Nationalism versus Peace
Paul Krugman has good column today on the threat of nationalism to globalization.
Shortly
before World War I another British author, Norman Angell, published a
famous book titled “The Great Illusion,” in which he argued that war
had become obsolete, that in the modern industrial era even military
victors lose far more than they gain. He was right – but wars kept
happening anyway….…the belief that economic rationality always prevents war is an
equally great illusion. And today’s high degree of global economic
interdependence, which can be sustained only if all major governments
act sensibly, is more fragile than we imagine.
Designing Monopoly
In Alabama it is illegal to recommend shades of paint without a license. In Nevada it is illegal to move any large piece of furniture for purposes of design without a license. In fact, hundreds of people have been prosecuted in Alabama and Nevada for practicing "interior design" without a license. Getting a license is no easy task, typically requiring at least 4 years of education and 2 years of apprenticeship. Why do we need licenses laws for interior designers? According to the American Society of Interior Designers (ASID) because,
Every decision an interior designer makes in one way or another affects the health, safety, and welfare of the public.
This hardly passes the laugh test. Moreover as Carpenter and Ross point out in an excellent article in Regulation from which I have drawn:
In more than 30 years of advocating for regulation, the ASID and its ilk have yet to identify a single documented incident resulting in harm to anyone from the unlicensed practice of interior design…These laws simply have nothing to do with protecting the public.
Most states do not have license laws for interior designers but the unceasing lobbying efforts of the ASID have expanded such licenses. Fortunately, unlicensed interior designers are fighting back! I love that unlicensed designers in New Hampshire have formed a anti-license league, Live Free and Design. Tuttle Lives!
Against Intellectual Monopoly
Against Intellectual Monopoly is a relentless, pounding, take no prisoners attack on patent and copyright law. It joins Lessig’s Free Culture and Heller’s The Gridlock Economy as an instant classic and a must-read on these issues.
Many people argue that the patent system has gone wrong in recent years, Boldrin and Levine argue that the patent system was rotten from the start. James Watt they say was a "scoundrel" who with his politically-connected partner Matthew Boulton used the patent system to crush their innovative opposition and delay the industrial revolution.
During the period of Watt’s patents, the United Kingdom added about 750 horsepower of steam engines per year. In the thirty years following Watt’s patents, additional horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel efficiency of steam engines changed little during the period of Watt’s patent; however between 1810 and 1835 it is estimated to have increased by a factor of five.
Will books be published without copyright? Boldrin and Levine point out that the 9-11 Commission Report was profitably published by Norton despite being available free for download. Not to mention the fact that most of the great works of literature were published without copyright. Boldrin and Levine are top-notch theorists but AIM is widely accessible and it succeeds best with its many historical discussions and contemporary anecdotes.
AIM does suffer in places from a lack of a lack of nuance and a surprising ability to ignore trade-offs. Boldrin and Levine argue, for example, that among the reasons we don’t need patents are a) because ideas aren’t copied immediately, they take time to diffuse, b) first movers have significant advantages and c) trade secrecy is often a more effective "means of appropriating returns" than patents.
Quite right on all three counts but each of these reasons also explains why patents are less costly than one might at first imagine. After all, what Boldrin and Levine are really saying is that intellectual monopoly would exist even without intellectual property law.
A standard model used to explain why patents might be useful implicitly
assumes that ideas are transmitted instantly at zero cost. Boldrin
and Levine smash the premise of this argument but the premise is sufficient for the conclusion not
necessary. Indeed, once you acknowledge that the slow diffusion of ideas helps entrepreneurs to appropriate the returns to their innovations it becomes an open question of how slow is best? When is the appropriability of returns strong and when is it weak? Doesn’t it differ for different goods? Shouldn’t intellectual property law recognize these differences? It’s clear, for example, that ideas are diffusing more quickly than ever before. On Boldrin and Levine’s argument, faster diffusion of ideas implies lower appropriability and thus a stronger argument for intellectual property law. Needless to say Boldrin and Levine are too busy using
a "mallet to smash shiny myths" to make this argument. (To be fair, they are more nuanced in
the conclusion.).
