Month: May 2009

Ferguson on Regulation and Deregulation

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis – or predicted the wrong crisis (a dollar crash) – have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans – who supposedly have much better-regulated financial sectors than the United States – have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the “Anglo Saxon” financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.

Niall Ferguson writing in the NYTimes.  Recommended.

My Markey-Waxman query repeated: what are the climate benefits of the bill?

Barkley Rosser, who is not held in the thrall of the Cato Institute, posts in the comments:

Sorry, you are going to be disappointed. So, I just googled "Markey-Waxman bill benefits" and, big surprise, got a big fat zero. I do not think anybody has made any estimate of benefits, high, low, or medium. If they have, they are buried pretty deeply somewhere, not easily accessible. And, I do not have the time to go cook up some numbers myself (don't even try to ask). So, anyone out there who wants to either cook up some numbers themselves or go digging more deeply, good luck. But, I doubt that the question will be satisfactorily answered…Oh, I should not say I got a "big fat zero." I got lots of hits saying lots of things. But none with any estimated benefits numbers that I could see, even half-baked ones.

Maybe it's still early but this apparent gap in the literature is not encouraging.  I'll repeat my query.  What would be the climate benefits of this bill?  If you want to cite an estimate involving strategic interdependencies with China and India, fine.  But please cite something that puts forward and defends a particular estimate.

Is there a better case for this bill than: "it will raise government revenue, which I favor anyway, and raise the costs of unsavory corporations, which doesn't strike me as so terribly unjust anyway, and on the estimate of climate benefits I will just fudge it and hope for the best and claim we must do something?"  David Frum comments.

Matt Yglesias has a different argument: better to start now than never
I would phrase a related point more technically: acting now may be
keeping open a valuable option on doing more later.  Still, I wish to
know what that option is worth, noting that if major action is impossible today it may be impossible tomorrow as well.

In the comments section of this post I'm not interested in being lectured about CO2 in the time of the trilobites, corrupt scientific groupthink, hearing that geo-engineering would be cheaper, or reading that various wimps won't face up to the need for nuclear power.  I'm also not interested in hearing whether the costs of shifting to greener energy are high or low, at least not today.  I just want to see the benefit estimates on this particular policy and if you put any serious estimate forward in due time I will assess it and report back to you.

Yes it is hard to model international interdependencies and option value — two of the major potential benefits — but we try to model such complexities for other policies all the time.  Surely it's worth some group doing a 50-100 page study of what we can hope to achieve.  Then we could see how plausible is the case for the bill.

If there is such a study, I promise I won't complain about the discount rate, I won't pretend that uncertainty militates in favor of inaction, and I won't dismiss it by saying a carbon tax would be better and then refusing to judge cap and trade vs. nothing.  I want to see whether you need crazy or sensible judgments to get large aggregate benefits from proceeding.

Comments, of course, are open but subject to the above caveats.  No trilobites!


I was very taken by this movie, which is much more insightful than the recent The End of Poverty?.  The film is an attempt to pay homage to Evo Morales and his supporters but it actually shows a far bleaker and more Caplanian picture of life on the ground.  It's one of the best movies on poverty, albeit unintentionally in whole or in part.  The two most unforgettable scenes are when the Morales supporters cannot get the calculator to give them an arithmetical answer ("we need a better calculator") and when they discuss how they torture wrongdoers by tying them to a post and letting the ants come and eat them for a while.  The discussions of how coca leaves are actually good for you are classics of political reasoning.  The lighter-skinned elites don't come off looking so good either.  Recommended, if you're into this sort of thing.

China kiln fact of the day

At around the time of the Industrial Revolution:

Pottery, for instance, was manufactured in both England and China. The
design of the kilns differed greatly, however. English kilns were cheap
to build but very fuel inefficient; much of the energy from the burning
fuel was lost through the vent hole on the top (Figure 4). The typical
Chinese kiln, on the other hand, was more expensive to construct and,
indeed, required more labour to operate. Figure 5 shows how heat was
drawn into the chamber on the left and then forced out a hole at floor
level into a second chamber. The process continued through many
chambers until the air, by then denuded of most of its heat, finally
exited up a chimney. In England, it was not worth spending a lot of
money to build a thermally efficient kiln since energy was so cheap. In
China, however, where energy was expensive, it was cost effective to
build thermally efficient kilns. The technologies that were used
reflected the relative prices of capital, labour, and energy. Since it
was costly to invent technology, invention also responded to the same

Check out the accompanying sketch, from a short essay by Robert C. Allen, drawn from his new book The British Industrial Revolution in Global Perspective.  The bottom line seems to be this:

Success in international trade created Britain’s high wage, cheap
energy economy, and it was the spring board for the Industrial

Here is what WolframAlpha gives you for "Industrial Revolution."

