Month: October 2007

Chic Ironic Bitterness

The ironists of frequent lament, then, far from being the evidentiary beings that willfully corrode society, in fact withhold their trust from a politics and culture undeserving of it.  In doing so they hold dearly and implicitly the ultimately Protestant values of sincerity and authenticity that civic trust needs but has forgotten.  In a world that seems to value the opposite, they must express those values ironically.  Through this move they take temporary inward recourse, leaving the world to realize just how upside down it has become.  And as they lean inward, they take their trust with them.

That is from the new and sometimes intriguing Chic Ironic Bitterness, by R. Jay Magill.  The focus is on how America didn’t much change after 9-11, how the supply and demand for irony stayed pretty much the same, and how Stephen Colbert refutes or at least counters Kierkegaard’s critique of Schlegel.  (Not everyone liked the book.)  Every now and then there is an author’s cartoon (e.g., "Immanuel Kant Bobble-Head Doll"), and on p.5 he stops and writes a stand-alone paragraph:

I’ll be citing the Pew Research Center in a few pages to back this up.

Recommended, ironically of course. 

Was RAND wrong?

No, not Ayn Rand, the RAND experiment on health care.  The RAND experiment randomly assigned people to different health plans and one of the big findings was that cost sharing reduced use of health care but had little effect on health outcomes.  My colleague, Robin Hanson, likes to use this as a club to argue that we should cut medical spending in half

Even randomized experiments have problems, however, and it turns out that there was a lot of attrition in the RAND experiment.  A Healthy Blog quotes from a new paper in the October 2007 issue of the Journal of Health Politics, Policy
and Law, by Dr. John Nyman of the University of Minnesota (alas not online).

Of the various responses to cost sharing that were observed in the
participants of the RAND HIE, by far the strongest and most dramatic was in the
relative number of RAND participants who voluntarily dropped out of the study
over the course of the experiment. Of the 1,294 adult participants who were
randomly assigned to the free plan, 5 participants (0.4 percent) left the
experiment voluntarily during the observation period, while of the 2,664 who
were assigned to any of the cost-sharing plans, 179 participants (6.7 percent)
voluntarily left the experiment. This represented a greater than sixteenfold
increase in the percentage of dropouts, a difference that was highly significant
and a magnitude of response that was nowhere else duplicated in the experiment.

What explains this? The explanation that makes the most sense is that the
dropouts were participants who had just been diagnosed with an illness that
would require a costly hospital procedure. … If they dropped out, their coverage
would automatically revert to their original insurance policies, which were
likely to cover major medical expenses (such as hospitalizations) with no
copayments … As a result of dropping out, these participants’ inpatient stays
(and associated health care spending) did not register in the experiment, and it
appeared as if participants in the cost-sharing group had a lower rate of
inpatient use. … the cost-sharing participants who remained exhibited a lower
rate of inpatient use than free FFS participants, not because they were
responding to the higher coinsurance rate by forgoing frivolous hospital care
but instead because they did not need as much hospital care, since many of those
who became ill and needed hospital care had already dropped out of the
experiment before their hospitalization occurred. …

Hat tip to The HealthCare Economist.

Medicare benefits for prescription drugs

The Medicare prescription drug benefit was, from the beginning, flawed in the details of its execution.  But in general terms it is turning out to be one of the best health care investments our government is making:

Rewarding inventors with inefficient monopoly power has long been
regarded as the price of encouraging innovation.  Public prescription
drug insurance escapes that trade-off and achieves an elusive goal:
lowering static deadweight loss, while simultaneously encouraging
dynamic investments in innovation.  As a result of this feature, the
public provision of drug insurance can be welfare-improving, even for
risk-neutral and purely self-interested consumers.  In spite of its
relatively low benefit levels, the Medicare Part D benefit generate
$3.5 billion of annual static deadweight loss reduction, and at least
$2.8 billion of annual value from extra innovation.  These two
components alone cover 87% of the social cost of publicly financing the
benefit.  The analysis of static and dynamic efficiency also has
implications for policies complementary to a drug benefit: in the
context of public monopsony power, some degree of price-negotiation by
the government is always strictly welfare-improving, but this should
often be coupled with extensions in patent length.

In other words, the optimal ex post incentive scheme involves some market power for drug makers.  To some extent the subsidy counteracts the deadweight loss resulting from that monopoly by lowering real prices to consumers.

Here is my previous post on the topic, also indicating that the Medicare prescription drug benefit is not nearly as costly as has been charged.  Of course subsidizing the pharmaceutical companies does not always sit so well with the left, so I am curious whether progressives will accept this result.  And I am curious whether they envision single-payer programs as continuing this subsidy, or confiscating pharmaceutical company rents instead.

As a side remark, Martin Feldstein was the one who saw, way back when, that health care economics would become such a major field; kudos to him.

