Month: August 2009

*Dear Undercover Economist*, by Tim Harford

Tim's new book is out this week and the subtitle is Priceless Advice on Money, Work, Sex, Kids, and Life's Other Challenges.  The book is basically Tim's "Dear Economist" advice columns from the FT.  It is priced at a very reasonable $10 and it reaffirms Tim's status as the #1 UK writer on popular economics.

Here Tim allows his readers to respond to his advice; check out the comments from loyal MR reader Michael Vassar.

Apparently Daniel Callahan does not plan on working for the Obama administration

It was only two days ago I vowed "no more health care blogging" but I never said "no more health care book blogging," so here goes.  Daniel Callahan's notable Taming the Beloved Beast: How Medical Technology Costs are Destroying Our Health Care System soon will be out.  Here is his position:

I can sum up what I want to say in some simple propositions.  First, ways must be found to return to more basic levels of medical care for ever more patients (e.g., to emphasize prevention and primary care) and to make it more difficult to receive medical care at the higher levels (e.g., advanced expensive cancer treatments or heart repairs).  Second, the priorities for technologically oriented health care should begin with children, remain high with adults during their midlife, and then decline with the elderly.  Third, if the medical care received during those first two stages of life is good, the elderly will have a high probability of a good old age even if advanced technologies are less available to them.  Fourth, health care cannot be reformed, or costs controlled, without changing some deeply held underlying values, particularly those of unlimited medical progress and technological innovation.

I don't like his anti-innovation take in the fourth point but there's a lot of truth to what he says.  It's also the case that the public knows, at some level however incoherent, how prevalent such reasoning is in the thought leaders of the Democratic Party.  The Democrats are right about the need to constrain Medicare expenditures, but the more they attack Republican stupidity and lies, the further they are from understanding why Americans now trust them less with health care reform than before. 

The Hansonian analysis of the discourse is that one needs to signal a more extreme symbolic affirmation with the proper "showing that you care" values than what the other side is doing.  The Republicans have the more extreme rhetoric and in fact people are used to the idea of lies — very used to the idea of lies — dare I say welcoming of the idea of lies? — when it comes to "showing how much you care."  To attack them as liars is to play into their hands.  To pose as The Reasonable Technocrat, as Obama has done in response, is to play into their hands even more.

Prison fact of the day

Bryan Caplan directs us to this claim:

More prisoners reported abuse by staff than abuse by other prisoners: 2.9 percent of respondents compared with about 2 percent.

Some of these are likely false charges but this is startling nonetheless.  Keep in mind there are more prisoners than staff by some number so the relative likelihood of staff abuse must be high in per capita terms.  Bryan sums it up:

The lesson: You might think that no one would be more inclined to sexual abuse than criminals in unisex confinement.  But if you give authority to relatively normal people who can leave the prison anytime they like, they're worse.

In Defense of the Public Option

The defense of the public option coming from the administration, Paul Krugman, Mark Thoma and many others is that a public plan would have lower administrative costs and it would discipline the insurance industry.  As stated, I find the argument weak.  The argument, however, begins to make a certain kind of sense when you consider what else the major health insurance reform proposals would do.    

The major proposals would require insurance companies to take all customers regardless of pre-existing conditions, offer guaranteed renewability and no dropping of coverage for the ill, impose no annual or lifetime caps, and offer coverage of preventative care with no-cost share, among other requirements. Finally, if insurance companies must take all customers regardless of pre-existing conditions it is obvious that sooner or later and probably sooner the government will require that everyone purchase health insurance.

In short, insurance reform will mean that everyone will be required to buy a product that will be tightly regulated and more homogeneous.  Both of these factors will increase the market power of insurance firms.  Since escape via non-purchase will no longer be a potential response to higher prices, mandatory purchase will reduce the elasticity of demand giving firms an incentive to increase prices.  Moreover, in oligopolistic markets, a more homogeneous product can increase the ability of firms to collude.

I believe that health insurance reform will increase the market power of insurance firms and drive up prices.  In this scenario, the public option at least has a raison d'etre, although whether it actually fulfills its purpose is an open question.

It's true that mandatory purchase doesn't necessarily lead to market power, auto insurance is quite competitive.  Nevertheless, given the potential of insurance reform to increase the market power of insurance firms the search for some disciplining device like the public option is reasonable.  Other useful reforms would be to have a single, national regulator of insurance – rather than the 50 we have now, allow an optional federal charter (as we do for banks) or (my preferred approach) move to a competitive federalist system for insurance similar to that for corporate charters.

Hat tip to Ray Lehmann for discussion.

Were the bailouts a good idea?

Following the renomination of Bernanke, it is worth revisiting this question.  Here is a recent report:

With the FTSE World Banks index up 130 per cent since its lows of
early March, the paper losses that governments in France, Belgium,
Luxembourg and Germany are sitting on have also shrunk. Berlin's 25 per
cent stake in Commerzbank's common equity is now worth only 2 per cent
less than the €1.8bn ($2.6bn) the German government paid for it.

spite of criticism of the bail-outs of lenders such as Citi, Bank of
America and Wells Fargo, the Treasury has reaped gains from the coupons
payable under the troubled asset relief programme bail-out funding,
most of which has been repaid.

If another big negative shock comes the government's liability position still could turn out to be much worse.  But if we stop and click pause and evaluate the policy today — the answer to my question is "yes, the bailouts were a good idea."

