Month: October 2009

Yglesias channels his inner Robin Hanson

Matt Yglesias offers wisdom on cutting health care spending.

Still, though waste is a huge element of our insurance spending, insurance-related waste is a relatively small portion of the overall waste–about 14 percent. The biggest chunk of excess spending we’re involved with is spending on “outpatient care.” We pay doctors more than other people do, our doctors order more tests than other doctors do, our tests are more expensive than other people’s tests, and we have many more relatively expensive specialists and relatively few relatively cheap GPs. And we have nothing to show for it.

The prospects for changing this, however, don’t look great to me. People don’t like insurance companies. Taking them on is popular. And nevertheless we see how difficult it is to really hurt their interests. Now imagine taking on the doctor lobby. More money is at stake. And doctors have a much better public image. And doctors and there families are a much bigger voting block than insurance executives and their families. And on top of that, people have a very strong mistaken intuition that getting lots of tests and seeing lots of specialists is in their interests.

*Mathletics*

The subtitle is How Gamblers, Managers, and Sports Enthusiasts Use Mathematics in Baseball, Basketball, and Football and the author is Wayne L. Winston.

I read only the sections on the NBA.  He proposes a four-factor model to evaluate teams: Effective Field Goal Percentage, Turnovers per Possession, Offensive Rebounding Percentage, and Free Throw Rate, or how often a team gets to the line.  He claims you can raise your PER by taking lots of bad shots and for that reason PER isn't a great measure.  Kevin Garnett was an underrated player.  Playing four games in five nights hurts you by an average of four points.  The raw data, unadjusted for the Lucas Critique, indicate that when you are up by three points, and there are less than seven seconds left, you should not foul the other team.

Some people will enjoy this book.  Baseball receives the most attention.  Each chapter simply ends and the author moves on to another topic without any overarching narrative other than the statistical method itself.

Here is some of his blogging.

Can a Nobel Peace Prize make peace harder to achieve?

David Axelrod spoke:

“I’d like to believe that winning the Nobel Peace Prize is not a political liability,” said David Axelrod,
a senior adviser to Mr. Obama. “But this isn’t something I gave a
moment of thought to until today. Hopefully people will receive it with
some sense of pride. But I don’t know; it’s uncharted waters.”

Putting aside domestic responses, can holding a Peace Prize make it harder to bring about peace?  I believe the answer is yes.  The positive scenario is that holding the Prize signals strength and induces other bargainers to jump aboard your winning bandwagon, for fear of being locked out of an eventual agreement.  The more negative scenario arises when the Prize holder is expected to pressure Country X, Ruritania.  If the Prize holder secretly wishes to favor Ruritania in negotiations, a President without a Prize can to some extent feign or credibly signal weak bargaining power: "I'm sorry, Ruritania just won't budge; you'll have to move closer to their position."  It's harder for the Prize holder to send this same signal, since everyone expects him to get Ruritania to budge (if not, the Prize holder also doesn't have any bargaining advantages either).  The Prize holder may find it harder to deal with truly intransigient nations; fortunately we don't have many of those in the world right now. 

Related arguments are that a Prize can make it harder to practice strategies of "creative ambiguity" or "low expectations."

David Frum suggests the Prize makes it harder for Obama to be hawkish

A simple recalculation story about the stimulus

Let's say a real estate agent is laid off and, at some point, needs to start working elsewhere in the economy.

One scenario is that the former agent searches for twelve months and finds a job in the health care sector.  The economy loses twelve months' worth of output from that individual.  (These numbers are chosen for illustrative simplicity and they are not estimates of actual variables.)

A second scenario is that the former agent is reemployed immediately, improving the energy efficiency of school buildings, and he is paid by stimulus funds.

Two years later, that stimulus money ends.  The former real estate agent then searches for twelve months and finds a job in the health care sector.

The net effect is to sub in two years of insulating work for two more years working in the medical sector, or wherever that individual ends up in the later years of his career.

Both scenarios involve the cost of twelve months unemployment and the associated foregone outputs. 

If you measure the progress of the stimulus early on, it will appear to yield higher employment and gdp growth prospects.  Those benefits are to some extent an illusion because you are not picking up the possibility that labor market search is postponed but not avoided.