Markets in everything: non-simultaneous trades

Via Al Roth, here is an NBA example which makes my head spin:

"Here is a more complicated example of a legal non-simultaneous trade:
a team has a $4 million Traded Player exception from an earlier trade,
and a $10 million player it currently wants to trade. Another team has
three players making $4 million, $5 million and $7 million, and the
teams want to do a three-for-one trade with these players. This is
legal — the $5 million and $7 million players together make less than
the 125% plus $100,000 allowed for the $10 million player
($12,600,000), and the $4 million player exactly fits within the $4
million Traded Player exception. So the $4 million player actually
completes the previous trade, leaving the two teams trading a $10
million player for a $5 million and a $7 million player. From the other
team's perspective it's all just one big simultaneous trade: their $4
million, $5 million and $7 million players for the $10 million player. "

Should we put a carbon tax on China?

Paul Krugman seems to say yes:

As the United States and other advanced countries finally move to
confront climate change, they will also be morally empowered to
confront those nations that refuse to act. Sooner than most people
think, countries that refuse to limit their greenhouse gas emissions
will face sanctions, probably in the form of taxes on their exports.
They will complain bitterly that this is protectionism, but so what?
Globalization doesn’t do much good if the globe itself becomes

I cannot agree with what I think is his recommendation.  I am not a global warming denialist but:

1. The Chinese are often paranoid (arguably for good reason) and we will get further being nice to them than by being confrontational.  Krugman himself admits that they don't seem themselves as culpable on this issue.  Chinese citizens wanting clean air at home are possibly our biggest ally so let's not alienate them.

2. Last I checked China was funding a big chunk of our government's debt.  Confronting them would have to be bundled with a regime of extreme fiscal conservatism and unilateral foreign policy.

3. It can be very hard to identify and isolate the energy inputs into an exported product, especially if the host government is uncooperative and a lot of money is at stake.

4. We cannot credibly penalize the Chinese until we solve our own pollution problem.  Even under Obama's proposed policies, in their purer forms, that is at best decades away.  In the meantime, what is it that is really being advocated?  Non-credible threats?

5. Once the political process gets its hand on such tariffs they will be directed against, say, Chinese cars, including maybe relatively clean ones, rather than the dirtiest Chinese exports.

6. Last I checked there was something called the United Nations and China sat on its Security Council.  The UN is the (supposed) forum for handling problems of this nature.  Yes, we could construct an alternative "League of Democracies" as John McCain (!) had suggested, in part to deal with global warming and other multilateral problems where the non-democracies won't cooperate.  I don't favor this change but if we are going to do it we need to realize how radical a foreign policy step it would be and how Russia would respond as well. 

One lesson I take from Krugman's piece is just how thin support for multilateralism really is.

I do understand the basic instinct of "this problem is really bad so we must do something…and now!"  I would suggest that we keep in mind the less obvious, but no less important intuition: "this problem is really bad and that means a lot of what we are tempted to do could make it even worse."

Medical care and comparative effectiveness

The idea is to have a commission examine which procedures should not receive full Medicare reimbursement.  I favor spending cuts for Medicare so for me it's a go.  Megan McArdle considers some basic issues.  I'll add or second a few points:

1. When it comes to health care, it's very hard to tell what works.  That's one reason why we don't pay doctors for results in the first place but rather we pay them for procedures.  Having a commission look at statistics only partially remedies this problem. Sometimes looking at outcome statistics from the broader population pool makes the estimate of treatment efficacy clearer and other times it makes the estimate of treatment efficacy fuzzier (you have more data points, but not everyone responds to a treatment in the same way). 

2. Where will the burden of proof be put?  Will the common procedures be the only ones to receive the funding axe (they're expected to prove themselves in the statistical court, so if they can't the funds dry up?)  Will "small numbers" medicine receive the benefit of the doubt or be required to prove itself?  The answer to this question will make a big difference.  

3. Let's
say a treatment for 1000 people helps only 20 of them and so the
aggregate statistics for that treatment are not so impressive.  If you
take those same results and define the population pool ex post as the
20 people who respond positively, suddenly the same treatment has a
success rate of one hundred percent.  Again, framing will matter a
great deal for the results.