Without the bailouts we would have had many more failed banks, very strong deflationary pressures, a stronger seize-up in credit markets than what we had, and a climate of sheer political and economic panic, leading to greater pressures for bad state interventions than what we now see.  Milton Friedman understood all this quite well, which is why argued bailouts would have been a good idea in the 1929-1931 period. 

(By the way, some libertarians like to pretend that Milton Friedman blames the Fed for "contracting" the money supply by one-third in that period but in reality Friedman blames the Fed for having let the money supply fall by one-third and not having run a bank bailout.)

If you are a libertarian, is not our current course more favorable for liberty than would have been a repeat of 1929-1931?  If not, I would be curious to hear your counterfactual version of how matters would have proceeded, without the financial bailouts.  Is it that you think the regional banks would have raised the financing to pick up the entire bag and keep the banking system afloat?  Or is it that natural market forces would have somehow avoided a wrenching surprise deflation?  Or do you think the authorities for some reason would have not nationalized the major banks?  Please let us know.

Maybe you think that the bailouts will have disastrous long-run consequences.  And maybe they will, I worry about this too.  But if anyone should know that modern politics can only stand so much short-run panic, it is libertarians and fans of Bryan Caplan's book.  If we had not done the bailouts we did, we would, within a few months' or weeks' time have received a much worse and costlier bailout run by Congress and Nancy Pelosi.  How does that sound?

I can see that Peter Boettke, on his blog, periodically struggles with these questions.  I speculate that Pete even toys with the idea that I am right and that Friedman, a founder of the Mont Pelerin Society, was right about 1929-1931.  But I wonder if he can bring himself to utter those magic few words: "All things considered, the financial bailouts were a good idea.  They would have been a good idea way back when and they were a good idea this time around."

Addendum: Megan McArdle comments.

Insurance markets in everything, no arbitrage condition edition

I enjoyed this one:

You've committed your life to Jesus. You know you're saved.  But when the Rapture comes what's to become of your loving pets who are left behind?  Eternal Earth-Bound Pets takes that burden off your mind. 

We are a group of dedicated animal lovers, and atheists. Each Eternal Earth-Bound Pet representative is a confirmed atheist, and as such will still be here on Earth after you've received your reward.  Our network of animal activists are committed to step in when you step up to Jesus.

We are currently active in 20 states and growing.  Our representatives have been screened to ensure that they are atheists, animal lovers, are moral / ethical with no criminal background, have the ability and desire to  rescue your pet and the means to retrieve them and ensure their care for your pet's natural life.  

…Our service is plain and simple; our fee structure is reasonable. For $110.00 we will guarantee that should the Rapture occur within ten (10) years of receipt of payment, one pet per residence will be saved.  Each additional pet at your residence will be saved for an additional $15.00 fee.   A small price to pay for your peace of mind and the health and safety of your four legged friends.

Unfortunately at this time we are not equipped to accommodate all species and must  limit our services to dogs, cats, birds, rabbits, and small caged mammals.

Thank you for your interest in Eternal Earth-Bound Pets. We hope we can help provide you with peace of mind.

For the pointer I thank The Browser.

Is it America or Europe which is overrated?

Bryan says Europe is overrated and here is one excerpt from a lengthy post:

…almost no one in Europe lives in places as comfortable and convenient as American suburbs: The houses are spacious, the cars are huge, cheap Big Box stores and chain restaurants are nearby, and (to quote South Park) there's "ample parking day or night.

Bryan suggests that American tourists like Europe so much because they are visiting it with U.S. incomes.  I am not sure which PPP calculation he is using but I disagree at a more fundamental level.  Bryan gives some good reasons why America is better for 37-year-olds with young children, namely lots of living space and easy shopping.  But I view much of Western Europe as better for the elderly, if only because it requires less driving and they are more likely to live close to their children and perhaps also they receive more respect.  Western Europe is probably better for children too, for reasons related to safety and health care.

My alternative view is that Americans rate European life so highly (in part) because the buildings from previous eras are so striking and attractive.  If all of the U.S. looked like U.S. postwar construction, the country would still impress more or less as it does.  If all of Europe looked like its postwar construction, Americans would be less likely to admire European policies and political institutions.  Yes I know about Lille, and contemporary Spanish architecture, but in reality most Americans would think of Europe as some kind of dump.

Addendum: Megan McArdle comments.

Spain fact of the day

To put things in perspective, Spain now has as many unsold homes as the US, even though the US is about six times bigger. Spain is roughly 10% of the EU GDP, yet it accounted for 30% of all new homes built since 2000 in the EU. Most of the new homes were financed with capital from abroad, so Spain’s housing crisis is closely tied in with a financing crisis.

You will find more information here.

Why don’t more people like spicy food?

Andrew, a loyal MR reader, has a request:

Tyler, why don't more people like spicy food? What prevents them from trying spicy dishes?

Mexicans acculturate their small children to spicy food gradually, by mixing increasing amounts of chilies into the meal.  It takes a while before the kids enjoy it and at first they don't like it.  If this has never been done to you, you need to make the leap yourself, usually later in life.  The whole point of spicy food is that at first it is painful, causing the release of endorphins to the brain.  With time the pain goes away and you still get the endorphins, although you may seek out an increasingly strong dose to boost the endorphin response.

Not all Americans think this is a good deal.  Older people are less likely to make this initial investment and endure the initial pain.  The same is true for uneducated people (adjusting for ethnicity), who both are less likely to know it will end up being a source of pleasure and who on average have higher discount rates.  What other predictions can be made?  If you and your country are too obsessed with dairy you will be led away from spicy food, one way or the other.  Milk usually counteracts the pleasing effects of chilies.