Month: July 2007

Bad Credit, Bad Driver

Some states ban the use of credit scores to price auto insurance in part because African-Americans and Hispanics tend to have lower (worse) credit scores and thus pay higher auto insurance rates.  The brute facts, however, are that credit scores are good predictors of auto claims. Luke Froeb at Management R&D summarizes a recent FTC study on the issue.

  1. Credit scores effectively predict … the total cost of [auto insurance] claims.
  2. Credit scores permit insurers to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers … . [note: this is why you can call up GEICO, let them look at your credit report, and get an auto insurance quote over the phone].
  3. a group, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians.
  4. …scores effectively predict risk of claims within racial and ethnic groups.
  5. The Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups.

Thus banning the use of credit scores would at best force good drivers (of all races) to subsidize bad drivers.  At worst, if insurance companies cannot price according to risk an adverse selection problem could be created in which good drivers purchase less insurance (to avoid having to pay the subsidy to bad drivers) thus pushing rates even higher and perhaps unraveling the market.

Slightly hoarse

Many of your podcasts have been sent off, the rest should follow early in the week to come.  My favorite question was from the guy who asked something like:

One sentence in your post stood out: "I believe this will be fun for me."  Was it?

He also told me it was OK to answer his question last.

If you blog and link to your podcast, please let me know, I’ll try to post a round-up of the links.  But given how personal so many of the questions were, I’m not sure many of you will be putting them up on your blogs…

Water transport and economic development

The French economic historian Maurice Aymard has estimated that the Dutch Republic was the only country in Europe where water transport was appreciably greater than land transport, in terms of tonnage carried.  In England it was about 50-50; in Germany the ratio was 1:5, but in France it was 1:10.

That is from Tim Blanning’s The Pursuit of Glory, Europe 1648-1815; here is my previous post on the book.

Underappreciated economists: a continuing series

Today I will pick E. Glen Weyl, a mere Youngling, who is studying at Princeton University.  Here is his paper on neural networks, and the abstract:

I consider a potential neural basis of overconfidence, the well-documented tendency of individuals to overestimate the precision of their predictions. I present a simple, classic connectionist model for predicting a binary variable. I show that while the network initially makes weak predictions (in the middle of the probability range) regardless of input, after observing randomly generated data it learns to be overconfident in the sense that when presented with other, unrelated random data it makes strong predictions. The model matches behavioral data in that it shows overconfidence growing with experience and then, eventually, declining. The model shows how overconfidence, far from being a surprising fallacy, can be seen as a natural outgrowth of statistical over-fitting in the brain.

Glen probably won’t be underappreciated for long.  Here is his seminal paper on two-sided markets (e.g.,  There is already talk he will be a leading economist of the next generation.

Here is Glen’s home page, and his other papers.

Here is Dave Warsh on Weyl.  Here is an article full of praise.  (He’s already looking non-underappreciated; note the CV, A.B. 2007, Ph.d. expected 2008.)  Here is Glen’s commencement address.  Here is Glen’s fight against protectionism.  Here are Glen’s film reviews.  Here is Glen’s dining guide for Princeton cuisine (hmm…).

I very much liked Glen’s paper on Simon Kuznets: Economist of the Russian Jewish Diaspora.

Here is Glen’s muse, Alisha Holland.  Here is Glen’s path to Unitarianism.

Let us all be grateful for people like Glen Weyl.

Gratitude tips

These are from the new and noteworthy Thanks!: How the New Science of Gratitude Can Make You Happier, by Robert Emmons:

1. Keep a Gratitude Journal

2. Remember the Bad

3. Ask Yourself Three Questions (What have I received from…?, What have I given to…?, and What troubles and difficulty have I caused …?

4. Learn prayers of gratitude

5. Come to your senses

6. Use visual reminders

7. Make a vow to practice gratitude

8. Watch your language

9. Go through the motions [of showing gratitude, thanking, smiling, etc.]

10. Think outside the box [TC: this one should have been left out]

I didn’t learn anything from this book, but in terms of both truth and importance it is one of the most significant books you can find.  Ever.  Provided you live enough above subsistence, gratitude is the single most important key to personal happiness.  And how commercial society affects gratitude is one of the great underexplored questions of economic science and sociology.

Justin Wolfers speaks

Legalizing wagering on which team wins or loses a particular game,
while banning all bets on immaterial outcomes like point spreads, would
destroy the market for illegal bookmakers and make sporting events less
corruptible by gamblers.


Point shaving may be widespread enough to have occurred in around 1 percent of N.C.A.A. basketball games.

Here is the full argument, and thanks to Chris F. Masse for the pointer; Chris also points me to this new and possibly very important study (a senior thesis by Jonathan Gibbs, at times the link isn’t working) of point shaving in the NBA.

Medicare for everyone?

