Month: October 2010
The pricing of in vitro fertilization
Robert G. Edwards has just won the Nobel Prize in medicine for his work on in vitro fertilization. So I searched for "economics in vitro" and found a recent paper on pricing IVF, by Anthony Dukes and Rajeev Tyagi:
This paper examines the economics of pricing practices at artificial reproductive clinics, which have introduced money-back guarantees (MBGs) for in vitro fertilization. We identify incentives for clinics to offer MBGs and evaluate the impact on couples' choices and on social welfare. Introducing MBGs allows a clinic to (i) segment couples simultaneously on their relative fertility and on risk preferences; (ii) offer quantity discounts to relatively infertile couples; and (iii) offer some risk-sharing to couples for this costly procedure, whose outcome is uncertain. Our results also show how the addition of MBGs can affect the overall social welfare.
In other words, price discrimination. (As it is applied, IVF succeeds one time out of five.) Low-fertility couples are made better off by the implied discount, some high-fertility couples may be worse off from the higher prices they face, and overall social welfare goes up from the money back guarantee, which also may signal provider quality.
Here is a recent critique, claiming that the money-back guarantee damages the nature of parenthood. Yet it is believed that four million people have been born, thanks to IVF.
Leaving Las Vegas (if they can)
In 2005 I presented figures on U-Haul pricing (via Andy Roth) between Los Angeles and Las Vegas. At that time it was much more expensive to rent a truck to go from Los Angeles to Las Vegas than from Las Vegas to Los Angeles.
| One-Way Trip (August 2005) | Price |
| Los Angeles to Las Vegas | $454.00 |
| Las Vegas to Los Angeles | $119.00 |
Since the distance is the same the difference is price was likely due to the fact that more people wanted to escape LA than leave Las Vegas. The key idea is to recognize that as an ideal U-Haul wants the number of trucks at each one of its locations to be the same every day. Thus, U-Haul must choose prices on all of its links so that at the end of the day the same number of trucks come into Los Angeles as leave. One way of doing this is reducing the price on Las Vegas to Los Angeles trips.
Ok, so what are prices today?
| One-Way Trip (October 2010) | Price |
| Los Angeles to Las Vegas | $223.00 |
| Las Vegas to Los Angeles | $234.00 |
Prices have halved on the LA to Las Vegas trip and doubled on Las Vegas to LA. Yup, the Las Vegas boom is over.
As I said in my earlier post, U-Haul pricing is an interesting way of talking about "demand and supply, the difficulties of identifying price discrimination, and why it's efficient to have "women enter free" nights at clubs." I leave the latter as an exercise.
Here is Tyler on Not Leaving Las Vegas.
Incentives
It turns out that major league hitters on the verge of a 3 handle batting average – .300 – hit an astounding .463 on their last at bat of the season:
That is from Barry Ritholtz, here is more.
UK welfare reform
Iain Duncan Smith has got the go ahead for his “revolutionary” plan to transform the UK’s welfare system, David Cameron, the Conservative party leader, has confirmed.
Under it a clutch of out-of-work and in work benefits, including income support, jobseeker’s allowance, disability and housing benefits will be combined in to a single universal credit.
A single means-test will be applied to ensure that “it will be worth it for everyone to work, wherever they are in the income scale, whatever benefits they receive. It is truly revolutionary,” Mr Cameron told the Sunday Telegraph.
There is more here (possibly gated) and also here and on scrapping the child benefit for high earners, here. In some ways this is a move towards Milton Friedman's guaranteed annual income proposal.
The details remain open, but strict means-testing will be applied to the single bundled transfer payment. This will lower the net benefit for people who can earn money, but who earn money with pain or otherwise at high cost. In relative terms, it will help people who have a single reason why they cannot earn or work, and hurt people who have multiple reasons why they cannot earn or work. Under the current system, people with multiple "burdens" (e.g., jobless, child, disability, etc.) can claim benefits from multiple distinct programs (though there is a scaling back of some benefits as total benefits income rises). You can think of the new reform as a lower net subsidy for "comorbidity."
The new reform seems to bundle two changes: 1. a greater emphasis on means-testing and less measurement and subsidization of "conditions," and 2. more will be done on a sliding scale and less will be done using discrete notches, based on definitions of conditions. Furthermore there seems to be 3. means-testing brings higher implicit marginal tax rates, but this is to some extent offset by lower net benefits.
Not Leaving Las Vegas
Unemployment in Nevada is now 14.4 percent, the highest in the nation and a stark contrast to the 3.8 percent unemployment rate here just 10 years ago; in Las Vegas, it is 14.7 percent.
August was the 44th consecutive month in which Nevada led the nation in housing foreclosures.
