Let’s spend more on health care?
That’s what David Cutler argues in his recent book Your Money or Your Life.
Cutler believes that our expenditures on health care have more than justified their cost. He therefore opposes the traditional recipe of “cut costs and use the savings to finance greater access.” His attitude is closer to “expand care now and improve the quality of outcomes.” If you think that more discretionary spending doesn’t make many people much happier, why not make them healthier and longer-lived instead?
As I read the book, Cutler is pushing two major ideas:
1. Subsidize insurance to ease the problems of the forty million uninsured. But he repeats the usual numbers, without convincing me that the problem is as bad as it sounds.
2. Pay for health care results, rather than rewarding expenditures per se. In other words, give doctors and hospitals bonuses for actually making patients better.
A loyal reader of MR should not be surprised to read that Robin Hanson had the idea first. Read his intriguing essay at the link. In Robin’s vision you buy your medical care from an institution that contracts with a third party to pay penalties, or receive bonuses, depending on your longevity, disability, et.c — whatever can be measured. I can imagine such incentive schemes working in the decentralized private sector, especially after much trial and error experimentation. (Note the potential adverse selection problem: you don’t want providers to have an incentive to shun hard-to-improve cases.) It is much harder to see federal or even state governments getting the incentives right, and having the political capital to see the correct decisions through.
The bottom line? Cutler is obviously a smart guy but overall I found the book underargued. I like his optimistic, can-do attitude, but I don’t trust it in the hands of politicians.
The economics of low-cost carriers
The nation’s low-cost carriers are profitable even as the venerable “legacy” airlines barely tread water. How can they make money while offering fares that are 40 to 70 percent lower? The reasons are many — cost of labor is a big one — but here are 10 major differences between the cheeky upstarts and the big boys.
The list runs as follows:
1. Low cost carriers generally serve cities of 1.3 million or greater.
2. Southwest has 84.6 employees per aircraft, United has 116.
3. JetBlue sells 2 percent of its tickets through travel agents, US Airways sells 61 percent through agents.
4. The low-cost carriers have more point-to-point flights. 40 percent of American passengers have connecting flights, it is only 10 percent for Southwest. Connecting passengers cost more money to serve.
5. Low-cost carriers generally avoid costly foreign flights.
6. A Delta captain earns $215,000 a year, an AirTran captain earns $135,000.
7. The low-cost airlines have cheaper pension plans.
8. Southwest, JetBlue, and AirTran have no downtown ticket offices. US Airways has 13.
9. US Airways pays its telephone reservation agents $21 an hour. JetBlue pays them $8.25 an hour and has them work from home, saving on office costs.
10. JetBlue flies one kind of plane, Delta flies 16 different kinds of aircraft.
Here is the full story. Obviously many of these cost savings can cut into long-run profitability, but that is how the low-cost airlines have penetrated the market.
If air genius Gary Leff offers commentary, I’ll write an addendum.
Addendum: Here’s Gary, he says “It’s the labor costs, stupid”.
Irrational gloom, or Alex cheers me up
Alex remains worried about our future, but let us look more closely at his concerns. His biggest fear is our future demographic structure:
…the Bush policies are not the major problem. The major problem is that we are about to be hit by a tidal wave of old people (contra Tyler demographics are the problem not the solution).
Hey, I hope to be part of that wave, the problem will be if I am not!
Let’s redo Alex’s doctor example. In my version, the doctor suddenly tells Alex that he will live to the ripe old age of two hundred, most of those years in reasonable health. This is reason to celebrate, even though Alex would have to restructure his retirement plans. Something like this, albeit in less extreme form, is going on in America: a large baby boom cohort can be expected to live to older ages. Bravo, I say. Count up those extra years, including the implicit value of leisure, at their full economic value, and our “intergenerational accounts” will look much better. Note also that the elderly have a higher quality of life than ever before, for reasons ranging from cheap eye surgery to bypass operations to new drugs.