In general, an actuarial comparison to other health insurance plans shows that Medicare provides significantly fewer benefits than coverage for federal employees, small employers, or Medicaid.

That is from Medicare Matters: What Geriatric Medicine Can Teach American Health Care, by Christine K. Cassel.  It should be noted that a) Cassel is much more positive about Medicare than that quotation alone would indicate, and b) this is an honest book which recognizes the weight behind many different points of view.

What percentage of the federal budget is Medicare?  Will Medicare be?  How many books on Medicare have you read?

Get the hint?

Addendum: I like supplying contrarian material; this article (registration but free) is an excellent critique of the usual libertarian defense of pharmaceutical companies.

Thoughts to ponder

This book review has introduced me to a new enemy, the economist Tyler Cowen…

…”The critical economic problem is scarcity,” he says in his book.
Like all other capitalist economist, Cowen is ideologically welded to
this bad idea of lack and shortages as the key problem. However,
scarcity is rarely real but manufactured. There is an abundance of
energy in the world. The sun gives it to us daily for free. All this
talk about there being not enough energy, food, fuel has been
essentially false. And the wars that have been fought to protect the
little there is for survival have been false wars–wars whose only truth
is that they befitted those who in this or that period of history owned
the means of production.

If scarcity was an authentic problem (rather than a fabricated one) then Africa would not be poor.

Here is the full review, which is titled "Bad Economics."  The pointer is from a loyal MR reader.

Queen fact of the day

Queen guitarist and songwriter Brian May, who gave up studying the stars to become one, will soon complete his doctorate in astrophysics.

May, 60, will submit a thesis titled Radial Velocities in the Zodiacal Dust Cloud next week at Imperial College London.

Here is the story.  Thanks to Daniel Klein for the pointer.  It’s long been my view that most rock stars are very very smart people.

Addendum: Read Dubner on smart rock stars.

What I’ve been reading

1. Falling Behind: How Rising Inequality Harms the Middle Class, by Robert Frank (the economist Robert Frank).  The best statement of the Frankian world view; every book of his is full of ideas and there are very few authors you can say that about.

2. John Lanchester, A Family Romance.  Imagine finding out your mother was once a nun and then that she led a life of lies.  I would have liked this book much better had it not been fiction.  It felt so real and even has good photos but I am disappointed to keep on thinking it is only a story. 

3. Gunther Grass, Peeling the Onion.  Why oh why oh why do I let myself be fooled.  There is only one author I find flat out too obnoxious to read, and it is this guy.  And that was before I learned of the whole SS business.  I had heard this one is different, but it isn’t.  Or it is, but he’s still too far over the line for that to matter.

4. Elizabeth Currid, The Warhol Economy: How Fashion Art & Music Drive New York City.  The title says it all.

5. The First Word: The Search for the Origins of Language, by Christine Kenneally.  The early chapters have excellent material on the contributions of Chomsky and Pinker, but after that it bored me.

The World We Have Lost

Four or six draught animals were needed to pull a coach and they had to be changed every 6 to 12 miles, depending on the condition of the roads.  In England it was calculated that one horse was needed for every mile of a journey on a well-maintained turnpike road.  So, for the 185 miles from Manchester to London, 185 horses had to be kept stabled and fed to deal with the seventeen changes required by the stagecoaches which traveled the route.  Those horses in turn required an army of coachmen, postillions, guards, grooms, ostlers and stable-boys to keep them running.  As a coach could carry no more than ten passengers, fares were correspondingly high and out of reach of the mass of the population.  A journey from Augsburg to Innsbruck by stagecoach, although little more than 60 miles as the crow flies, would have cost an unskilled laborer more than a month’s wages just for the fare.

That is from new and excellent The Pursuit of Glory, Europe 1648-1815, by historian Tim Blanning.  The best parts of this book — which are very good indeed — are the early sections on the economic history of transportation.

Here is a previous installment of The World We Have Lost.

Economic Inquiry has a new policy

R. Preston McAfee (a great choice) is the new editor, and he writes in a mass email today:

insidious, in my view, is the gradual morphing of the referees from
evaluators to anonymous co-authors. Referees request increasingly
extensive revisions. Usually these represent improvements, but the
process takes a lot of time and effort, and the end result is often
worse owing to its committee-design. Authors, knowing referees will
make them rewrite the paper, are sometimes sloppy with the submission.
This feedback loop – submitting a sloppy paper since referees will
require rewriting combined with a need to fix all the sloppiness – has
led to our current misery. Moreover, the expectation that referees will
rewrite papers, combined with sloppy submissions, makes refereeing
extraordinarily unpleasant. We – the efficiency-obsessed academic
discipline – have the least efficient publication process.

The system is broken.