The article is here and it details other grim aspects of the city's economy. This is a simple yet effective example of the current non-separability of aggregate demand and structural problems. Demand in Las Vegas is ailing and businesses are complaining of low sales. Yet this is a sectoral shift as well, resulting from especially bad local housing problems, lower travel demand from outsiders, and a growing desire for investment safety rather than gambling risk. Las Vegas needs for the United States to have higher real asset values, not just higher nominal aggregate demand.
It is a mistake to require that the sectoral aspect of the explanation postulate an offsetting boom in some other city or some other non-travel, non-gambling sector; that is one sectoral theory but not the one which applies today.
Assorted links
1. A theory of political change or the lack thereof.
2. Textbook-perfect example of us vs. them thinking.
3. China mobile Jackie Chan fact of the day.
4. Via Chris Hayes, very good essay on conservatism.
5. State of Play, good British TV show on journalism and politics, recommended.
Why is hospital food so nutritionally bad?
Mario Rizzo asks me:
Why is hospital cafeteria food so poor from a nutritional point of view? Fried chicken, preservative-filled cold cuts, cheese everywhere, etc. Keep in mind I am not talking about the food served patients who may have appetite problems. It is food they serve everyone else including doctors and nurses, many of whom know better.
You'll find some proximate answers here, referring to the institutional arrangements for supplying the food. Here is a UK discussion. Here are some signs of progress. I would make a few more fundamental points:
1. Few people choose a hospital on the basis of the food or on the basis of the food their visitors can enjoy. Furthermore the median American has bad taste in food and the elderly are less likely to enjoy ethnic food or trendy food. You can't serve sushi. They are likely to use the same food service contract for the patients and the visitors.
2. For the patients, some of the food is designed for the rapid injection of protein and carbohydrates. For a terminally ill patient who is losing weight and wasting away, this may have some benefits. Since healthier people tend to have very brief hospital stays, they can undo the effects of the fried chicken once they get out. Many of the sicker patients in for longer stays have trouble tasting food properly at all.
3. Taxing hospital visitors is one way of capturing back some of the rents reaped by patients on third-party payment schemes.
4. I would be interested to know more about the insurance reimbursement rates for hospital food, but at the very least I suspect there is no higher reimbursement allowed for higher quality. Combine third party payment with a flat price for rising quality and see what you get. Furthermore, low quality food is another way the hospital raises its prices to inelastic demanders, again circumventing relatively sticky reimbursement rates from the third party financiers. It's one sign that the net pressures are still in inflationary directions.
5. You can take the quality of the food as one indicator of the quality of other, harder-to-evaluate processes in the hospital.
What I’ve been pawing or will be pawing
1. J.G. Ballard, Miracles of Life: Shanghai to Shepperton An Autobiography, self-recommending.
2. Robert L. Tignore, Egypt: A Short History. A good introduction and overview.
3. Barry Eichengreen, Exorbitant Privilege: The Decline of the Dollar and the Future of the International Monetary System.
4. Steven Rattner, Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry. An entertaining account of economic policy making inside the Obama administration.
5. Steve Hely, How I Became a Famous Novelist.
6. John Quiggin, Zombie Economics: How Dead Ideas Still Walk Among Us, reviewed by Arnold Kling.
7. Robert Ashley, Outside of Time. The story of his compositions, a new theory of drone, why American opera has failed (one syllable per note is a problem), and how he used his Tourette's to help him turn involuntary speech into music: "I spent years tinkering with my consciousness trying to reconcile the performer — legal and highly paid — with the person you cross the street to avoid."
From the comments
Master of None, Just to be clear, I am not one of those monetarists who argues that you should expect to find a correlation between current movements in M, however defined, and future movements in AD. Indeed if you did find this sort of correlation, it would suggest extraordinary incompetence on the part of the Fed. If they are inflation targeting, there should be no correlation between M and P. And yet M would still be causing P.
These studies don't seem to incorporate recent advances in monetary theory, such as the Woodford model where current movements of AD are caused by changes in the future expected path of monetary policy. It's almost impossible to pick that up with Granger causality.
I agree with the logic of Scott's point, but I might interpet it differently than he does. I would file this one under "Good macroeconomic knowledge is hard to come by."
Assorted links
1. Europe according to France, a map. There is more here.
2. 24 different English language accents (some have curse words)
3. Gramophone classical music picks for the year.
4. Markets in everything: credit card cosignatures, via Jodi Beggs.
What I don’t understand about Ireland
What does anyone keep his or her money, in any sizable amount, in an Irish bank when you can have a euro-denominated account in a German or English bank? Admittedly the interest rate on Irish deposits may be higher, but that has to be matched by a comparable rate of return on bank assets, which right now doesn't seem possible for Ireland. (One fear I have is simply that it isn't and that Irish banks are falling more deeply under.) No matter what bailout is promised, at the end of the day your "euro" might no longer be a true euro.