A plausible intermediate scenario is that an economic downturn is a mix of real and weak AD factors.  So, after the fiscal stimulus, and after the insulation work is over, the former real estate agent can reemploy himself in six months rather than twelve.  By this point in time AD is higher (perhaps) and labor market adjustment is easier.  Still, the short-run measure of stimulus benefits will be about twice as high as the actual net benefit, all long-run adjustments considered.  It will look, in the short run, as if twelve months unemployment have been avoided when in fact the savings are a net of only six months unemployment avoided (toss in discount adjustments plus consider the costs of taxation and debt).

Many people argue that "we're not yet out of the water" or that we are seeing a "jobless recovery."  I agree on both counts.  I would stress that those arguments do not unambiguously favor the case for more stimulus.  On one hand, troubled times may suggest that we can't let the economic recalculation happen all at once.  On the other hand, if the labor market is still sluggish when the stimulus ends, we are just postponing search and unemployment, not much reducing it.

“Friends” in Hollywood

You know the old saying about wanting a friend in Washington?  Buy a dog.  Well, it's entirely the opposite in Los Angeles.  Here, everybody has lots of friends.  It seems everyone is your friend.  Of course, I'm being somewhat facetious. The city is no more (or, in fairness, probably no less) friendly than any other big North American city.  My point is about the vernacular.  In Los Angeles 'friend' can mean business associate, someone you know, someone you met once, a guy you've had a couple of email exchanges with….Truly, people never say "I know someone over at Warner Brothers" it's always "I have a friend at Warner Brothers".  It's never "I know that director" it's "that director is a friend of mine".  Upon my first brush with this practice it irked me as I saw it as fake and disingenuous.  I assumed that people were bragging about who they knew and embellishing the truth.  However over time I came to realize that that wasn't actually the case, at least not entirely.  The word really has a different meaning here.  When people talk about 'friends' they often aren't really claiming to know that person socially, or that they see them on the weekends, or have their home number.  They would even be surprised if you made that assumption.  To them, when they say 'friend' they mean it and expect it to be understood by the listener as 'someone I know'.  It's taken on a more nuanced meaning in this context.  (Recently, I was mediating a disagreement between two parties and each of them said to me of the other, "Well, he's a good friend but…" when it was clear from their interaction that they were anything but.  In contexts like these it can be a very curious affectation that pushes the boundries of any normal understanding of the word.) 

We all know that different part of the country use different words ('soda' vs 'pop') and many industries have their own specific vocabulary.  I'm not sure which one of those two possibilities is at work here.  I'm curious if entertainment workers in New York use the work 'friend' in the same way it's done in LA or if people in LA who are not in the entertainment business (I hear there are a few of such people) use the term as I describe above?  Is it geographic or industry specific?

Opium in Afghanistan

Let's turn the microphone over to the very intelligent Jeffrey Clemens, who is now a Ph.d. student at Harvard I believe:

Recent estimates suggest that in 2007, Afghan opiate production accounted for about 93 percent of the world's total. This article presents a framework for estimating the potential for source country drug control policies to reduce this production. It contains a first pass at estimating the potential for policy to shift the supply of opium upward, as well as a range of supply and demand elasticities. The estimates suggest that meager reductions in production can be expected through alternative development programs alone (reductions are less than 6.5 percent in all but one of the specifications presented). They also suggest that substantial increases in crop eradication would be needed to achieve even moderate reductions in production (reductions range from 3.0 percent to 19.4 percent for various specifications). The results also imply that, all else being equal, the cessation of crop eradication would result in only modest increases in opiate production (with estimates ranging from 1.6 percent to 9.6 percent).

I can't find an ungated copy, can you?  In any case, the bottom line seems to be that this problem won't get solved.

Markets in everything

Max L. writes to me:

www.ultrinsic.com has gone live and has expanded its betting options for college grades in some interesting ways.  Students can bet not only on their grades in particular classes but also on their career GPA's.  They can also buy insurance for bad grades and make a bunch of different "multicourse" bets.  I thought the expansion adds an interesting finance technique and speeds up the rate at which students feel the burdens/benefits of their academic performance. Also, Ultrinsic either must already have or must develop an effective model for predicting student performance, which should create a lot of very useful data for a huge variety of purposes.

Max also sends along this piece on Hamas and Bernie Madoff.

Payroll tax cuts and gross job flows

In the comments section to my last post a number of people argued that in the current recession firms simply don't have the sales to support a larger workforce so a small reduction in labor costs from a payroll tax cut isn't going to increase employment appreciably.

