Month: September 2009

How profitable are health insurance companies?

Here is one report:

Health insurers, in fact, ranked below many other industries in
profitability, including other health sectors, according to the latest
Fortune magazine rankings. While pharmaceutical companies were the
third-most profitable industry last year, with a 19.3 percent profit
margin, health insurers ranked 35th, with a 2.2 percent profit margin.
Health insurers also ranked lower in profitability than medical
products and equipment makers, pharmacies and medical facilities.

Here is a related list on relative profitability.  It's true that profits are up a lot in percentage terms since 2000 but that doesn't mean profits are high.  Of course it is possible these accounting measures of profit are lies or misleading.

Here are the share prices of Aetna over time and make sure you notice the splits.  It's not clear we can infer anything from this data (for instance if the monopoly position were evident from the beginning, equity returns would be quite modest), but if you wish you can peruse Yahoo Finance for evidence.  I don't find it.  Recent low equity returns may be the downturn at work but the original question is how profitable these companies are in absolute terms.

I'm very willing to "Cry Uncle" on this one because all I've done is some blogger research using Google.  But I would genuinely like to know: if you favor a public plan, or if you think insurance companies are holding strong monopoly positions, what is your evidence for their extreme profitability?  If you go to the second link you'll see lots of people claiming the companies are very profitable and should be squeezed in some manner.  Or do you simply think the companies are not very profitable?

I thank Robert Olson and several other MR readers for related queries.

A Theory for Why Latvian Women are Beautiful

Recently a colleague returned from a trip to Latvia and remarked on how beautiful the women were.  A discussion ensued at which it was agreed that women in a number of other countries were also very beautiful but markedly less outgoing than the Latvians.  As you may recall, beautiful Latvian women like to parade their beauty. My colleague further informed us that the latter event was not unique, having witnessed something similar himself.

Is my colleague's observation a mere statement of prurient preference?  Does this kind of thing belong in a family blog?  Don't worry, at Marginal Revolution we never serve our prurience without a little theory. 

Sociosexuality is a concept in social psychology that refers to how favorable people are to sex outside of commitment.  It can be measured by answers to questions such as "I can
imagine myself being comfortable and enjoying "casual" sex with
different partners" (agree strongly to disagree strongly) or "Sex without love is ok," as well as with objective measures such as the number of sexual partners a person has had.  A low score indicates subjects who favor monogamous, long-term, high-investment relationships.  A high score indicates subjects more favorable to sex for pleasure's sake alone. with less regard to commitment.  On average, males have higher sociosexuality scores than females but sociosexuality scores for females vary widely across countries.

Why might female sociosexuality scores vary?  One hypothesis is that in cultures with low operational sex ratios (the number of marriageable men/number of marriageable women) female sociosexuality will be higher.  The argument is that when the relative supply of males is low, competition for mates encourages females to shift towards the male ideal, i.e. when supply is scarce the demanders must pay more. (Note that this theory can also explain trends over time, e.g. Pedersen 1991).

Ok, where does this get us?  Well in Sociosexuality from Argentina to Zimbabwe, Schmitt (2005) surveyed some 14,000 people on sociosexuality and he correlated female sociosexuality with the operational sex ratio.  Here are the results:


Notice that Latvia has one of the highest rates of female sociosexuality in the 48 nations surveyed and the lowest sex ratio.

Thus, the theory is that Latvian women appeal more strongly to the male ideal because the number of marriageable men in Latvia is low relative to the number of women.  Is it any wonder that my colleague found the Latvian women beautiful?

Views on what the Fed should have done

He asks:

My question for Tyler: which of these views [Friedman and Schwartz vs. Bernanke as practitioner] do you think is correct?
Also, a related question, do you see any distinction between propping
up particular banks and reflating the system as a whole?

Our substantive discussion has really involved two interrelated
issues: what Milton Friedman believed and what is the proper policy in
the face of a potential financial panic. Friedman obviously modified
his views over time, becoming more libertarian, and it may be true that
the early Friedman might have accepted direct bailouts as a stopgap
MEANS of preventing monetary contraction. But I do not believe that the
logic of Friedman's monetarist business-cycle theory requires direct
bailouts. Would Tyler agree?