Two other issues:
First, contrary to what Alex suggests, “g>r” would solve the problem. Growing debt, which is a transfer, doesn’t change the fact that the intertemporal budget constraint has melted away, provided we can shift real resources into the present (if you’re not an economics nerd, the point would take too long to explain in non-technical language, read the link if you must).
Second, I am not convinced that Alex has put his money where his mouth is. He is conspicuously silent about whether he has gone short in bonds. Plus I bet he would have taken a tenured professorship, bought a house, and bought an internationally diversified portfolio anyway, I certainly did all of these and I am an optimist.
The bottom line? A growing population, combined with a bulge of old people, requires planning wisdom and creates some costly expenditure pressures. But overall longer lives are cause for rejoicing, not our economic doom. Love and time are what we are ultimately seeking to economize, and longer lives contribute toward both ends.
My Haitian fears confirmed
While many in the crowds greeting the rebels appeared joyous, they were also raucous. Early in the afternoon, Mr. Philippe appeared on the balcony of the former headquarters of the Haitian Army, which sits adjacent to the palace and was renovated into a museum in honor of Haiti’s 2004 bicentennial. He flashed victory signs to the crowd.
A moment after he stepped away, a soldier began tossing art from the museum into the street, beginning with a sculpture of a casket with a figurine inside. It shattered as it hit the ground and the crowd roared. More paintings followed, and someone set the pile of art aflame.
Inorel Delbrun, an art collector who had come hoping to catch a glimpse of the rebel leader, was horrified.
“This is Haitian art,” Mr. Delbrun said. “It hurts to see it destroyed. This is our culture.”
Here is the New York Times story, with a few photos. Here is my previous worry.
Now here’s rational gloom.
New trends in self-publishing
Why not go with Borders, the people who sell you the books?
“It’s easy to publish your own book!” the “Borders Personal Publishing” leaflets proclaim. Pay $4.99. Take home a kit. Send in your manuscript and $199. A month or so later, presto. Ten paperback copies of your novel, memoir or cookbook arrive.
Fork over $499, and you can get the upscale “Professional Publication” option. Your book gets an International Standard Book Number, publishing’s equivalent of an ID number and is made available on Borders.com, and the Philadelphia store makes space on its shelves for five copies.
Borders is the latest traditional bookseller or publisher to branch into self-publishing using print-on-demand or P.O.D. technology. P.O.D., inheritor of the vanity press and survivor of the dot-com implosion, makes it feasible – technologically and economically – to produce one copy of a book.
Unlike e-books, which also appeared in the late 1990’s, P.O.D. self-publishing has developed into a real business, attracting involvement from the likes of Random House, Barnes & Noble and now Borders.
Forty percent of all self-published books are sold to the authors, and most of the other sixty percent are sold on-line. One company, iUniverse, has 17,000 published titles. 84 have sold more than 500 copies, and a half dozen have made it to Barnes and Noble shelves. But then again, traditional vanity presses charge you at least 8 to 10K to publish a book, with no guarantees.
Here is the full story. As Clay Shirky notes, the world is moving from the paradigm of “first filter, than publish” to “first publish, then filter.”
But does self-publishing have a bright future? Yes and no. Soon self-publishing won’t be worse than going with a mediocre press. The value of the very best certifiers will go up (in the academic market this is Harvard, Princeton, Chicago, and MIT presses, for a start), if only because the proliferation of writing makes their sorting function more important. At the same time the relative value of the middling certifiers will fall. It will become apparent they don’t offer a better product than writers operating on their own. At some point you have to ask whether the press is lending reputation to the author, or vice versa.
By the way, here is one self-published memoir which I love, the author Thelma Klein was the mother of well-known economist Daniel Klein. Yes they still have copies if you want to buy one, and they only cost a few dollars.
Can suicide be rational?
Carolyn G. Heilbrun’s suicide this past October could not have come as a great surprise to her family and friends. After all, the 77-year-old former Columbia University literature professor and mystery author [pen name Amanda Cross] had written for years about her plans to kill herself.