4. This commission, if it sticks to its statistical mandate, will be able to recommend many more possible cuts than any vote-maximizing administration will be likely to make.  Some other principle will be used to determine cuts.  Many defenders of the Obama administration are overestimating how scientific this process will be.

5. What does the public choice equilibrium look like?  Should Medicare "strand" some chronic ailments, with large numbers of people suffering only moderately, or should the occasional person be allowed to "die in the street"?  Any spending cuts policy will generate news stories of one kind or another; which will have greater political resonance?

6. The fairly arbitrary cuts we get will in some ways resemble means-testing.  The discretionary procedures are mostly enjoyed by higher-income and higher-education groups.

7. Imagine an analogy from broader life.  Imagine a government that would cut (some) subsidies for any input which could not be shown, statisically, to causally produce better outcomes in life.  You can see how open-ended this would be.  What if you applied this same metric for your personal spending?  Would there be much left to spend your money on?

Addendum: Read the highly intelligent Arnold Kling.

TED Talks: Search, Translate, Subtitle

TED has developed a cool new technology that makes it possible to search, caption and translate TED talks.  Each talk will now come with an transcript.  What's cool is that you can click on any phrase in the transcript and you will jump to that point in the video.  If you go to my talk, for example, and click on "open interactive transcript" you can see this in action.  What this means is that videos will now be Google searchable.

In addition, by linking a translation to the English transcript it's possible to have talks searchable in multiple languages.  Thus, TED is now seeking volunteer translators to convert TED talks into some 40 other languages.  Here, for example, is Bonnie Bassler's great talk on quorum sensing in bacteria (how bacteria talk to one another)  which is translated into Swedish and Spanish.  My talk is still in English only but if anyone translates it they will get a shout out from me!  With a click, translations and transcripts can be shown as subtitles so not only will TED talks be available in other languages they will also be available to the hearing impaired.

Stuff they don’t teach in graduate school

Chris Blattman has a problem to do with his research that they just don't teach about in graduate school.  Which type of anti-malarial drugs should he provide for his research assistants?

I have more and more research assistants in the field these days, and it would
be really fantastic if none of them fell deathly ill because of, well, my
research papers.

Here's the question. We have at least two perfectly
common anti-malarial options–doxycycline and mefloquine–each of which cost a
few cents each. They've been around a while, so we know what to expect. Doxy:
sun sensitivity in the occasional case, and no milk in your coffee that morning
(which is a tragedy). Mefloquine: crazy dreams among a few (including

Along comes a fancy-pants new drug, Malarone. It costs $6 a pill,
with insurance, and has to be taken every day. Why would I pay 120 times more
than the generic? Is it 10 times as effective? 1.2 times? Just as effective? As
far as I can tell, there aren't studies on the matter.

Amazon as book publisher

Here is the latest:

In its most significant foray into publishing, Amazon has acquired world English rights to a self-published novel by a midwestern teenager called Legacy. The acquisition is the first for the e-tailer's newly launched publishing banner, AmazonEncore. Amazon is re-releasing the fantasy title, in hardcover, in August. The book, by Cayla Kluver, is part of a planned a trilogy–it was published under the banner Forsooth Books, founded by Kluver and her mother–and, according to Amazon, is the first in a currently unknown number of titles from AmazonEncore.

Economic theory predicts that if Amazon were to start publishing, it would publish nobodies rather than established star writers.  Can you explain why?

The third health care cost fallacy

Let's start with a correct claim:

The fiscal outlook is grimmer than before, therefore we should spend less on health care reform than I used to think.

I'm willing to make a comparable admission when it comes to tax cuts, so will you sign on to this claim about health care and revise your policy prescriptions accordingly?  (Unless of course your previous estimate had forecast the current revenue situation; Nouriel Roubini could claim this.)

If you do not sign on to this claim, you are committing the third health care cost fallacy.  Note also that your support for non-revenue-intensive means of health care reform might well go up, for related reasons.

You will find fallacies one and two here and here.  Might there be TANSTAAFL deniers who commit all three?

Addendum: Megan McArdle offers some related sentences to ponder:

Conversely, if there is some political or institutional barrier which is preventing you from controlling Medicare cost inflation, than that barrier probably is not going away merely because the program covers more people.  Indeed, to the extent that seniors themselves are the people blocking change (as they often are), adding more users makes it harder, not easier, to get things done.