Category: Economics

Toll Collect

by  Alex Tabarrok in

After more than a year of delay, Toll Collect, Germany’s high-tech system of road pricing for big trucks, started operation earlier this week and appears to be working well.  Some 800,000 trucks use Germany’s 12,000 km of highways every day – all of these trucks will soon be tracked by GPS (i.e. from outer space!) and the big ones will be billed.  The toll system will also be tied into traffic reports and routing systems.

In other tolling news, Texas is considering a massive superhighway project that would be privately built, operated and tolled.

I see toll roads, most privately operated and some privately owned, as the road of the future.  Road pricing can not only reduce congestion it can also help with accident externalities.

Previous posts on this topic including my debate with Tyler can be found here.

Incentives matter

by  Tyler Cowen in

Swofford, a postal worker from Seminole County, claimed his prize Tuesday in a $34.7 million lump sum payout, ending weeks of mystery about who won the November 24 drawing.

Swofford, 53, and his wife separated three years ago. But two weeks after the winning numbers were announced, Ann Swofford served him with divorce papers and claimed a share of the prize.

Just before Christmas, the Swoffords and their lawyers hammered out an agreement. His wife will get $5.25 million and $1 million will be set aside to support their 11-year-old son. In return, she agreed not to seek any more of Swofford’s winnings.

Swofford said he remembered reading about a divorce case where a lottery winner kept it a secret and was penalized in court.

Here is the full story.  And here is a very different discussion of how incentives can matter.

Gerard Debreu has passed away

by  Tyler Cowen in

Gerard Debreu, 83, a former University of California
at Berkeley economist who won a Nobel Prize for breakthroughs in the
study of supply and demand, died Dec. 31 in Paris. No cause of death
was reported.

Dr. Debreu taught at Berkeley for more than 30 years.
He won the 1983 Nobel Prize in economic sciences for his theoretical
work on how prices operate to balance supply and demand.

Here is an obituary.  Here is The New York Times account.

Freezing social security benefits in real terms

by  Tyler Cowen in

Wednesday I reported on the Bush Administration plan to check the growth of social security benefits.  To take an extreme version of the idea, what if nominal benefits rose with the price index rather than with the general level of wages?  Real benefits then would be constant rather than rising over time.

I see the following possible problems:

1. Perhaps the elderly face rates of price inflation (e.g., health care, personal servants) above and beyond the measured CPI.

2. It is unjust to keep our real contribution to the elderly constant over time.

3. The elderly will suffer a negative relative status effect.  Everyone else will have nanotechnology robots, but the elderly in 2075 will not.  They will be left behind.

4. The value of the social security program will grow small, in real terms, relative to the economy as a whole.

On #1, we should be willing to make all required differential adjustments (email me if you know a good source on rates of price inflation faced by the elderly, and yes it must adjust for changes in medical technology).  On #2, I will grant the point but dollars can be used to fight many injustices.  Rising real benefits, although "automatic" on today’s books, are in fact a new expenditure and should be evaluated as such.  It is unlikely that this is the best anti-poverty program we can devise.  Plus the elderly will enjoy a rising standard of living, over time, as the economy grows wealthier and they can save more when young.  #3 boils down to #2.  #4 is not a problem per se, if it results from growing riches.  And note that price indexing would not kick in until the more distant future.

The real issue, I suspect, boils down to medical care.  Many life-saving improvements are falling in price in real terms (what did a triple bypass cost in 1940? — infinity).  So we encounter more opportunities to prolong lives.  But if benefits are fixed in real terms, not all of these opportunities can be exploited.  That is, more people will use the new improvements, but constant benefit levels mean that access will be more differential than if real benefits would rise.  Are you prepared for this?

If you are a critic, here is the real problem.  The most important service for many of the elderly is health care.  Yet price indices are notoriously inaccurate and unjust when many prices are falling from levels of "infinity" to "very high."

