Month: June 2012

Yana reviews the new John Goodman book

You can buy Priceless: Curing the Health Care Crisis here, her comments are under the fold…

Goodman’s *Priceless: Curing the Healthcare Crisis* is an excellent treatise on the healthcare industry and how our political solutions are making that world increasingly perverse, ineffective, and stagnant. Tyler has written before about how healthcare is one of the few remaining industries with low-hanging fruit for innovation. In my work I am consistently struck by how many great healthcare delivery ideas are illegal and Goodman showcases many examples of healthcare entrepreneurship which aren’t allowed to take off because of the regulatory environment and the entrenchment of major players.

Goodman at once lays a strong foundation for healthcare as a system “too complex for any single individual (or group of individuals) to grasp or understand” and makes a strong case for how much hubris policy has had in trying to address the problems of the industry. Herein lies the most powerful lesson of the book: while it is impossible that any entrepreneur will devise an overarching solution for our healthcare problems we have forgotten how to let process innovators test solutions and chip away at problems the way they do to roaring success in other industries.

Goodman pinpoints various turns the US has taken to bring existing private coverage and provision of services under the government umbrella. Woven together, these examples provide a vivid picture of systematically government payers have crowded out private sector solutions. This has led to stagnation while propagating the myth that the government is the only capable provider of services for everything from prescription drug coverage (with the passage of Medicare Part D) to comparative-effectiveness research ($1.1 billion allocated under the stimulus bill alone). This has led to a price system so broken that it does not exist. Goodman’s discussion of time prices exposes that we cannot simply push prices down without shifting the costs to other means of rationing. Similarly, his comparison of Medicaid to food stamps showcases how ridiculous Medicaid’s prohibitions on supplementing care with cash are, even within the internal logic of a robust welfare state.

Goodman is not shy about exposing the politics of healthcare and how it stands in the way of treating those who need care the most, including the poor and elderly, but this book is no exercise in partisanship. Rather, he homes in on one of the biggest insurmountable obstacles that the political debate brings to bear:

“Normally I do not comment on the motives of people I disagree with…Yet through the years I have discovered that the most important differences people have over health policy have little to do with facts, reasoning or logical argument. The most important differences stem from differences in fundamental world views. There are a very large number of people in this field who find the price system distasteful – at least for medical care…For well-intentioned reasons perhaps, they are emotionally predisposed to favor the suppression of normal market processes.”

Goodman has a strong grasp of realities such as the fact that many acute care services will always be sticky to being provided locally but that ambulatory and elective procedures make up the majority of the market and have the potential for reinventing how healthcare is delivered. Many will disagree with the ideas presented but the book will push the thinking of anyone involved in healthcare. This is especially true since Goodman has a thoroughgoing understanding of healthcare as an industry, a quality which most of the loudest voices in policy sorely lack.

European Vacation

From the NYTimes:

For most Europeans, almost nothing is more prized than their four to six weeks of guaranteed annual vacation leave. But it was not clear just how sacrosanct that time off was until Thursday, when Europe’s highest court ruled that workers who happened to get sick on vacation were legally entitled to take another vacation.

I predict more people will be getting sick during their vacations.

The case originated in Spain but applies to all the European Union.

Hat tip to the author, Paul Geitner, who ends with this line, “The ruling does not apply to the 25 percent of the Spanish labor force that is currently unemployed.”

Will Uruguay legalize marijuana?

Uruguay is showing a novel approach to Latin America’s growing fatigue with the war on drugs with a new proposal: normalize marijuana use and hand over its distribution and marketing to the government.

Under a plan Defense Minister Eleuterio Fernández Huidobro announced late Wednesday, which the leftist government will soon present to lawmakers, the state will oversee sales, which would be allowed only to adults 18 and older.

The article is here, here is more, hat tip goes to @EndeavoringE.

*The Hour Between Dog and Wolf*

This new and interesting book focuses on the hormones and neuroeconomics behind market trading and traders.  It also has a good passage on the illusion of free will:

In fact our conscious brain has surprisingly little grasp of what makes us decide to do one thing rather than another.  A telling example of this ignorance has been provided by Joe LeDoux and Michael Gazzaniga, two neuroscientists who conducted a study of patients with a severed corpus callosum, the bundle of nerve fibers connecting the two hemispheres of the brain, leaving the two sides of the brain unable to communicate with each other.  LeDoux and Gazzaniga gave instructions to these patients, via their right hemisphere (hemispheres can be targeted with instructions shown to either the left or right visual field), to giggle or wave a hand, then asked them, via the left hemisphere, why they were laughing or waving.  The patients’ left hemisphere had no knowledge of the instructions given to their right hemisphere, but the patients would nonetheless venture an explanation, saying that they were laughing because the doctors looked so funny or waving because they thought they saw a friend.  However implausible the answer, the patients were convinced they knew why they were acting in the way they were; but they were deluded in thinking so.  Their self-understanding was pure confabulation.

