishing has a winner-take all component.  Thus, greater leverage brings greater inequality.  The average writer’s income hasn’t gone up much in the past thirty years but today, for the first time ever, a handful of writers can be multi-millionaires and even billionaires.  The top pulls away from the median.   
The same forces that have generated greater inequality in writing – the leveraging of intellect, the declining importance of physical labor in the production of value, cultural and economic globalization – are at work throughout the economy.  Thus, if you really want to understand inequality today you must first understand Harry Potter.

Measuring health care costs and benefits

The U.S. spends more than any other country on health care, over 14 percent of gdp.  A crude economist would take the "gdp" of the health sector as a measure of its economic value.  Of course this isn’t quite right, since spending money does not automatically increase health or customer satisfaction.  Advocates of European health care systems are keen to point this out.

In other words, "p x q" doesn’t measure the benefits of the U.S. system.  But critics are quick to insist that "p x q" measures the costs of the U.S. system.  That is a disconnect.  The real costs are what could have been produced with those same resources, or opportunity costs. 

Let’s say a patient pays $1000 to a doctor, but half of that sum is fraudulent pricing brought on by patient irrationality, non-transparency, fear of death, and fraud.  Sound familiar?  The real social cost is what the doctor could have produced, had he not been looking after that patient.  The real social cost is $500, not $1000.

How does this sound as a debating point: "America doesn’t have better health care outcomes than Europe, and in real terms we are spending about seven percent of gdp —  adjusting for relevant corrections– on health care"?  Not so fierce. 

Of course one might dispute the 1:2 ratio mentioned above.

But in general, the more American medical care is overpriced in current markets, the more current expenditures overmeasure social costs.

The more you think that government can bargain down prices without wrecking supply, the more you should think that current expenditures overmeasure social costs.

Recall that economists do not find efficiency loss in higher prices per se.  Higher prices are bad as a sign of restricted output.  But the American medical system has high prices and relatively high outputs, for reasons partially explained by Maggie Mahar.  So don’t measure cost by the high prices, look for output restrictions, either for health care or elsewhere.

Two caveats: We still must consider secondary economic costs; for instance it is harder to switch jobs for health insurance reasons.  Second, medical care is a sector where distribution and efficiency are not totally separate. 

But the general point remains: many of the arguments for greater government involvement imply that the true cost of the American medical system is less than the current numbers imply.

Rich, handsome men

The female students were asked to rate the men for their attractiveness as long-term partners.  Overall, the better looking men were rated as more attractive, as were those men with higher status.  Crucially, however, there was an interaction between facial attractiveness and status, such that good-looking men with high status were actually rated as less attractive than good-looking men of medium status.

Here is the full report.  Remember when Yogi Berra said (more or less): "No one goes there anymore, it is too crowded."

I am not sure that being rated less high is, for these wealthy, handsome men, a sexual or mating disadvantage.  I do not feel sorry for them.

Be afraid, be very afraid

On his travels to almost 100 countries, Barry Goldsmith, a creator of tours for General Tours, says he has worried about risks like terrorism, crime and infectious disease. But one trumps all the others.

“It’s traffic accidents,” Mr. Goldsmith said.

Road accidents are “the largest cause of nonnatural death among U.S. citizens overseas,” said Betsy L. Anderson, a senior consular official at the State Department.

Here is the full story.  Some of the lessons are simple: insist on a vehicle with seat belts, sit in the back whenever possible, try to avoid driving or being driven at night, and don’t take too many car trips.  Avoid the "Andean bus plunge."