The bottom line: I am ready to push the "yes button" on this change.  That being said, I would use the money to address our broader fiscal problems, and not to finance a transition to government-run personalized accounts.  As the economy grows, over time, we would in any case move toward a greater importance for private saving.  And if you wish, bundle the whole thing with greater means-testing.

Here is a good discussion on how social security indexing works and would work under possible reforms.  Here is further useful commentary.  Here is Matt Yglesias on tinkering with the retirement age, another good idea.  Russ Roberts offers general comments on the problem of social security, try Arnold Kling as well.  Brad DeLong lays down the party line.

Great economists by birthday

by  Tyler Cowen in

The list is arranged both by name and by date. 

Today, of course, is the birthday of Sir Isaac Newton.  Yes, he was also an economist.  Here are his writings on money, which were an offshoot of his work at the Royal Mint.  Newton promoted bimetallism and went to great lengths to fight counterfeiters.  This latter campaign included both new means of executing and torturing them, and dressing up in disguise and catching them in the street.

Everything you always wanted to know about the current account…

by  Tyler Cowen in

Read here, from the Cleveland Fed, the charts and graphs are useful as well.  It is the single best source I have seen on this issue.

The bottom line: (with which I agree)

I explain why growing current account deficits and expanding inflows of foreign savings are not indefinitely sustainable, and why big deficits imply big corrections. Throughout the trip, however, I emphasize that we simply have no basis for determining when, how fast, or how  jarring any adjustment might be. Those who claim a definitive word on that topic may just be spinning their wheels.

Thanks to the very useful Macroblog for the pointer.  And on a related note, Brad DeLong and Brad Setser discuss the difference between the trade deficit and the current account.

Addendum: Here is Brad Setser on why the dollar is not in free fall.

A profile of Malcolm Gladwell

by  Tyler Cowen in

Author of The Tipping Point, and the forthcoming Blink, Malcolm Gladwell is one of the most influential economic (and social) journalists today.  Whatever I see by him I read immediately; I enjoyed this profile as well.  Learn why he receives $40,000 per lecture.  And if you don’t know Gladwell’s work, here is an archive of his articles.

Thanks to www.geekpress.com for the pointer.

The economics of dueling

by  Tyler Cowen in

Ron Chernow, in his biography of Alexander Hamilton, writes:

Duels were also elaborate forms of conflict resolution, which is why duelists did not automatically try to kill their opponents.  The mere threat of gunplay concentrated the minds of antagonists, forcing them and their seconds into extensive renegotiations that often ended with apologies instead of bullets.

Put that into plain English: We have a Rubinstein bargaining game where players fail to reach an agreement, thereby eating up more and more of the pie.  Each individual plays "chicken" and hopes the other will give in.  But when you approach the precipice…ah…chicken becomes an increasingly dangerous strategy.  The time horizon is truncated, "hold out" behavior becomes riskier, and perhaps the negative wealth effect brings individuals to the bargaining table.  (It is complicated; rising costs may simply make you keener to wait out your opponent.  A mutual increase in risk, however, can boost the likelihood of a bargain.) Then the Coase theorem kicks in and players reach a deal.

Of course to enforce this meeting of the minds, the the probability has to be real that an actual duel will result.

I used to think of duels as an inefficient form of signaling, typically with honor at stake.  In contrast, this hypothesis may suggest that pre-duel risk generation is set privately at too low a level.  The riskier you make things seem with your potential opponent, the more that subsequent would-be duelers will be scared into an agreement. 

The hypothesis also suggests why duels have (mostly) vanished, namely because trading and contract technologies have improved (except in ghettos).  The signaling hypothesis can predict either an increase or decrease in duels, depending on whether the demand for honor or life rises more rapidly with income.

Betting on Canadian CEOs

by  Tyler Cowen in

Online site Betfair this month introduced wagering on the fates of CEOs of nine troubled companies…

CEO wagering is legal in the United Kingdom but is not available because the Brits are bored by the prospects of CEOs getting sacked, says Jordan Ferguson, Betfair’s head of international sales.