Heilbrun was suffering from none of the conditions commonly associated with suicide when she evidently took an overdose of pills and put a plastic bag over her head. She was neither terminally ill, in severe pain nor, apparently, depressed. Instead, she committed what some have called “rational suicide” — ending one’s life out of a conviction that one has lived long enough, that the likely future holds more pain than joy.
Rational suicide, a coinage dating back nearly a century, has also been called balance-sheet suicide, suggesting that sane individuals can objectively weigh the pros and cons of continued life, and then decide in favor of death.
Read the whole story. (You will note that The Washington Post has new registration procedures, it takes no more than a minute, and we link to them frequently, you are encouraged to register.) Or sometimes you may attempt suicide to get more attention and resources from other people.
I am a skeptic, and unlike many economists I am willing to point The Finger of Irrationality. Consider the following:
Heilbrun’s decision [is] such a disturbing one, says suicide expert John L. McIntosh, chairman of the psychology department at Indiana University South Bend. Even someone making what appears to be a thoroughly rational case for suicide, McIntosh says, can be suffering from depression or cognitive rigidity, an unwillingness to consider other options. Health professionals, he stresses, should be diagnosing and then treating such individuals.
So what happened?
Heilbrun…had been especially open about her plans. In her 1997 book, “The Last Gift of Time,” she described life after age 70 as “dangerous, lest we live past both the right point and our chance to die.”
Two concerns that Heilbrun mentioned were her “inevitable decline” and becoming a burden on others. Her motto, she said, was, “Quit while you’re ahead.” But though she was then 71 years old, Heilbrun chose not to act — not yet. Her sixties, to her surprise, had been a source of astonishing pleasure. She wanted to keep writing, enjoy her family and friends, spend time in a new home and keep certain “promises.”
In the July 2003 issue of the Women’s Review of Books, however, Heilbrun wrote that she feared “living with certainty that there was no further work demanding to be done.” She had consented to life, she stated, “only on the terms of borrowed time.”
On Oct. 9, 2003, Heilbrun was found dead in her New York apartment, having committed suicide. A nearby note read “The journey is over. Love to all.”
My take: I plan on hanging on until the bitter end. Perhaps that is why I cannot so easily imagine a rational suicide, apart from cases of extreme pain and terminal illness.
The baby boomers take over music
For the first time, people in their 40s are buying more albums than teenagers. According to recent figures from the British Phonographic Industry (BPI), the 12-to-19 age group accounted for 16.4% of album sales in 2002, a sharp fall on 2000 (22.1%), while 40- to-49-year-olds went the other way, rising from 16.5% to 19.1%. Buyers in their 50s (14.3%) are not far behind. Soon, half of albums will be bought by people who have passed their 40th birthday.
That’s Britain, of course. Here is the full story. America is not yet at this point, but a mix of demographics and downloading has changed our music market as well. So expect more stars like Norah Jones and more Paul Simon reissues.
And does this line make you feel old?
The term “adult oriented rock”, meaning the Eagles if you were lucky and Boston if you weren’t, was common currency 30 years ago.
In the U.S. last year, the biggest musical earners were The Rolling Stones and the Eagles, largely through touring. Paul McCartney was next in line, I shelled out over $100 to see him lip synch through the high notes of “Maybe I’m Amazed.”
Economic freedom in North America
The Fraser Institute has just put out its Economic Freedom of North America, 2004 report, here is the full and lengthy text, including all the data.
And how do the freedom rankings look? If you look at all sources of government intervention, the winners are:
1. Delaware
2. Colorado
3. Georgia
4. Nevada
5. New Hampshire
Louisiana comes in seventh, Alberta comes in ninth. Here is a short piece on enterprise culture in Alberta, here is a press release on possible declines in economic freedom in Alberta.
The eight biggest losers are all Canadian provinces, with Prince Edward Island as the least free. Here is a bureaucratic report on their current economic situation. Here is a summary of other Canadian results, including a recent upward freedom trend in Canada as a whole.
As for the States, West Virginia comes in last; for the full list go the linked report. If you look only at “sub-national” freedom (state-level regulations but not federal impacts), Colorado moves into first place, most of the other results do not change very much.
