Month: August 2007

Words of wisdom on preventive care

No one really knows whether preventive medicine will save money in the long run, let alone free up the billions of dollars a year needed to help pay for universal health insurance.  In fact, studies have shown that preventive care – be it cancer screening, smoking cessation or plain old checkups – usually ends up costing money.  It makes people healthier, but it’s not free.

“It’s a nice thing to think, and it seems like it should be true, but I don’t know of any evidence that preventive care actually saves money,” said Jonathan Gruber, an M.I.T. economist who helped design the universal-coverage plan in Massachusetts.

Here is the article by David Leonhardt.

An economist’s palate

The Washington Post covers my economic principles for finding good food.  Excerpt:

I’m sweating and furiously frustrated when I finally arrive, 30 minutes late, at the Hong Kong
Palace, an utterly nondescript Chinese restaurant in a Seven Corners
strip mall. Tyler Cowen is patiently reading when I arrive, unsurprised
that it took me so long to find it. He almost always likes the
hard-to-find joints best. The fact that Hong Kong Palace has an
unlisted phone number is, in Cowen’s eyes, another big plus.

An economist at George Mason University,
Cowen has rather unusual criteria for restaurant selection. He doesn’t
first look at the menu, the ambiance or the reviews.  Being an
economist, he thinks about the rental market, property taxes,
competition and clientele.  "All of us already act like economists," he
said, digging into a plate of Chengdu dumplings in a black vinegar sauce.  "We just have to think about what we already know about the world and apply it to dining."

I liked this article very much.  Elsewhere here is an interview with me in MacLean’s, the Canadian magazine.  What is it they say about them spelling your name right?

Addendum: Arnold Kling reports on my Bloomberg podcast, which I can’t find on the web either; maybe try here.

Confessions of a Jane Austen Addict

That’s the title of Laurie Viera Rigler’s new and fun book.  The basic premise is that a pouty L.A. girl "wakes up" in the body of a character in a Jane Austen novel; here is the book’s website.  She also finds herself courted by an ardent suitor, Edgeworth, who wants an answer to his marriage proposal and soon.  My wonderings were skewed as usual:

1. Would I, at first, have to act sick and crazy so as to cover up what are in fact more systematic lapses from accepted codes of social behavior?

2. If I am a rational Bayesian, what percentage of "transported people" should I expect to find in my new world?  (It is indicative that our heroine thinks she is very special and isn’t much concerned with this question.)  Would such people be natural allies or enemies?

3. If I met another transported person, could I figure this fact out?  How long would it take and what are the best hints to drop?  Should I just mention "the Boston Red Sox" and see what happens?

4. Living in such a world, how useful is it to know how the novel ends?  (This is a theme in the story.)  Could such knowledge compensate for not understanding the non-articulated rules of this world very well?  What rate of interest should I pay on borrowed money, given the presence of speculative opportunities?

5. Being a rational Bayesian, how should I revise upwards my estimates that the world is ruled by an evil Demi-Urge, and what does this imply for the optimal degree of ethical behavior?

It is a sad commentary on our educational system that Courtney, the heroine of the novel, never ponders such a question.

6. At what percentage of "transported people" would we expect to see an impact on real GDP, and would this impact be positive or negative?

Readers, what other questions should I be asking?

Bonchon chicken

6653 Little River Turnpike, #H, Annandale, VA, 703-750-1424,  Is it the best fried chicken I’ve had?  I didn’t even mind the forty-minute wait, though now I know to call ahead, as the Koreans do.  Get it with both sauces – soy and garlic, and hot –and be sure to ask for the kimchi.

Here is the NYT on Korean fried chicken.  It’s also healthier than you think: crunchy, spicy, and non-greasy. 

Seth Roberts sentence of the day

Actually, the Shangri-La Diet is engineering, not science.

Natasha is now taking flaxseed oil, and I tell her it will make her smarter.  Someone once asked me, isn’t Seth’s proposal based on a placebo effect?  I wonder — when the individual is genetically special and also the basic unit of analysis — how exactly is a placebo effect defined?  It either works or it doesn’t.

Here is Seth buying Planet Earth, as all wise men should.

The Persistence of Poverty

…paying the first bill in a stack of overdue bills does little to relieve a guilty conscience.

That is from Charles Karelis’s truly intriguing The Persistence of Poverty: Why the Economics of the Well-Off Can’t Help the Poor.

If your car has lots of scratches and dents, getting rid of just one doesn’t help much either.

More generally, if pains and troubles are high enough, extra pain and trouble just isn’t so bad.  You hardly notice it.  But that overturns standard economic assumptions of diminishing marginal utility, and the rest of Karelis’s model follows directly. 