Similarly, Boldrin and Levine argue that the larger the market the less patent protection is needed, hence globalization implies less patent protection. Again, quite right (see also my paper, Patent Theory versus Patent Law, on this point). But you won’t see Boldrin and Levine drawing the corollary conclusion that more intellectual property rights are optimal the smaller the market, despite the fact that we have a very successful example where increased patent rights for smaller markets generated considerably more innovation, namely the Orphan Drug Act.
For economists, it’s also surprising how little marginal analysis you find in AIM. For example, Boldrin and Levine ask, Did Rowling really need a billion dollars to write Harry Potter? Surely, a few million would have been enough. But that’s like saying that taxing lottery winnings won’t reduce the number of buyers because the winner will still get a huge return on her dollar of investment.
The bottom line is that that there is a Laffer curve for innovation – more appropriability increases innovation at first but innovation declines when appropriability extends too far. I agree with Boldrin and Levine that rent-seeking has put us on the wrong side of the Laffer curve for innovation. We need to reduce intellectual monopoly with patent reform, less copyright protection, and a greater use of patent substitutes like prizes. But unfortunately, when it comes to innovation there is no invisible hand theorem which moves us automatically to the top of the curve.
Auto buybacks backfire
In my post, Gun Buyback Misfires, I pointed out that a) gun buybacks encourage people to turn in old, low-quality guns that are unlikely to be used in any case and b) gun buybacks can encourage people to buy and hold more guns because the buyback is a form of insurance, if the gun gets old or stops working you can sell it to the police.
In an excellent post Steve Levitt points out that Alan Blinder’s proposal for auto buybacks suffers from exactly the same problems.
…the majority of vehicles that are turned in will not have been driven much, if
at all. Indeed, I suspect one of the most visible responses to this program will
be a new market for mechanics fixing up cars that don’t run at all just enough
so that they can be driven to the government’s lot to collect the cash.The biggest problem with this policy, however, is the way it distorts long
run incentives. Let’s say the rules of the program say that a car must be at
least fifteen years old to qualify for a big government subsidy to scrap it.
This gives powerful incentives to people with twelve-year-old cars they were
planning on scrapping to keep driving them for three more years to collect the
government bounty. Instead of reducing the number of clunkers on the road, this
program could actually lead to an increase!
Topsy-Turvy
Economists who secretly want to be rock stars and rock stars who secretly want to be economists.
The Pledge of Allegiance
Barack Obama was heckled by a crazy bystander for not beginning a speech with the pledge of allegiance. He handled the event gracefully (video here along with cogent commentary by Matt Welch.) As I’ve written before, I think the pledge is creepy.
Cato’s Gene Healy says it well:
From its inception, in 1892, the Pledge has been a slavish
ritual of devotion to the state, wholly inappropriate for a free
people. It was written by Francis Bellamy, a Christian Socialist pushed
out of his post as a Baptist minister for delivering pulpit-pounding
sermons on such topics as "Jesus the Socialist." Bellamy was devoted to
the ideas of his more-famous cousin Edward Bellamy, author of the 1888
utopian novel Looking Backward. Looking Backward describes the future
United States as a regimented worker’s paradise where everyone has
equal incomes, and men are drafted into the country’s "industrial army"
at the age of 21, serving in the jobs assigned them by the
state…Bellamy’s book inspired a movement of "Nationalist Clubs,"
whose members campaigned for a government takeover of the economy. A
few years before he wrote the Pledge of Allegiance, Francis Bellamy
became a founding member of Boston’s first Nationalist Club….
Bellamy’s ritual for honoring the flag was right in step with those other National Socialists. Here’s a picture illustrating the recommended salute (which later was to became politically incorrect).
The salute may be gone but the message remains.
Feldstein on Fiscal Policy
Martin Feldstein, a proponent of the recent fiscal stimulus, said it didn’t work.