Economic freedom and prosperity are strongly correlated (Louisiana is an outlier), although the direction of causality of course can be debated. Here is a link to other Fraser data sources.
Why I am not as pessimistic as Alex
Alex, citing Larry Kotlikoff, despairs for our fiscal future, read his earlier post as well.
I agree with the Krugman-DeLong-A.Sullivan-Tabarrok (if I may call it that) critique of current fiscal policies. But I don’t agree that our government is “bankrupt,” or accept the cited claim by Kotlikoff that “our country is in worse long-term fiscal shape than Brazil.” Neither is close to being true, check out Brazil’s BB bond rating for a start.
What is the real cost of our fiscal irresponsibility? First, we could be using current resources more effectively. But productivity trends have been strongly positive for some time now. So while things could and should be better, current magnitudes are not themselves evidence of disaster.
Second, when the time comes to pay off the debts, we will require some combination of inflation, spending cuts, and tax increases. Since most of the debt is short-term, inflation won’t do it. The real problem has to be taxes. Spending cuts Alex probably favors, at least I get that feeling reading the guy’s blog. The danger is that we will end up with Western European levels of taxation, stifling our entrepreneurial culture.
So the real cost of our current fiscal irresponsibility is the increase in deadweight loss, resulting from the required increase in taxation, as will be needed to pay off all those trillions. The real cost is not equal to the number of trillions that need to be paid back. And most of the associated transfers are within a generation (tax some living people to pay off bondholders, other living people at the time), rather than across the generations. Let’s not confuse the size of the deficit, or the debt, with the size of the intergenerational transfer.
Keep two other things in mind as well. First, there is some chance that the growth rate of the economy will exceed the real rate of interest. In that case we can simply grow out of our debt, which over time will become small relative to the size of the economy. It is irresponsible for a government to take the risk of spending on this basis. Nonetheless it is at least possible that, in technical parlance, “g > r”.
Second, America will likely experience favorable demographics. Here is Nicholas Eberstadt:
…the United States is envisioned to grow from 285 million in 2000 to 358 million in 2025. In absolute terms, this would be by far the greatest increase projected for any industrialized society; in relative terms, this projected 26 percent increment would almost exactly match the proportional growth of the Asia/Eurasia region as a whole. Under these trajectories, the United States would remain the world’s third most populous country in 2025, and by the early 2020s, the U.S. population growth rate – a projected 0.7 percent per year – would in this scenario actually be higher than that of Indonesia, Thailand, or virtually any country in East Asia, China included.
No, that won’t solve the problem but it is a help.
I should note that Alex and I probably do not disagree about the economics of the matter (if we do, you will hear from him soon enough). But I think he is neglecting the importance of the following:
The United States remains a strong and prosperous country. Our infrastructure, national culture of innovation, human capital, and economic dynamism are unparalelled in world history. The Bush fiscal policies, whatever their irresponsibilities, costs, and drawbacks, haven’t changed those core facts.
So I walked down to Alex’s office and issued him the following challenge: if you think I am wrong, sell all your stocks and go short on U.S. Treasury securities (and long on Brazil, if you wish!). With all the money you will make, you can buy out my half of this blog.
A Rose by Any Other Name?
Years ago, the possibility of adopting a 28% “flat” tax on income (generally no deductions allowed) was seen as the solution for fixing the complex tax system. Today, there is outcry over a tax calculation that preserves a preferential 15% tax rate for dividends and capital gains, allows deductions for home interest and charitable contributions, but generally taxes income at 28%. A modified version of the flat tax? No, it’s called the AMT.
That is Kenneth Barkoff’s letter in the March 8 issue of Business Week, Barkoff is a tax specialist.
Some people complaining about the Alternative Minimum Tax may be objecting to its unfairness, as not everyone falls under its rubric. People with high deductions, as might arise from a second home, are the most likely victims. Other objections cite the height of the rate. Yet other critics may not like the process through which the AMT became so binding, namely the so-called Bush tax cuts, which made more people eligible for AMT status.
Gary Becker’s analysis suggests that a flat tax, if it is efficient, also will make government larger in size. Efficient taxation will make it easier to afford large government.