Poor enough people will accept risk in the downward direction rather than smoothing consumption, so they buy lots of lottery tickets.  They also commit more crime, so they can have at least some joyous times, and they take lots of "stupid" chances.  Yet the poor are not irrational or necessarily dysfunctional in terms of procedural rationality, but rather they are optimizing given constraints.  They are taking the Friedman-Savage model very very seriously.

"Getting tough" with the poor through policy is more likely to backfire than succeed, as it just encourages more mean-reducing, risk-taking behavior.  At some level the marginal utility of consumption for the poor fits the standard model, so income effects will more likely bring normal behavior than will substitution effects.  That’s one reason why the EITC works relatively well.

The more the poor regard themselves as lagging the rich (rather than doing better than, say, their peers back home in Gujarat), the more stupid risks they will take.  That’s why poor immigrants are more value-maximizing than the poor that have lived in America a long time and adapted to American norms and expectations.  The immigrants don’t regard their burdens as insuperable and they are on standard downward-sloping marginal utility curves.

It can make more sense to give money to people on the verge of leaving poverty, rather than people deeply mired in poverty.  The former transfer will get people onto "normal" marginal utility curves, but the deeply poor will just squander their new wealth, as it doesn’t much alleviate their unhappiness.

This short book is a wild ride.  The absence of traditional evidence makes it hard to evaluate these hypotheses, but it is one of the more valuable and stimulating contributions of the year.

Brad DeLong’s query

…why the extraordinarily outsized pay packets of the high financiers?
Why doesn’t competition–which sorta works elsewhere in the
economy–cause us to see greatly reduced earnings? We understand, we
think, why celebrities get paid so much–a combination of increasing
returns in distribution, being the genuinely best in the world, and
being well-known for your well-known-ness. But why financiers?

What is it that blocks effective entry and competition, exactly?

The post is here.  I see the high returns of hedge fund managers as the result of a "who moves first?" game.  Someone
is the first to buy a big chunk of an underpriced asset, and indeed the
greater liquidity of capital markets makes it possible for the first
mover to buy a bigger chunk than ever before.

The other buyers might (though might not) come only a second later
with their purchases of the same asset.  In that sense the world is
very competitive.  Entry into purchasing the undervalued asset is not
blocked.  But still someone has bought first and will earn a
huge bundle.  Highly competitive "piling on" simply speeds up the
receipt of the eventual capital gain by the first purchaser, it does
not limit the size of that gain.

Who is a first-best economist?

The gut instinct…is to apply a simple supply-demand framework to the question at hand. In this world, every tax has an economic deadweight loss, every restriction on individual behavior reduces the size of the economic pie, distribution and efficiency can be neatly separated, market failures are presumed non-existent unless proved otherwise (and to be addressed only by the appropriate Pigovian tax or subsidy), people are rational and forward-looking to the first order of approximation, demand curves always slope down (and supply curves up), and general-equilibrium interactions do not overturn partial-equilibrium logic.  The First Fundamental Theorem of Welfare Economics is proof that unfettered markets work best.  No matter how technical, complex, and full of surprises these economists’ own research might be, their take on the issues of the day are driven by a straightforward, almost knee-jerk logic.

The second group — "second best" economists — is Akerlof, Stiglitz, Shiller, Krugman, and Rodrik himself; I believe you know their approach.

I think of myself as a better-than-first-best economist.  On average market solutions have positive Pareto-relevant externalities, if only through supplying experimentation and strengthening social norms in favor of commerce.  That’s true even for the market in thumbtacks, if you consider it as feeding into a broader social stream.  Externalities are virtually everywhere and often I prefer to think in terms of Hayek’s theory of spontaneous order.  Where markets should be allowed to operate, markets are usually too weak in their reach and scope.  Yes there is a continuum of social returns but only rarely are we close to an optimum. 

But I don’t mean this as a plea for laissez-faire.  Governments must produce public goods, maintain social order, and of course support markets.  At the margin, those activities, such as imposing accountability under the law, are also largely underprovided.  For the appropriate selection of policies, government is also better-than-first-best, despite its apparent static inefficiencies.

An oversimplified version of my view is that anything good is underprovided at the margin.  This follows from a belief in strong network and peer effects, and a belief in the relevance of basic sociology.

I favor much less government than Akerlof or Stiglitz or Rodrik himself; yes I view them as "second best" when it comes to government just as they are second best when it comes to markets.  But I’m often 4th or 5th best when it comes to what government does.