Addendum: Sorry for the omission, here is the paper itself.

How special is American inequality?

Will Wilkinson writes:

I was surprised to discover that U.S. market income (i.e., pre-tax) inequality is lower than the U.K.’s, the same as Germany’s, and only slightly higher than Sweden’s…

Check the graph at the link.  Will continues:

This is from Brandolini and Smeeding’s 2007 “Inequality Patterns in Western-Type Democracies: Cross-Country Differences and Time Changes” [pdf].  While the U.S. pre-tax Gini is still on the high side of the median of these 16 OECD countries, it is remarkable how much differences in tax and transfer policies push the U.S. to the top in inequality in disposable income.  This is striking to me because, at a glance, it suggests that the U.S. is not all that distinctive in the way the basic structure of the economy affects the distribution of market income.  Unions in Germany and the U.K. are rather more powerful than in the U.S., but (again, at a glance) appear to do nothing to reduce inequality relative to the U.S.  Of course, eyeball empiricism isn’t dispositive.  But it seems to me to fit pretty well with the weak effect of the relationship between declining unions and rising inequality found in other research, and suggests that the structure of basic American political-economic institutions is not especially conducive to inegalitarian outcomes.

My take: This is all well worth knowing, and it does help counter the view that growing inequality of income is a poliical conspiracy.  But oddly both the critics and the defenders here are missing one major inequality-related difference between Germany and the United States, namely social norms.  We have weaker families, weaker social pressures to conform, deeper bayous, and as a result more flat out lunatics, losers, and violent psychopaths.  (Did I mention we also have more innovation?)  That’s inequality too, though the usual political recipes aren’t likely to provide the cure.

Addendum: One very eminent source emailed me and he wishes to stress that the (relatively) high level of the European Gini stems from higher levels of unemployment, whereas the relatively high level of the American Gini stems from the rich being very rich.  He points out that although the final Ginis may be similar, the underlying patterns are very different and it would be misleading to conclude that America and Germany have ended up at the same pre-tax point.  This is absolutely correct, my apologies if the post created a misleading impression.

Angola fact of the day

The International Monetary Fund projects a  24 percent economic growth this year – one of the fastest rates in the world.

Wow.  Here is fact number two:

…the Catholic University of Angola’s research center say two in three
Angolans still live on $2 or less a day, the same percentage as in
2002…no one disputes that most Angolans face appalling living
conditions, sky-high infant mortality rates, dirty water, illiteracy
and a host of other ills.

If you hadn’t guessed: it’s oil money: "The government is taking in two and a half times as much money as it did three years ago."

Amazon One-Click Patent Struck Down

The US patent office has ruled that enough prior art anticipated the one-click patent to rule a number of the major claims invalid.  Perhaps we should chalk up another win to Eric Maskin!

I’m pleased that the Amazon patent was ruled invalid but insufficient attention to prior art is not the main problem with current patent law.  Patent law needs to change so that patents would be ruled invalid or given much shorter lengths if they do not involve large, sunk costs.

Wednesday dog blogging

In many parts of France, dog-power was vital to the early industrial revolution.  In the Ardennes, where nail-making was a major domestic industry, a passer-by who peered into one of the nail-makers’ low stone cottages would see a small dog scampering inside a wheel to keep the bellows blowing.  In the Jura, villages without a water supply used wheel-spinning dogs to run machines.  The usual stint was two hours, after which the dog, slightly singed by flying sparks, went to wake its replacement and could then do as it liked.  The humans worked for up to fifteen hours a day and were often stunted, myopic and claw-fisted.  The dogs seemed to have been better adapted to the task.

That is from the new and fascinating The Discovery of France: A Historical Geography from the Revolution to the First World War.  Most of all, this book shows just how recently our modern notions of France were formed, and how late particularism persisted in the French psyche and ways of life.

Better Baby Bonds

Presidential candidate Hillary Clinton proposed giving every newborn $5000 that would accumulate interest and be available once the young person turned 18.  She is now backing away from the idea but it’s still worth thinking about the economics of the proposal. 

Consider first that many parents already save to help their children through college.  Thus, the first and primary beneficiaries of the plan wouldn’t be children but parents who knowing that their child has some $12,000 (with interest) coming on their 18th birthday can afford to spend more on themselves.  (Or if you like the parents can spend more on buying the teenager a new car instead of tuition, room and board.)

The parents may be the primary beneficiaries of the transfer but they are also the primary bearers of the tax.  Thus, instead of parents taking money out of their pocket and giving it their children directly we have the government reaching into the pocket of the parents with one hand and giving to the children with the other.  But taking a dollar from A and giving it to B typically costs a lot more than a dollar – given the costs of taxation and bureaucracy a dollar taken may be only 50 cents received.   