Here are the facts. Tax rebates of $78 billion arrived in the second
quarter of the year. The government’s recent GDP figures show that the
level of consumer outlays only rose by an extra $12 billion, or 15% of
the lost revenue. The rest went into savings, including the paydown of
debt….Although press stories emphasizing that the rebates induced additional
consumer spending were technically correct, they missed the important
point that the spending rise was very small in comparison to the size
of the tax rebates.
It’s a peculiar op-ed, however, as he then goes on to say:
The small rise in spending in response to these tax rebates is similar
to what previous studies of one-time tax cuts found. It also
corresponds to what both basic economic theory and common experience
imply. Although someone who receives a permanent annual salary increase
of $1,000 typically would increase his annual spending by an almost
equally large amount, a $1,000 rise in wealth caused by a share price
increase or a tax rebate would raise spending only gradually over a
number of years.
Right. But a short-term tax cut is exactly what Feldstein called for in an earlier op-ed.
The poor effects of the Bush tax rebate as fiscal stimulus, however, let Feldstein now attack the Obama plan for a $1000 tax rebate. Nothing wrong with that – McCain has nothing better however – but what Feldstein doesn’t say is that if you follow the logic of his two op-eds (and this is not something I would necessarily buy into) the conclusion should actually be that fiscal stimulus would work better if it ran through government spending.
How an Economist Thinks
Over the weekend a crew came round my neighborhood offering to paint house numbers on the curb. Large bold curb numbers, they pointed out, make it easier for emergency service workers to find houses in the dark. Good argument. The price was good too. Then I noticed my neighbors were having their numbers painted. So of course, I declined.
Sentence of the Day
Freedom Fries Under Attack
The Los Angeles council has just passed on ordinance banning new fast food restaurants in a poor section of South/Central LA. William Saletan calls it Food Apartheid and writes:
We’re not talking anymore about preaching diet and exercise, disclosing
calorie counts, or restricting sodas in schools. We’re talking about
banning the sale of food to adults….It’s true that food options in low-income neighborhoods are, on
average, worse than the options in wealthier neighborhoods. But
restricting options in low-income neighborhoods is a disturbingly
paternalistic way of solving the problem.
Milton Friedman once said:
I don’t think the state has any more right to tell me what what to put in my mouth than it has to tell me what can come out of my mouth.
Friedman was talking about drug prohibition but today the target could just as easily be food prohibition.
Hat tip on the Friedman quote to Don Boudreaux at Cafe Hayek.
Summers Vindicated (again)
For the past week or so the newspapers have been trumpeting a new study showing no difference in average math ability between males and females. Few people who have looked at the data thought that there were big differences in average ability but many media reports also said that the study showed no differences in high ability.
The LA Times, for example, wrote:
The study also undermined the assumption — infamously espoused by former Harvard University President Lawrence H. Summers in 2005 — that boys are more likely than girls to be math geniuses.
Scientific American said:
So the team checked out the most gifted children. Again, no difference. From any angle, girls measured up to boys. Still, there’s a lack of women in the highest levels of professional math, engineering and physics. Some have said that’s because of an innate difference in math ability. But the new research shows that that explanation just doesn’t add up.
The Chronicle of Higher Education said:
The research team also studied if there were gender discrepancies at the highest levels of mathematical ability and how well boys and girls resolved complex problems. Again they found no significant differences.
All of these reports and many more like them are false. In fact, consistent with many earlier studies (JSTOR), what this study found was that the ratio of male to female variance in ability was positive and significant, in other words we can expect that there will be more math geniuses and more dullards, among males than among females. I quote from the study (VR is variance ratio):
Greater male variance is indicated by VR > 1.0. All VRs, by state and grade, are >1.0 [range 1.11 to 1.21].
Notice that the greater male variance is observable in the earliest data, grade 2. (In addition, higher male VRS have been noted for over a century). Now the study authors clearly wanted to downplay this finding so they wrote things like “our analyses show greater male variability, although the discrepancy in variances is not large.” Which is true in some sense but the point is that small differences in variance can make for big differences in outcome at the top. The authors acknowledge this with the following:
If a particular specialty required mathematical skills at the 99th percentile, and the gender ratio is 2.0, we would expect 67% men in the occupation and 33% women. Yet today, for example, Ph.D. programs in engineering average only about 15% women.