Brits use Betfair to wager on everything from snooker to U.S. football, but the only gamblers interested in CEOs are North American, and U.S. laws make Betfair restricted to Canada, Ferguson says.

Betfair does not back wagers but acts as a middleman for customers wishing to take different sides of a bet. Betfair’s revenue comes from keeping 2% to 5% of the winning bet, Ferguson said.

Volume has been light. Less than $100,000 was wagered for or against CEOs in the first two weeks, Ferguson says.

Arthur Millholland, CEO of Calgary-based oil exploration company Oilexco, has been the most likely to lose his job by April 30, 2005, according to Monday’s betting on the Betfair site. Someone who bets $10 that Millholland will still be around next spring would get about $20 if he survives.

Here is the full story.

Something smells fishy

by  Alex Tabarrok in

I share with Tyler a high opinion of Jared Diamond’s work but at least part of his explanation for the collapse of the Norse settlements in Greenland does not pass the smell test.  As relayed by Malcolm Gladwell in his review, the Norse used inappropriate farming techniques which stripped the land bare.  Fair enough, mistakes happen.  But a key part of the morality lesson that Diamond wants to tell is that cultural straitjackets doomed the Norse to failure.  The most important piece of evidence being, in Diamond’s telling, that even as they starved the Norse refused to eat the fish that were there for the taking.

Frankly, I think this part of the story is absurd.  As Diamond notes, the evidence from bones is that at the end the Norse were eating their pets.  A cultural norm against eating fish that is stronger than eating pets?  I don’t think so.  A few martyrs might refrain but thousands of people?  No way.  We know that starving people eat insects, they eat dirt, sometimes they even eat each other.  I reject this one from my armchair.

Addendum: Matt Yglesias gets up from his armchair, at least far enough to reach Google, and casts further doubt on the fish story.

The socialist calculation debate

by  Tyler Cowen in

Here is one of my (very short) essays that nobody ever read; it is now on my home page.  We all know that communism and socialism fail because planners do not have access to market price signals.  They therefore cannot calculate the best means of producing goods and services.  But is the argument so simple?  I start with a few questions:

1. How does rational calculation take place within the firm?  Keep in mind that some corporate giants are larger in economic terms than the smaller socialist economies.

2. If one person owned (privately) all the firms in the economy, would rational calculation be possible?

3. If one dictator controlled all the firms in the economy, would rational calculation be possible?

4. If institutional investors or a diversified citizenry all owned the so-called "market portfolio" in equal proportions, like the Capital Asset Pricing Model suggests, would rational calculation be possible?  [TC: Or is this scenario of "perfect capitalism" not much different from pure communism?]

When is competition "for real," and when is it just play?  If I were dictator but still believed in markets, could I not simulate a sufficiently effective form of competition?  Does the socialist calculation debate simply collapse into the problem of incentives?  No, socialism does not work, but we have not heard the last words on the calculation debate.

In praise of impersonal medicine

by  Alex Tabarrok in

Many people complain that medicine is too impersonal.  I think it is not impersonal enough.  I have nothing against my physician (a local magazine says he is one of the best in the area) but I would prefer to be diagnosed by a computer.  A typical physician spends most of the day playing twenty questions.
Where does it hurt?  Do you have a cough?  How high is the patient’s
blood pressure?  But an expert system can play twenty questions better than most people.  An expert system can use the best knowledge in the field, it can stay current with the journals, and it never forgets.

Consider how many people die because physicians forget the basics. Gina Kolata reports on a Medicare program to rate hospitals on the quality of care provided in the treatment of  heart attacks, heart failure and pneumonia – these three areas chosen because there are standard, clinically proven, treatments that everyone agrees are highly beneficial.

At Duke University’s hospital, for example, when patients arrived
short of breath, feverish and suffering from pneumonia, their doctors
monitored their blood oxygen levels and put them on ventilators, if
necessary, to help them breathe.