Yet once deposits flee Irish banks in large enough numbers, the Irish government has to suspend convertibility into the euro or in other words restrict capital movements, whether that is legal or not under EU law. And then suddenly Ireland has a new currency, whether they admit it or not.
There is also a contagion effect. Let's say that Portugal, Spain, Ireland, and Greece are the weak members of the eurozone. A pending bank run in any one of these countries could trigger a convertibility suspension in the others.
Do you think that all of these countries have a strong enough (or maybe I should say "weak enough"?) political economy to impose ongoing cuts in living standards on their voters, to pay back their debts in full? These countries not only have to do the hard work behind the payback, but they have to convince investors and depositors in advance that they will follow through consistently.
That's why I don't think the current configuration of the eurozone will last. A collapse would require only one weak link in the chain.
Right now I would not keep my money in any Irish bank, but presumably some of the people in Ireland remain loyal to their institutions. It's odd how the eurozone is premised on a cosmopolitan Europe, but right now it is hanging by the thread of some very provincial preferences.
*Red Plenty*
"No!" said the Chairman in triumph. "No subsidy!" This is America! Don't you see that the very fact that the hemburger [sic] kiosk is there means that somebody has worked out how to make a profit by selling the meal at fifteen cents. If the capitalist who owns the kiosk couldn't make a profit at that price, he wouldn't be doing it. That is the secret of everything we see here."
Here is one Amazon review of the book, Francis Spufford's latest:
This is a fantastic, innovative look at the economic policies of the USSR under Khrushchev. If my opening sentence sounds dull, please don't see it as a true representation of this book. Spufford's approach is to interweave extensive research with the imagination and invention of a novelist. The end result is a fantastic patchwork in which fictional characters rub shoulders with historical ones and stunning descriptive passages add lustre to what might have been dry, factual information.
It's one of the most stylish fictional experiments of the year, and yet it suddenly, and repeatedly, breaks into disquisitions about market socialism, Oskar Lange, the measurement of Soviet gdp, and Leonid Kantorovich.
Here is one Guardian review of the book. Here is a Telegraph review, also a rave. Here is more praise. Here is the Amazon UK listing. For a while Amazon US claimed the book would come out in March, now there is just this strange and useless listing.
I thank a loyal MR reader for the pointer.
Does money boost real output?
Here is one sentence to ponder:
The significance attributed to money in influencing output has fluctuated greatly as various aspects of VAR modeling have advanced.
It is instructive to read the first few paragraphs of that paper (and here), to get a sense of how murky the issues are. And that is looking at non-liquidity trap periods. If you want a more recent defense of the relevance of money, try this paper. Here is a more skeptical view. Either way, I defy you to come away convinced.
The evidence is much stronger that deflationary shocks are bad; see this Christina Romer and David Romer paper.
We do have theoretical grounds for believing that monetary expansions will be potent when there are lots of unemployed resources and when the demand for money has recently spiked up. But if we're relying on theory, theory doesn't tell us much about expected employment effects because we're back to Arnold Kling's point:
Pretty much everything in AS/AD is riding on the hypothesis that labor supply is highly elastic at the nominal wage and labor demand is reasonably elastic at the real wage.
This is another way of understanding why the Fed is afraid to inflate some more. The gain is uncertain, but the bureaucratic cost of coming out for higher inflation is pretty much for sure.
Mark Thoma's views on the asymmetry of monetary policy, across periods of falling and rising income, can be found here.
Overall, it is easier to break things than to put them back together again.
What Makes the US Health Care System So Expensive?
Here's a shout out to Austin Frakt and Aaron Carroll at The Incidental Economist for their blogging about health care.
In particular, Aaron Carroll's series on What Makes the US Health Care System so Expensive does a very good job of locating the sectors where the US health care system is more expensive than we would expect compared to other countries (it's less good at identifying why these sectors are expensive but we have to start somewhere.) The link is to the introduction to the series. Aaron's post on Red Herrings was especially good.
Austin has also put together a useful set of powerpoint slides on the US Health Care Crisis. He invites you to steal these for your classes or talks or just to read.
One reason why fiscal reform is difficult
Joblessness and the accompanying loss of health benefits drove an additional 3.7 million people into the Medicaid program last year, the largest single-year increase since the early days of the government insurance plan, according to an annual survey by the Kaiser Family Foundation.
Enrollment in the program, which provides comprehensive coverage to the low-income uninsured, grew by 8.2 percent from December 2008 to December 2009, the second-largest rate of increase in the 10 years that Kaiser has conducted the survey. There were 48.5 million people on Medicaid at the end of 2009, or about one of every six Americans.
The article is here. The dilemma is simple: variations in Medicaid coverage account for a lot of the variation in the health of state government finances. Yet if states cut back on Medicaid in some manner, there will be more people on the more expensive subsidized exchanges, come the full onset of the Obama health plan.