Consequently, Economic
Inquiry is starting an experiment. In this experiment, an author can
submit under a ‘no revisions’ policy. This policy means exactly what
it says: if you submit under no revisions, I (or the co-editor) will
either accept or reject. What will not happen is a request for a

will ask referees: ‘is it better for Economic Inquiry to publish the
paper as is, versus reject it, and why or why not?’ This policy returns
referees to their role of evaluator. There will still be anonymous

who receive an acceptance would have the option of publishing without
changes. If a referee noticed a minor problem and put it in the report,
self-respecting authors would fix the problem. But such fixes would not
be a condition of publication.      

You could try dating women on this basis as well; we’ll see how it goes.  Elsewhere in the world of journals, Science is ending its link to JSTOR, a sad moment for scholarship.

My goodness, many of you are jumping on David Brooks

You’ll find a lengthy list of criticisms here, read for instance the continuing invective from the usually reasonable Ezra Klein.  Brooks for instance wrote:

…after a lag, average wages are rising sharply. Real average wages rose by 2 percent in 2006, the second fastest rise in 30 years.

This met with many screams, not the least because he did not report the median wage.  Yet the following shows up as reported in Brooks’s own NYT:

The average hourly wage for workers below management level [emphasis added] – everyone from school bus drivers to stockbrokers – rose 2.8 percent from October 2005 to October of this year [2006], after being adjusted for inflation, according to the Bureau of Labor Statistics. Only a year ago, it was falling by 1.5 percent.

The author on that piece is David Leonhardt (with Jeremy Peters), who is usually accorded significant (and deserved) respect by the left-wing side of the blogosphere.  Yes there are other ways to read the data, and of course that was December, but read that piece and you will see that Brooks is not way out of line.  For instance Leonhardt and Peters report (with caveats):

For now, however, paychecks are growing fatter in nearly every corner of the economy.

A 2007 update shows higher gas prices hurting this trend in real terms; that doesn’t change the fact that labor markets have been doing better than in the recent past.

Brooks makes nine claims (or try this link), and to my eyes eight of them check out directly, based on material I am familiar with and yes I mean the original sources, not journalistic summaries of them.  (I should note it is not easy to estimate the total gains from globalization, and I wouldn’t put much weight on any particular number here; still those gains are likely very large, as Brooks suggests.) 

I am busy recording your podcast requests, and haven’t had time to check out his claim number two:

The second complicating fact is that according to the Congressional Budget Office, earnings for the poorest fifth of Americans are also on the increase. As Ron Haskins of the Brookings Institution noted recently in The Washington Post, between 1991 and 2005, “the bottom fifth increased its earnings by 80 percent, compared with around 50 percent for the highest-income group and around 20 percent for each of the other three groups.”

Your opinions on this claim are, of course, welcome in the comments.  But in the meantime the economy — however imperfect — simply isn’t as bad as many bloggers are suggesting.

Markets in everything, Eugene Debs edition

We again see life imitating art:

The picketers marching in a circle in front of a downtown Washington office building chanting about low wages do not seem fully focused on their message.

Many have arrived with large suitcases or bags holding their belongings, which they keep in sight. Several are smoking cigarettes. One works a crossword puzzle. Another bangs a tambourine, while several drum on large white buckets. Some of the men walking the line call out to passing women, "Hey, baby." A few picketers gyrate and dance while chanting: "What do we want? Fair wages. When do we want them? Now."

Although their placards identify the picketers as being with the Mid-Atlantic Regional Council of Carpenters, they are not union members.

They’re hired feet, or, as the union calls them, temporary workers, paid $8 an hour to picket. Many were recruited from homeless shelters or transitional houses. Several have recently been released from prison. Others are between jobs.

"It’s about the cash," said Tina Shaw, 44, who lives in a House of Ruth women’s shelter and has walked the line at various sites. "We’re against low wages, but I’m here for the cash."

Carpenters locals across the country are outsourcing their picket lines, hiring the homeless, students, retirees and day laborers to get their message across. Larry Hujo, a spokesman for the Indiana-Kentucky Regional Council of Carpenters, calls it a "shift in the paradigm" of picketing.

Political groups also are tapping into local homeless shelters for temps.

One resident of the Community for Creative Non-Violence shelter earns $30 a day holding a sign outside a Metro stop protesting nuclear war. In 2004, residents of at least 10 shelters were paid to collect signatures on petitions in favor of legalized gambling. Residents call this type of work "lobbying."

The carpenters union is one of the most active picketers in the District, routinely staging as many as eight picket lines a day at buildings where construction or renovation work is being done without union labor.

Supporters of the practice consider it a creative tactic in an era of declining union membership and clout. But critics say the reliance on nonunion members — who are paid $1 above minimum wage and receive no benefits — diminishes the impact and undercuts a principle established over decades of union struggles.

Here is the story, and thanks to Scott Rogers for the pointer.