So even by the authors’ calculations you would expect twice as many men as women in engineering PhD programs due to math-ability differences alone (compare with the media reports above). But what the author’s don’t tell you is that the gender ratio will get larger the higher the percentile. Larry Summers in his infamous talk, was explicit about this point:
…if one is talking about physicists at a top twenty-five research university, one is not talking about people who are two standard deviations above the mean…But it’s talking about people who are three and a half, four standard deviations above the mean in the one in 5,000, one in 10,000 class. Even small differences in the standard deviation will translate into very large differences in the available pool substantially out.
If you do the same type of calculation as the authors but now look at the expected gender ratio at 4 standard deviations from the mean you find a ratio of more than 3:1, i.e. just over 75 men for every 25 women should be expected at say a top-25 math or physics department on the basis of math ability alone (see the extension for details on my calculation). Now does this explain everything that is going on? I doubt it. As Summers also pointed out it takes more than ability to become a professor at Harvard and if there are variance differences in characteristics other than ability (and there are) we can easily get a even larger expected gender ratio.
Does this mean that discrimination is not a problem? Certainly not but we need the media and academia to accurately present the data on ability if we are to understand how large a role other issues may play.
Addendum 1: Andrew Gelman points out that perhaps alone among the media, Keith Winstein at the WSJ reported the story correctly.
Addendum 2: The authors show variance ratios of 1.11 to 1.21, I take a VR of 1.16. If we set the female variance to 1 this implies the standard deviation for female ability is 1 and for male ability 1.077. Using an online calculator for the Normal distribution you can find that given their standard deviation .0102% of males have ability of 4 or greater (4 female sds) but given their sd only .0032% of females can be expected to have the same level of ability, thus a gender ratio of 3.18.
Note that we are assuming that mathematical ability is normally distributed – we know the data fit this distribution around the mean but we don’t know much about what happens at the very top.
More Inflation
First oil, then rice and wheat, and now the cost of hiring low-skilled labor is up by 12% in just one day. Shocking.
Hat tip to Don Boudreaux.
Bad News, Good News
Yesterday, I was supposed to be on Street Signs with Erin Burnett to talk about the effect of the Iraq war on the state of the economy. Sadly, they canceled me at the last minute. Bummer. Then when I got home, there it was, waiting, mocking, the Tivo recording of "my show." I felt bad but… I had to watch.
Heh, they got Joe Stiglitz to replace me! Well, anything less than a Nobel prize and I would have been insulted but I feel much better now! Amusingly, Stiglitz and I are good substitutes on this issue. In case you are wondering, we both think that at the present time the net effect of the Iraq war is (modestly) contractionary rather than stimulative due to higher oil prices, higher interest rates and less wealth.
Democrats Proudly Cut Medicare Benefits
Last week Congress cut benefits to Medicare recipients and liberal pundits applauded. Indeed, Paul Krugman said this was "Kennedy’s Big Day" and "the first major health care victory that Democrats have won in a long time." Of course, Krugman and the others who applauded this "victory" didn’t say that they were cutting Medicare benefits – even though that is exactly what they were doing – instead they framed the victory as one over privatization and waste. Here’s the story.
Medicare beneficiaries can enroll in Medicare’s fee for service plan or they can choose Medicare Advantage joining, for example, an HMO. In the latter case, Medicare pays the HMO a rate per enrollee and the HMO competes to obtain enrollees by offering them a package of benefits and premiums.
Now what you will be told about Medicare Advantage is that it is more expensive than traditional Medicare. Thus the CommonWealth Fund says:
Private Medicare Advantage (MA) plans were paid an
average 12.4% more per enrollee in 2005 compared with what the same
enrollees would have cost in the traditional Medicare fee-for-service
program…
That much is true. But why are MA programs more expensive? The answer, which one gets by innuendo and implication, is that Medicare Advantage programs are wasteful and the extra money is being pocketed by corporations.