Two years ago, my view was this: if there is a banking crisis, the Fed should be loose with money and let the market sort out which banks deserve support and which do not.  And stop there.  When Bernanke let Lehman go, I remember being happy and thinking he finally had "real guts."  I now view that attitude as  mistaken, as I had not forecast how badly some credit markets would freeze up, most of all the collapse of repo as analyzed by Gary Gorton.  Two years ago I also had not imagined that the U.S. economy could end up with so many insolvent banks at once.  I had thought that the presence of "real money on the line," from bank CEOs, would stop such an outcome.  That was wrong too. 

When I perused Friedman's writings lately, I found that, as far as I could tell, he never discussed how to deal with widespread bank insolvency.  I interpret him as believing that LLR and loose money and the FDIC could deal with banking crises; furthermore over time his mix of this recipe became successively more libertarian and less interventionist, as David mentioned.  But I also think that perhaps he, like I, hadn't imagined that the insolvency problem would take on the breadth and depth it did.  (Note that although he became more libertarian about the present, he never repudiated his previous call for Fed activism during the GD.)   

On the right and wrong of the matter I side with Bernanke and the bailing out of at least some of the insolvent banks.  I also think that the more modest Friedman recipe is still fine for most "panics," just not this one.

I side with Bernanke because an economy can withstand only so much major bank insolvency at once.  Lots of major banks were levered up 30-1 or so.  Their assets fell in value more than a modest amount and then they were insolvent, sometimes grossly so.  (A three percent decline in asset values already puts you into insolvency range.)  If AIG had gone into bankruptcy court, some major banks would have been even more insolvent.  Or if Frannie securities had been allowed to find their non-bailout values.  My guess is that at least 15 out of the top 20 U.S. banks would have been flat-out insolvent if, starting at the time of Bear Stearns, all we had done was loose monetary policy and no other bailouts.  Subsequent contagion effects, and the shut down of short-term repo markets, and a run on money market funds, would have made even more financial institutions insolvent.  The world as we know it then becomes very dire, both for credit reasons and deflation reasons (yes you can print up currency to keep measured M up and running but the economy still collapses).  So we needed not just emergency lending but also resource transfers to banks, basically to put them back into the range of possible solvency.

I can imagine some responses to this:

1. My sense of the numbers is wrong and, without bailouts, very few banks would have become insolvent.  There would have been another Lehman or two but pretty soon the dust would have settled and we would be back to where we are now, albeit with weaker moral hazard problems in the future because we taught a bunch of banks and their creditors a lesson.

2. The current status quo is so, so bad that it is worse than most major banks going insolvent and into bankruptcy court and the economy collapsing.

3. We can have most of the major banks, insolvent and in bankruptcy court, without the economy collapsing.

Any one of these would prove me wrong.  But the other responses I see in the blogosphere mostly pick up on other tacks, usually citing defects in my understanding. 

If you disagree with me on bailouts, a simple starting question is this: without the bailouts, and with loose monetary policy only, how many of the twenty largest banks do you think would have ended up in bankruptcy court within a fairly narrow time span?  Until you've addressed that question, we're not getting to the bottom of the substantive issue.  I should add that I've put this question to some serious anti-bailout thinkers and I am still waiting to hear back from them.  It is my belief that they never framed the issue that way in the first place.

Believe me, I would be quite happy if I could go back to my previous "minimalist" views.  But I find that when I ask myself this question about the number of insolvent major banks, and the economic and political consequences of that, I can't. 

Addendum: Here is a recent piece on how Milton Friedman's views have been cited, borrowed, and criticized in the recent crisis.  Arnold Kling comments.

Our health care intuitions, or death panels for astronauts

It turns out the hard problem is getting a man back from Mars, not sending him there.  The return trip could cost hundreds of billions extra.  It turns out Lawrence Krauss had the same idea I did:

If it sounds unrealistic to suggest that astronauts would be willing to
leave home never to return alive, then consider the results of several
informal surveys I and several colleagues have conducted recently. One
of my peers in Arizona recently accompanied a group of scientists and
engineers from the Jet Propulsion Laboratory on a geological field
trip. During the day, he asked how many would be willing to go on a
one-way mission into space. Every member of the group raised his hand.