The author is John Coates and you can buy the book here.

Spam and the separating equilibrium

From Jeffrey Bloomer:

The researcher, Cormac Herley, looked into so-called “Nigerian scams,” named for the African nation where the scammers often claim to reside. The emails typically seek a cash investment and promise a lofty payoff, often linking themselves to off-shore corporations or royalty. Herley’s algorithm-rich analysis found that the obvious spam clichés are a deliberate attempt to weed out potential victims who are too savvy to fall for the scheme—and in turn make the most of the human capital required to secure funds from the people who are duped.

“Since gullibility is unobservable, the best strategy is to get those who possess this quality to self-identify,” Herley writes, and the scheme ingeniously lines up the most gullible recipients in one swoop. Those who are left “represent a tiny subset of the overall population” but nevertheless a lucrative one for the spammers.

This also explains the apparent overabundance of the emails from Nigeria, since the country is so widely associated with Web scams. Though some of the first such schemes originated there in the 1980s during a period of high unemployment for well-educated young professionals, most launch elsewhere today, including the United States.

Far from the usual spam indictment, Herley’s study suggests applying the spammers’ logic in a larger context. Read it in full here.

For the pointer I thank Claire A. Hill.

Tick Size and Listings

In earlier posts I have argued for a smaller tick size to reduce rent-seeking. The Wall Street Journal reports today that there is a move to increase tick size in order to increase rent seeking.

Smaller and lesser-known companies could benefit from being nickel-and-dimed, at least on stock markets.

Allowing thinly traded stocks to rise or fall in broader increments–five or ten cents versus the current penny, for instance–could help those securities draw more investors and make their shares easier to trade, according to exchange and brokerage executives.

Publicly traded companies or those eyeing an initial public offering should have the ability to choose whether they want their shares to move cent-by-cent or in larger steps, executives told lawmakers at a Wednesday hearing in Washington.

In other cases, exchanges ought to be able to transact the most heavily traded shares in fractions of a cent, some said.

There is a case for having a tick-size function, in which tick sizes would change with share price and perhaps also volume. Many exchanges in the world have such tick functions. I am suspicious, however, when industry insiders plump for higher tick sizes as being in the public interest. In particular, I have doubts that this is true:

Wall Street’s current methods for trading stocks have helped fuel a slide in the number of publicly traded companies, according to David Weild, senior adviser with Grant Thornton LLP. He told lawmakers Wednesday that the number of U.S.-listed companies has declined steadily for the last 15 years, with an average 208 listings falling off exchanges per year since 2002.

The increments by which stocks can be bought or sold, known as their “tick size,” are a key factor, Weild said at the hearing. Trimming the increment to one cent created more potential prices at which shares can trade, making it more work for traders to ensure liquidity, he said.

IPOs and listings are down but I think tick size is at most a minor reason. There are more plausible reasons for declining listings including more competition from abroad, greater use of private equity, increased stringency of regulation in the United States (SOX) and perhaps also declining profitability of small firms.

FYI, here is the testimony from the hearing before the House Financial Services Committee.

Hat tip: John Welborn.

The wisdom of Simon Johnson

As conventionally measured, both Ireland and Spain had responsible fiscal policies during the boom, but they were building up big contingent liabilities, in the form of irresponsible banking practices.


Fiscal austerity will not help, but fiscal expansion is also unlikely to do much – although presumably it could increase headline numbers for a quarter or two. The private sector needs to grow, preferably through exporting and through competing more effectively against imports.

The whole column is excellent.

Steve Postrel on marginalism and the paradox of higher education

Via Reihan, this is an excellent blog post.  Rather than excerpt, let me reproduce the whole thing:

By now, you may be getting sick of reading articles and blog posts about the crisis in higher education. This post is different. It proposes an explanation of why students have been willing to pay more and more for undergraduate and professional degrees at the same time that these degrees are becoming both less scarce and more dumbed down. And that explanation rests on a simple and plausible economic hypothesis.