But they forgot something:
patients who were elderly or had a chronic illness like emphysema or
heart disease should have been given a pneumonia vaccine to protect
them against future bouts with bacterial pneumonia, a major killer.
None were.

All bacterial pneumonia patients should also get antibiotics within four hours of admission. But at Duke, fewer than half did.

The
doctors learned about their lapses when the hospital sent its data to
Medicare. And they were aghast. They had neglected – in most cases
simply forgotten – the very simple treatments that can make the biggest
difference in how patients feel or how long they live.

…[Similarly, the] hospitals were asked how often their heart attack
patients got aspirin when they arrived (that alone can cut the death
rate by 23 percent). When they were discharged, did they also get a
statin to lower cholesterol levels? Nearly all should, with the
exception of patients who have had a bad reaction to a statin and those
rare patients with very low cholesterol levels. Did they get a beta
blocker?

Once hospitals learned their score, it was up to them what to do.
Over the next year, ones that improved in these measures saw their
patient mortality from all causes fall by 40 percent. Those whose
compliance scores did not change had no change in their mortality rate,
and those whose performance fell had increases in their mortality rates.

"Those are the most remarkable data I have ever seen," said Dr. Eric
Peterson, the Duke researcher who directed the study and has reported
on it at medical meetings.

Unfortunately, we (doctors and patients) have a model in our head of the nearly omniscient doctor carefully attending to the needs of every patient on an individualized basis – medicine as craft.  Instead what we need is medicine by the numbers.  But doctors don’t like being told what to do.

"We tried to come up with a standardized order set," with all the
measures that Medicare was asking about, Dr. Gross said. "But the
doctors didn’t want to use the sheet," insisting they would just
remember those items. Then they forgot.

The solution, Dr. Gross said, was to assign specially trained nurses
to see what care was provided and remind doctors when important steps
were omitted. The result was immediate improvement, Dr. Gross said,
even in items not on Medicare’s list.

The nurses, in effect, are being trained to follow standardized procedures, just as does an expert system.

Thanks to the John Palmer, The Econoclast, for the link.

How much were those gifts worth anyway?

by  Tyler Cowen in

1. I enjoyed the giving at $100, the amount I spent.  In this case
the net benefits are $150, yet it took only $100 worth of resources (assuming the
gift was produced competitively).  Christmas is an excellent deal.

2. I enjoyed the giving at $50, which was the value to my sister.  I
like giving gifts, but only insofar as other people like receiving
them.  In this case there is no deadweight loss.  The benefits sum to $100, precisely the social cost of producing the gift.  [Hey, what if my sister enjoys the fact that I enjoy giving to her, I enjoy that she enjoys, and so on…?]

3. I don’t enjoy giving at all, but I need to signal attachment to
avoid the collapse of my social relationships.  We could then estimate
the value of the resulting signaling and sorting effects, but the value
of giving is zero.

Now shift gears just a bit.  The U.S. government is running significant unfunded
liabilities over the course of the next two generations.  Might we respond by offering  the next generation greater gifts?

If you
believe #1 as a more general account of giving, the value to a gift donor is in the personally chosen
sacrifice, not the produced net benefit to the recipient.  We have already chosen personally
optimal levels of sacrifice, and won’t much increase our gift bequests
(i.e.,  savings) to help out descendants when their circumstances worsen.   

If you believe #2, we more likely care about how much net
value our behavior produces, and not just about the cost of a single
sacrifice.  We might then be more inclined to increase savings and
bequests to offset future economic difficulties.  If you believe #3, we are selfish and won’t
save and bequeath any more than we have to.  All of these scenarios can be given different
assumptions and twists, but that is my first cut approximation at the
correct answers.  Ricardian Equivalence involves some very particular assumptions about the structure of altruism.

The bottom line: The best-case scenario for the value of
Christmas is not the best-case scenario for the future of the American
economy.  Are you thinking more about what you spent, or more about how
much your gifts were enjoyed?  It is the latter scenario that offers cause for a more general economic optimism.

Thanks to Blake for the pointer and query.