Who’s really the utopian?  And how did government ever work itself up to that number two?

Markets in everything roundup

1. Random number generators

2. Do you need a pre-arranged ring on your cell phone?

3. A vasectomy for an iPhone?

4. Matt writes in:

There are companies that register domain names for you,  companies that register domains and then sell them to you, and now companies that come up with unregistered domain names that you can register: and

Twinkie, Deconstructed

There are entire companies which do nothing but break eggs open for other companies; the largest such egg-breaking company is based in Elizabeth, New Jersey.

That is from Twinkie, Deconstructed: My Journey to Discover How the Ingredients Found in Processed Foods Are Grown, Mined (Yes, Mined), and Manipulated Into What America Eats, by Steve Ettlinger.  So far this is my pick for the best food book of the year.

I also learned that a twinkie is about half sugar, sulfuric acid is the most produced chemical in the world, sugar is used to clean out cement mixers, phosphate rock and limestone make Twinkies light and airy, Twinkies’ butter flavor is created out of gas, Twinkies contain only one preservative (sorbic acid), and the original 1930 Twinkies were filled with banana flavor, not vanilla.

The bottom line is that I ordered bought two more of the guy’s books.

Home Envy?

In a survey Robert Frank finds that people say they would rather live in a 3000 square foot home when their neighbors have 2,000-square-foot bungalows than live in a 4000 square foot home in a neighborhood of McMansions.  Greg Mankiw asks:

Do people really behave as reflected in this survey? I bet the 4,000 square foot
house surrounded by McMansions would sell for more than the 3,000 square foot house
surrounded by bungalows.

Let’s take it to the data.   I regressed the sales price of about 12,000 houses in Northern Virginia on a bunch of housing characteristics including number of bathrooms, bedrooms, levels, age of the house and so forth.  I also included the average sales price of homes in the same neighborhood.  The result?  Houses in neighborhoods with high average prices sell for more than similar houses in neighborhoods with lower average prices.  Thus the prima facie evidence is that the same house is worth more if it is surrounded by more expensive houses – the opposite of Frank’s hypothesis.

Now it could be that the high average price of other homes in the neighborhood is controlling for unobservables of "your" home so here is a more precise test.  I defined a variable (sqft-avgsqft) where sqft is the lot size of your house and avgsqft is the neighborhood average.  I then split this into a positive difference, when your house is bigger than your average neighbor’s house and a negative difference when it is smaller.  Bigger houses ought to sell for more everywhere but if Frank is right then square footage is more valuable when other people’s square footage is low (lording it over your neighbors).  Similarly, if Frank is right people should be especially averse to living in small houses in big neighborhoods thus a negative difference should result in much lower prices.

Below you can find the relevant part of the regression.  The bottom line is that houses with bigger lots sell for more (the positive coefficient on lotsqft) but the increase in price is less when your lot size is bigger than the average lot size.  In other words, people do not want to own the biggest house in the neighborhood.

What about when your house is smaller than average?  Here there is no penalty.  Contra Frank, people do not mind having a small house in a neighborhood of McMansions.

SalesPrice Coef. Robust Std. Err. t P>t [95% Conf. Interval]
pos dif -.4012873 .0992195 -4.04 0.000 -.5957739 -.2068006
neg dif .0352269 .0474728 0.74 0.458 -.0578278 .1282815
lotsqft .760224 .0527708 14.41 0.000 .6567846 .8636635

Although the data are inconsistent with Frank’s argument that the rich make the middle class worse off they are consistent with an alternative status effect in which people dislike lording it over their neighbors or in an alternative interpretation, the poor make the rich worse off. 

What is carbon-friendly?

Can this result be true?  The guy claims that food production and refrigeration is so energy-expensive that it is more carbon-friendly to drive your car than to walk.  Walking requires that you eat more to make up the lost energy, as you can lose only so much weight (what’s the relevant margin here?  Ten feet of walking?  A lifetime of walking?).

It is also claimed that: "Paper bags cause more global warming than plastic."  Here is the book, I’ve ordered it and will report in due time.  In the meantime, here is Ezra’s coverage.

From Chicagoboyz, here is a good post on whether tangerines from a distance can be more carbon-friendly than local fruit.  Here is an earlier MR post on the same.

Assorted links

1. Camille Paglia: save the arts with religion

2. Gayle King flirted with me a lot

3. What’s a nerd anyway?  No way is it, at its core, "a rebellion against the cool white kids and their use of black culture…"  Genetics, anybody?

4. Let companies run for electoral office?

5. How are autistic and aspie girls different from the boys?  In the article, Skuse is the guy who nails it.