The CommonWealth Fund says:
"…eliminating extra payments to private plans could save Medicare a projected $30 billion over five years." (italics added)
Paul Krugman says:
the fastest-growing type of Medicare Advantage plan, private
fee-for-service, costs taxpayers 17 percent more per beneficiary than
Medicare without the middleman. (italics added).
Robert Waldmann is least careful and in a comment on Tyler’s article on means testing says
Cowen doubts that expanding the public share of health insurance would
reduce costs. We have a test case medicare vs medicare advantage
accounts. They cost, on average 12% more per patient…
Thus the message is that traditional Medicare is cheaper because it eliminates the middleman, doesn’t involve private corporations, and is more efficient at lowering costs. None of this is true.
I’ll give you the full story in a minute but let me first point to one clue that something is amiss. According to all of the above "enrollment in these plans has been growing rapidly" (Krugman). Now why would so many Medicare beneficiaries opt out of low-cost, efficient Medicare and into high-cost, inefficient MA plans?
While you puzzle over the clue let’s cover the necessary background. Here is how the MA program pays a private provider (quoting the CBO).
Private plans that want to participate in the Medicare Advantage program must submit bids indicating the per capita payment for which they are willing to provide Medicare’s Part A (Hospital Insurance) and Part B (Supplementary Medical Insurance) benefits–and to take on the financial risk of doing so.
The government compares those bids with county level benchmarks that are determined in advance through statutory rules. The benchmarks are the maximum payment the government will make for enrollees in private plans; in most cases the plans’ bids (and the resulting payments) are lower than the benchmarks….
If a plan’s bid is less than the benchmark, Medicare pays the plan its bid plus 75 percent of the amount by which the benchmark exceeds the bid.
So far you might think that Krugman et al. have a point. If the benchmarks are set too high and Medicare pays the plan its bid plus 75% of the amount by which the benchmark exceeds the bid then the plans could bid their costs and get extra payments. Now, I hope that many of you are thinking, What about competition? Good thinking! Indeed, if that was all there was to it, competition would push the bids below costs. But in fact to resolve our puzzle we need not rely on competition and economic theory because here is the kicker (quoting the CBO again, italics added):
If a plan’s bid is less than the benchmark, Medicare pays the plan its bid plus 75 percent of the amount by which the benchmark exceeds the bid. Such a plan must return that 75 percent to beneficiaries as additional benefits or as a rebate of their Part B or Part D premiums.
Now the solution to our puzzle becomes clear. Why do beneficiaries choose MA plans?
…because such plans provide additional benefits beyond those available within traditional Medicare, including coverage for services not covered by FFS Medicare (for instance, dental services) and cash rebates of premiums or reduced cost-sharing.
In fact, the CBO estimates that the vast bulk of the increased payments to private providers flow to enrollees who get better benefits and lower payments. Indeed, in the case of HMOs enrollees benefit twice – first because the benchmarks are higher and second because, contra Krugman et al., the HMOs actually have lower costs than traditional Medicare! Thus the CBO writes:
In contrast, payments to HMOs averaged 10 percent above FFS costs…On average, HMOs offered extra benefits and rebates equal to 13 percent of FFS costs; those additional benefits and rebates reflected the difference between the benchmark (which averaged 10 percent above FFS costs) and the plans’ bids (which averaged 3 percent below FFS costs).
That could be written more clearly but what they are saying is that Medicare pays HMOs 10 percent more than they would pay for an enrollee in traditional Medicare but the HMOs offer the enrollee 13 percent more worth of extra benefits and rebates. In other words, the HMOs pass on to the enrollee all of Medicare’s "extra payments" plus some. (Note that this is exactly what one would expect in a competitive market.)
Now, I am not saying that higher Medicare payments are a good idea. But I dislike the fact that politicians are being lauded for fighting "wasteful privatization" when what they are really doing is cutting medical benefits for the elderly.