My take: I’ve never understood the conservative/right-wing obsession with flat taxation. I don’t favor arbitrary taxation per se, but we already have something resembling a flat tax right under our noses, and no one is very happy with it.
Haitian update
FoxNews reports that U.S. troops are protecting “key sites” in Port-Au-Prince. Let’s hope that this includes the murals at the Episcopal Church of Haiti, the high point of Haitian artistic achievement, dating from 1950-1951. Please let us be more prepared than we were in Iraq.
View some images, but they don’t come close to seeing the murals in person. Here are some more visuals, combined with a brief essay on Haiti by DeWitt Peters, an early patron saint of Haitian art. Here is the best single view. Note that the murals are currently falling apart from moisture and leakage, they require extensive renovation.
Here is The Lord’s Prayer According to Papa Doc Duvalier, a less notable Haitian achievement. Here is a picture of the voodoo gods, pondering Haiti’s destiny.
Addendum: Here is Daniel Drezner on Haiti and drugs.
Why celebrities are good for your kids
Celebrity worship may play an important part of growing up, suggest the results of a UK study.
Star-struck teens are generally emotionally well-adjusted and popular, with their celebrity interests forming a healthy part of adolescent development and bonding, say psychologists from the Universities of Leicester and Coventry.
However, those with extreme celebrity fascination, are likely to be lonely children without close attachments to friends or family, suggests the new study.
John Maltby and David Giles surveyed 191 English schoolchildren between the ages of 11 and 16. They found that those who avidly followed celebrities’ lives were the most popular.
For about 30 per cent of the children, gossiping about favourite celebrities with their peer group took up much of their social time. These children were found to have a particularly strong and close network of friends and to have created a healthy emotional distance from their parents.
“As children grow up, they start to transfer their attachment from parents to their peers. Celebrities start to take on the hero status role that their parents formerly fulfilled when the children were younger and it seems to be a healthy part of development,” explains Maltby, who led the study.
“The main function of celebrity attachments in adolescence may be as an extended social network – a group of ‘pseudo-friends’ who form the subject of peer gossip and discussion,” he told New Scientist. “The ongoing subject of celebrities’ lives can provide a valuable bonding tool among their friends, while enabling them to be emotionally autonomous from their parents.”
Here is the full story. And don’t forget my book on fame, which views the production of celebrity as one of the most beneficial aspects of modern popular culture. Not only do stars give us focal points for social orientation, but we gain by paying them with fame rather than having to part with more money.
Markets in everything, continued…
…Maybe it’s a sign of the times — or just a gimmick — but celebrities, athletes and high-powered business executives who want protection from potential rape or other sexual charges can now obtain consent forms for their would-be partner to sign, acknowledging the pair is about to engage in consensual sex.
“This really is for someone you don’t know,” said attorney Evan Spencer, who wrote the one-page, “pre-sexual agreement” form for Colorado-based Protect Condoms Inc. “If you’re a professional athlete on the road, and you encounter someone you don’t know, certainly a person who is a man of means will want to be protected by something like this.”
The company has sold more than 4,000 forms at $7.99 each, according to president Nelson Banes. The standard consent forms are one-page documents to be signed by two parties, both of whom agree “to engage in any and all sexual acts legally permissible under state and federal law with consentee,” according to the Protect Condoms form, which includes two condoms in its package.
Here is the story. This link will bring you back to previous installments of Markets in Everything.
The economics of Internet phone calls
A new essay from Clay Shirky is almost always blogworthy. Recently he offered up his treatment of VOIP. Here is his entree into the topic:
“When” could still be a very long time, however. The incumbent local phone companies — Verizon, SBC, BellSouth and Qwest — have various degrees of interest in VoIP, but are loathe to embrace it quickly or completely, because doing so means admitting to everyone — shareholders, regulators, customers — that both monopoly control and artificially high voice revenues are going away. (The fact that this is true does not much lessen the pain of saying so.) As a result, they will likely try to convince regulatory agencies, both the FCC and the states’, to burden competitive VoIP firms like Vonage with additional costs and rules, while delaying their own offerings.