Baby bonds are more likely to be a net increase in wealth for poor families.  But will the money be spent on something like college?  Yes, in some cases, but it’s naive to think that the only problem of poverty is lack of money.  Laugh or curse if you like but think about it this way: A child born in the United States already owns an immensely valuable asset, namely the right to live and work in the United States.  This right is worth much more than $12,000 (ask any immigrant) so is more money really going to make a big difference in life choices?

A baby bond might be worth testing if it were targeted to the poor (to avoid the wasteful transfer) and if instead of focusing on income it looked to incentives.  A better baby bond would be a true bond paid only if say the baby graduated from high school and had not been charged with a crime by their 18th birthday.

That was then, this is now

In the early 1970s, investment banking still maintained a relatively even balance between job satisfaction and the accretion of wealth.  The thirty-nine Morgan Stanley partners were paid $100,000 a year and considered that they were well compensated.  Parker Gilbert recalls commuting with a couple of colleagues when they were in their early thirties and hearing someone say:"If we could only make $5 million, we could retire and play golf."

Anyone lucky enough to have inherited a million dollars in 1970 could buy an apartment on Park Avenue — four bedrooms, two maids’ rooms, living room with wood-burning fireplace, dining room, kitchen, and library — for under $100,000.  In 1971 corporate raider Saul Steinberg bought one of the most expensive apartments in the city, at 740 Park Avenue, for $250,000.

That is from Patricia Beard, from Blue Blood & Mutiny: The Fight for the Soul of Morgan Stanley.

It is an interesting question — to say the least — how we got from there to here.  Most of all, the contemporary world is immensely better at allocating talent and maximizing the value that talent can create (admittedly some of this is paper shuffling value, it is not all social value).  That is one of the fundamental productivity shifts behind the rise in income inequality; people with that pro-golf attitude simply couldn’t make it to the top today, and back then many would-be earnings superstars were held in chains by sheer social stupidity, lack of access to the right training, or inability to connect with the proper social networks.

If you work in investment banking and don’t want to play by those rules, "the system" is happy to hit the hyperspace button, send you back to Butte, Montana, and feed you bananas and milk.  However no one is going to boil you in oil. 

Let’s be glad all those people — many of them silly — slave so hard on our behalf.

The best two sentences I read today

According to a study that even the New Republic’s Jon Cohn admitted he
thought was probably exaggerated, being uninsured killed 18,000 people
a year this decade.  Methicillin-resistant Staphylococcus aureus, on the
other hand, apparently kills 19,000 a year.

That’s from Megan McArdle, who continues:

Non libertarians can, of course, go along wishing that we would have
national health care and a War on Infection.  But it’s worth asking
yourself: in a world of scarce resources, where you could only have
one, which would you choose?  And by what principle?

The fact that I have read very few sentences today does not diminish the stellar quality of these thoughts.

Underappreciated economists, a continuing series

Vivian Hoffman, currently a Ph.d. candidate at Cornell.  When I read this description of her research I think that modern economics is very much on the right track:

I study the economics of anti-poverty and health interventions using household survey and experimental economics methods.  Most of my work to date has been in East Africa.  For my dissertation research on demand for and intra-household allocation of insecticide-treated mosquito nets, I conducted fieldwork in southwestern Uganda. Ongoing projects include a study on the impact of food aid receipt on labor supply and agricultural production in Malawi, estimateing the returns to farm assets in rural Ethiopia, and an experimental investigation into the effect of stigma on HIV testing behavior.  I hope to continue working at the intersection of health and development economics.  My interests also include health and poverty-related issues in Canada and the United States.

Here is the abstract on her main paper:

This paper reports results from a field experiment in Uganda. Whether a mosquito net was purchased or received for free affected who within the household used the net. Free nets were more likely to be allocated to those members of the household most vulnerable to malaria, whereas purchased nets tended to be used by the household’s main income earners. The effect was strongest for free nets received by the mother, increasing the probability that all children five and younger slept under nets by 26 percent relative to when nets had been purchased by either parent or given to the father.

In other words, within the household the breadwinners have a greater practical ability to control priced goods than non-priced goods.  This hints at one reason why men are often more willing to "think like economists" within the family.

You might think that Vivian has not yet done enough to be judged, but surely she has done enough to be judged as underappreciated.  So go appreciate her and remove that label from her name!

Mechanism Design and Markets

mechanism design increases our appreciation of markets, if only by
showing how difficult it is to produce good outcomes while respecting
the constraints that markets must satisfy. In a sense, mechanism design
is to markets what genetic algorithms are to life. Theorists may one
day design a better market mechanism or a better genetic code but for
now the gains will come from using our deeper understanding to gently
improve something that’s already pretty marvelous.

That’s me writing at Reason.