First, let me dispose of the idea that “college (and business school) is all about signaling.” The explanation I present allows signaling to represent a major part of the value of higher education, but it says that the historical increase in willingness to pay for education is not caused by an increase in its signaling value. (And the evidence for signaling or screening education premia, as opposed to human capital accumulation, is pretty thin anyway.) I’m certain signaling plays a role in creating value for certain degrees from certain institutions for certain people in certain situations. That it dominates the value proposition for college seems like a stretch.

My hypothesis is that it is precisely the dumbing down of U.S. education over the last decades that explains the increase in willingness to pay for education. The mechanism is diminishing marginal returns to education.

Typical graduate business school education has indeed become less rigorous over time, as has typical college education. But typical high school education has declined in quality just as much. As a result, the human capital difference between a college and high-school graduate has increased, because the first increments of education are more valuable on the job market than the later ones. It used to be that everybody could read and understand something like Orwell’s Animal Farm, but the typical college graduates could also understand Milton or Spencer. Now, nobody grasps Milton but only the college grads can process Animal Farm, and for employers the See Spot Run–>Animal Farm jump is more valuable than the Animal Farm–>Milton jump.

So the value of a college education has increased even as its rigor has declined, because willingness to pay for quality is really willingness to pay for incremental quality. This principle holds true in many markets. For example, a roof with mean time to failure of 5 years is a lot more valuable than one with a MTF of 2 years, but a 25-year MTF isn’t that much better than a 22-year MTF for most owners. A fuel economy increase from 12 to 15 miles per gallon is a bigger deal than an increase from 27 to 30 MPG.

Empirical points in favor of this diminishing marginal returns/reduced overall rigor hypothesis:

1. Rigor appears to be declining over time at all levels of American education.

2. Rate of return evidence classically suggests that the big marginal gains to education come from lower levels of education.

3. The median wages of college graduates have been flat, but the median wages of high-school-only graduates have gone down even more.

4. The MBA market has continued to support higher tuitions and enrollment despite the secular trend in rigor.

5. Employers increasingly favor those with more education even as they complain more about the quality of the graduates they hire.

Additional implications:

1. The incremental human capital gained from attending a (truly) better school rather than a typical school is increasing, since the additional learning is more basic (and hence more valuable) than it used to be.

2. Five and six-year undergraduate-to-masters programs should grow to accommodate those who would benefit from additional human capital.

3. More-rigorous high schools will attract larger premia (in either tuition, ability to be selective, or, for public schools, their impact on local property values), because at lower overall levels of rigor the increment of human capital is worth more.

Extensions of the logic to signaling considerations:

1. If you accept that the marginal ability and effort necessary to acquire education increases in the level of education (the flip side of the assumption about diminishing marginal payoff), then the signaling value of the typical degree is actually declining. The innate ability difference between the college and high-school-only graduate shrinks as both curricula are made less rigorous.

2. Signaling by the quality of the institution attended and the difficulty of the major subject studied is becoming more important; a very selective (or hard to complete) school or major adds back some of the lost signaling power of the typical degree.

3. We should see college degrees becoming more important in occupations that wouldn’t seem to “require” them under the old model of college, such as service staff in food service and hospitality jobs.

Markets in everything

After nearly ten years of doing this series, I still find novel and (to me) startling entries, hat tip to @SciencePunk.  Excerpt:

P4304 Sigma Pseudo Corpse Scent Formulation I Canine training aids for the detection of corpses.
For early detection, or below 0 °C
P3929 Sigma Pseudo Corpse Scent Formulation II Canine training aids for the detection of corpses.
For post-putrification detection
PSCI Sigma Pseudo Corpse Scent Corpse Scent Kit Canine training aids for the detection of corpses.
P7184 Sigma Pseudo Corpse Scent drowned victim scent A valuable training aid for water search. It provides a reliable scent source for 30 to 45 minutes, in still or running water, at depths of 1-12 feet.
Canine training aids for the detection of corpses.

South Korea fact of the day

Although inflation in the late 1970s was below the 1974-1975 level, it was high by post-Korean War standards.  It was up from 16% in 1977 to 22% in 1978 and 1979.  The average rate of inflation in Korea in the period 1962-1969 was 17.3%.  In the period 1970-1979 it was 19.3%.

You will note that  South Korea, during those years and subsequently, was one of the greatest growth marvels in all of human history.

The point is not that we should aim for such high rates of inflation today, rather that if growth is strong an economy can stomach more inflation than you might think.

That quotation is from Alice Amsden, Asia’s Next Giant: South Korea and Late Industrialization.