Complicating this de facto Plan A, however, is the fact that VoIP isn’t a service, it’s just a set of protocols, meaning that competitors don’t have to set themselves up as upstart phone companies to deploy VoIP. If Plan A is “Replace the phone system slowly and from within,” Plan B is far more radical: “Replace the phone system. Period.”
Here are two excellent paragraphs:
The official tradeoff in current telecom regulation is service guarantees in return for monopoly control. Over the decades, though, a third part of the bargain has arisen. Phone companies tolerated high taxation as well, in part because it guaranteed continued freedom from competition. As a result, telephony is treated as a vice instead of an essential service — the taxes and surcharges on a phone bill are more in line with the markup on alcohol and tobacco than with gas or air travel.
However, monopoly control, essential for the current bargain, is ending. The cumulative threats of competitive local phone companies, the decrease of second lines due to DSL and cellphone use, and now VoIP have made the old deal unsustainable. The rise of a competitive market seems conceptually simple, but most parts of the US have had a phone monopoly for longer than they’ve had indoor plumbing, so the possibility of phone service without the incumbent phone company is hard for many observers to understand.
The bottom line:
I can’t do better than to quote Clay:
With railroad bankruptcies in the 1940s, no one thought that the tracks would be ripped up and sold for scrap. Similarly, the question of whether the incumbent phone companies can survive if VoIP pops the bubble of voice revenues is separate from the question of whether the wires in the ground will continue to exist. Someone will sell data transmission over copper wires, but there’s no reason it has to be the existing phone companies, in the same way that someone still runs trains from St. Louis to Chicago, but it isn’t the B&O Railroad anymore.
Clay makes blogging easy, though arguably less fun. Just quote him and say yup, yup, and yup.
Academy Awards and Dollars
1. The Best Picture award winners have a median rank of ninth at the box office for the relevant year.
2. The pictures with Best Actor winners have a median rank of nineteenth.
3. The Best Actress award movies have a median rank of thirty-two, in other words these movies tend to be niche pictures, not big hits. Women don’t get the best starring roles in the hits.
4. Big studio blockbusters won Best Picture awards for many decades, The English Patient broke this pattern in 1996.
5. Over the last two decades, the Golden Globe “Best Picture – Drama” winner matches with the Best Picture winner 70 percent of the time.
6. Rob Schneider has applied to be a voter on the Academy Awards; to this date he has been refused. Mike Myers and Martin Lawrence are allowed to vote. Most of the voters are within the movie business and many have close links to the films under consideration.
The economist in me: I would design the awards to maximize the profits of the movie industry. Winning a major award boosts a picture’s box office appeal. So ideally the awards should go to the pictures with the highest elasticities of appeal, with respect to the award. This will be correlated with absolute levels of popularity, but not exactly. Might an older demographic see Return of the King holding a Best Picture award, but not otherwise? In contrast, most people won’t see a horror movie no matter what, so horror films are unlikely to win Best Picture awards.
The very existence of the awards encourages box office as well. The time leading up to the awards should be full of debate, controversy, and suspense. Award winners should not be too predictable. Furthermore the winning picture should reflect glory on the awards, rather than draining reputation. Historical spectaculars, or pictures with a high-brow element, are ideal. The awards should maximize profits over time, not just year-by-year.
Some of the awards should be given to indies, or to other minor players in the film industry. For the awards process to have maximum impact, it should command maximum legitimacy and loyalty from all points of view. Don’t let anyone feel totally left out.
Nor should you let controversial black singers bare their breasts at your mainstream audience.
Let voters receive gifts and special favors from directors and movie studios. This process of “bribery” will allow the final voting outcome to maximize profit, albeit with some uncertainty around the edges.
Did I mention that the award should make America look good? Cold Mountain, which was “outsourced” and filmed in Romania, was not a good candidate this year and indeed it was slighted in the nominations process.
That is how I would maximize profits with the award.
Hey, isn’t this what they have done?
Addendum: Read Alex on the Academy Awards.