The argument sounds plausible but the premise is wrong – in fact, lots of firms are selling and hiring.  In July, for example (the most recent data), firms hired over 4 million workers.  Yes, 4 million.  Even in declining sectors like construction there were 346,000 new hires in July alone.  In the 12 months preceding July, firms hired 51.3 million workers.  The problem of course is that during the same time there were 56.6 million job separations (quits, layoffs, retirements) for a net job loss of 5.3 million.

Even though we are still experiencing a daily net loss of jobs it's important to remember that there are about 200,000 hires every working day  Lots of firms are hiring.  In order to increase employment a payroll tax cut need not shift firms "from firing to hiring" it need only increase the hiring rate of those firms already hiring or on the margin of hiring.

The data is from the JOLTs survey which releases more data tomorrow.  The uber-source on job flows is Davis and Haltiwanger and their extensive work with co-authors.  For a good, non-technical, introduction to this and related topics I recommend, The Natural Survival of Work,

*American Homicide* ($40, even though the release date is listed as 10/15)

This book has many good and quotable bits, for instance:

Anglos continued to kill Hispanics at a fairly high rate in the 1880s and 1890s.  Hispanics were five times more likely than the Chinese to be killed in interracial homicides.  They held a wider range of jobs than the Chinese did, moved more freely in society, and enjoyed full civil rights if they were citizens, so they came into contact with Anglos more often and posed a greater threat to them.  They also responded in kind to Anglo aggression, killing Anglos at eight times the rate the Chinese did.  But the Hispanic community, unlike the Chinese community, was becoming less homicidal.

That is from Randolph Roth's new and notable American Homicide (no subtitle, yay!).  Here is a PW summary:

[Roth] distills his argument into several key statistics, all of which hinge upon the fact that Americans are murdered more frequently than citizens in any other first world democracy: U.S. homicide rates are between six and nine per 100,000 people. Roth refutes popular theories about why this is so (e.g., poverty, drugs) and lays out an alternate hypothesis: "increases in homicide rates" correlate with changes in people's feelings about government and society, such as whether they trust government and its officials and their sense of kinship with fellow citizens.

The demons think this is an important book and the genetic influences on my behavior do not appear to contradict that assessment.  I found this bit interesting:

…although the FBI data are incomplete, there appears to have been a steady decline in spousal homicide in recent decades, from roughly 1.5 per 100,000 adults per year to 0.5 per 100,000.

This book is a treasure trove of historical nuggets, data, and clear writing.  It's the single best source on early murder rates in the American republic.  It's especially interesting on how the South evolved to be the most murderous region of the United States.  "There's just a whole lot of people there who need killin'," I recall one man (in another book) opining about Texas and its high murder rate.

the unusual economics of the film industry

Per Alex's kind introduction yesterday, I'm his brother Nicholas and I'm guest blogging for the week.

I'm not an economist but if I have learned anything from my brother (and i have learned lots) it's that economics affects us all.   And i don't mean that in the obvious way that the economy affects us all.  I mean that the academic and esoteric economic theories that are studied in graduate university courses have a very real world and every day practical application.

One interesting thing that I've always found about the film business from an economic point of view is that unlike in any other business I can think of, the cost of manufacturing the product has no affect on the purchase cost to the consumer.  For example Honda can make a cheaper car with less features and cheaper finishes than BMW without losing all of their customers to the superior car because they sell their product for less.  You spend less to make something, you charge less for it.  Makes complete and obvious sense.  Not so in the film business.  I am an independent film producer and I make films that typically cost somewhere between $5M and $10M.  But when I make, say, an $8M film it has to compete at the same price level as the studios' $80M or $100M film.  It costs the consumer the same $12 at the multiplex (and whatever it costs to rent a DVD from Blockbuster these days) for either film.   There is no price advantage to the consumer for choosing to see a less expensive film.  This naturally makes it terribly difficult for smaller films to find an audience.  I find this quite fascinating and I can't readily think of another industry like it. 

A few years ago Edgar Bronfman Jr, during the time his family briefly owned the Universal film studio, suggested that theaters actually charge different admission prices for different pictures so those films that cost less to make had correspondingly lower ticket prices than the mega-budget studio pictures.   He was roundly ridiculed by the industry.  But truth be told I actually think the less-the-warm reception his proposal received had more to do with the fact he was an 'outsider' who had bought his way into Hollywood than on the actual merit of the idea itself.  Sound like good economic practice to me.