…We might want to restrict the voyage to older astronauts, whose
longevity is limited in any case. Here again, I have found a
significant fraction of scientists older than 65 who would be willing
to live out their remaining years on the red planet or elsewhere. With
older scientists, there would be additional health complications, to be
sure, but the necessary medical personnel and equipment would still
probably be cheaper than designing a return mission.

Let's take bets on that happening.

Elsewhere on the health care front, consider Massachusetts:

State-subsidized health insurance for 31,000 legal immigrants here will no longer cover dental, hospice or skilled-nursing care under a scaled-back plan that Gov. Deval Patrick announced Monday.

David Hume on the posts of honour

Were MOLIERE and CORNEILLE to bring upon the stage at present their
early productions, which were formerly so well received, it would
discourage the young poets, to see the indifference and disdain of the
public. The ignorance of the age alone could have given admission to
the Prince of TYRE; it is to that we owe the Moor: Had
Every man in his humour been rejected, we had never seen

That's from Hume's Of The Rise and Progress of the Arts and Sciences.  I discuss related points in my What Price Fame?  The proximate pointer is from Dan Klein.

Markets in everything, law of one price sucking arbitrage edition

The relationship between Colombia and Venezuela has long been a tense one, but there is still arbitrage across the border.  You may recall, of course, that Venezuela has heavy gasoline subsidies and thus cheap fuel:

On arrival in Colombia, he found a stall set up by the side of the road where he regularly sells his fuel.

A 20-year-old "pimpinero" – as those who siphon off fuel are known – takes the petrol from Juan's car by sucking it out of the tank with his mouth and a hose, seemingly oblivious of any potential health risks.

The transaction is successful and Juan leaves with about $7-worth of Colombian pesos for what cost him about 50 US cents in Venezuela.

Recently, Venezuelan Energy Minister Rafael Ramirez announced that Venezuela would not be renewing an agreement on subsidised fuel with Colombia.

Here is the full story and I thank Stan T for the pointer.

Why are Arabic streets so narrow?

I can't say I'm fully convinced by this explanation but at least it is an explanation and it refers back to early medieval times:

The other important feature of the Great Mosque was that, as a space, it was closed off to the outside.  Roman cities were structured by wide streets leading to central forum areas, to which processions led and where public participation could be considerable, as continued to be the case in Constantinople for centuries.  Amphitheatres (in the West), theatres and racetracks were other major venues for public activity, and the Hippodrome of Constantinople carried on this tradition for a long time.  In the Islamic world, the mosque courtyard took over from all of these; major political events, like collective oaths of loyalty, took place there, not in any secular location.  And the Arab states did not use processions as a major part of their political legitimization; the assembly in the mosque courtyard was sufficient for that.  The need for wide boulevards ended; pre-Islamic Syrian and Palestinian colonnades were quite quickly filled in with shops in the eighth century, some of them commissioned as public amenities by caliphs.  The narrow streets of Islamic cities resulted directly from this, for there was no public interest involved in keeping them clear from obstructions like vendors' stalls, beyond a certain minimum (enough for two loaded pack animals to pass each other, later jurists said).  Public display came to be focused on the mosque, and secondarily, rulers' palaces and city gates, rather on the cityscape as a whole…The caliph and his advisers were nonetheless making a set of conscious symbolic and political points by organizing the Great Mosque as they did; and the way the public space in Islamic cities change, to focus so exclusively on mosques…would have seemed to them auspicious and fitting.

That's from Chris Wickham's The Inheritance of Rome: A History of Europe from 400 to 1000.  If you're wondering why I'm skeptical I suppose the key question is how much weight to place on the mere fact that Wickham a) seems to be certain, and b) in general knows what he is talking about.  What would count as a test?  Is a systematic comparison possible with Christian or otherwise non-Islamic cities in the Middle East from the same period?

Here is a related post on donkeys.