Category: Economics

The Indian city of Varanasi is getting through around 600,000 condoms a day, but this is no population control exercise. The weavers of the holy city, home to the world-famous Banarasi saris, have made the contraceptives a vital part of garment production.

The weaver rubs the condom on the loom’s shuttle, which is softened by the lubricant thus making the process of weaving faster.

The lubricant does not leave any stain on the silk thread which might soil the valuable saris.

There are around 150,000 to 200,000 hand and power looms in Varanasi alone and almost all are using the technique.

And every loom has a daily consumption of three or four condoms.

At first, weavers stocked up on condoms from the family planning department under a government scheme to provide them free of cost.

Some weavers even registered with fake identities to get their hands on the precious prophylactics.

Here is the full story. Thanks to Paul N for the pointer.

The headline in the NYTimes read “Schering Case Demonstrates Manipulation of Drug Prices.” The article continued:

A $345.5 million settlement by Schering-Plough yesterday to resolve a government Medicaid investigation provides a detailed glimpse into how drug companies can manipulate prices to overcharge state and federal programs.

Government officials have taken a keen interest in how drug makers price and market their drugs in recent years, and the settlement is the latest in a series reached with large drug makers over accusations that they have overcharged Medicaid. Last year, Bayer paid $257 million and GlaxoSmithKline paid $86.7 million to settle similar allegations.

Now you probably think this article is about how drug firms acted collusively in order to raise prices, right? Nope, read carefully and you will see that intense competition from Allegra caused Schering to reduce the price of Claritin. Great! Not according to the Feds. The price reductions violated Medicare’s Most Favored Customer clause which requires pharmaceutical manufacturers to give Medicare the lowest price they offer any other customer.

Most Favored Customer/Nation clauses are routinely analyzed in game theory texts as ways for firms to tacitly collude to raise prices. The idea is simple – it’s easier to commit not to compete if lowering price for one customer means lowering prices for all customers. Indeed, this is precisely why the antitrust authorities often sue to prevent firms from using MFC clauses. The evidence supports the theory, after the MFC clause was introduced pharmaceutical prices rose.

The US Attorney may think that “we’re fighting to keep the costs of health care down for everyone,” but in truth by reducing competitive pressures to lower prices they are helping the pharmaceutical firms to maintain a cartel.

Addendum: Put it this way, now that the government has successfully sued the firms for reducing prices do you think a) the firms will now cut the price to Medicare to match the rebates or b) stop giving rebates?

E-Loan offers customers a choice of processing their loan paperwork in 12 days using all-domestic workers or 10 days by bringing on some workers in India, 85 percent choose the quicker turnaround.

Delta is now considering something “similar,” charging a fee to have calls handled by U.S. agents. What genius came up with this? You don’t need to be a behavioral economist to predict that framing the deal this way just won’t fly. Instead, offer your customers a new option; lower prices if they choose to use overseas agents. Or, as Gary Leff suggests, offer the customers shorter wait times. “All our US agents are busy right now, would you like to be directed to an overseas agent for immediate service?”

Background: George Loewenstein is one of the leading figures in Economics and Psychology.

While walking in Pittsburgh one afternoon, Loewenstein tells me that he doesn’t see how anybody could study happiness and not find himself leaning left politically; the data make it all too clear that boosting the living standards of those already comfortable, such as through lower taxes, does little to improve their levels of well-being, whereas raising the living standards of the impoverished makes an enormous difference. (full story)

Of course, you don’t need Loewenstein to make this point. You could just listen to my favorite song by Johnny Cash, featured in the so-good-it-hurts soundtrack for Kill Bill, Volume 2:

How many times have
You heard someone say
If I had his money
I could do things my way

But little they know
That it’s so hard to find
One rich man in ten
With a satisfied mind

…

Money can’t buy back
Your youth when you’re old
Or a friend when you’re lonely
Or a love that’s grown cold

The wealthiest person
Is a pauper at times
Compared to the man
With a satisfied mind

The answer to Loewenstein’s challenge can be found in the growing psychological literature on gratitude. Several interesting experiments (like this one) ask subjects to keep a “gratitude journal.” Main idea: Every day, write down things you are grateful for. Depending on the experiment, control groups either do nothing, or keep an “ingratitude” diary, or write down a random childhood memory. The main finding is that keeping a gratitude journal makes people happier than the other treatments.

So what? Almost all redistributive rhetoric urges people to dwell on the negative – you or other people aren’t getting what is due. This in turn makes people want to “do something” about the problem. And you can rest assured that no matter how much redistribution there is, egalitarians will never say “OK, life’s fair now. We’re done complaining.” No, what they foster is literally a lifestyle of ingratitude – a recipe for unhappiness.

If we really want to make people happier, we would do almost the opposite. Tell people to be grateful for what the market gives them, and try to emulate more successful people instead of envying them. Children hear this all the time, and it is damn good advice. Adults should practice what they preach.

Price a Chilean cemetary charges for an alarm built into coffins to ensure against mistaken live burial: $462

That is from Harper’s Index, in the latest issue of Harper’s. Here is a related link.

Here is some evidence on the likelihood of being buried alive.

The Italians take things further, albeit at a higher price:

In 1995 a $5,000 Italian casket equipped with call-for-help ability and survival kit went on sale. Akin to bleeping devices which alert relatives to an elderly family member’s being in trouble, this casket is equipped with a beeper which will sound a similar emergency signal. The coffins are also fitted with a two-way microphone/speaker to enable communication between the occupant and someone outside, and a kit which includes a torch, a small oxygen tank, a sensor to detect a person’s heartbeat, and even a heart stimulator.

What I would want: Satellite radio, Spenser’s The Faerie Queene, and a cell phone with a good battery.

It is hard to improve on the words of Richard Epstein. He tells us that antitrust law should be directed against cartellizing behavior, not unilateral business practices designed to gain competitive advantage:

One theoretical social response to cartels would be to follow the libertarian line that treats them as ordinary contracts to be enforced against private defection. At this point, the only relief comes from new entry – unless the cartel extends its reach to include them as well. Unhappy with this response, the traditional common law refused to enforce cartel agreements in the hope that a healthy dose of cheating will lead the cartel to crumble. The antitrust laws turned up the heat by exposing members of cartels to criminal sanctions and, later, treble damage actions.

Thus far the antitrust law looks intelligible enough, but a big monkey wrench is thrown into the works by Section 2 of the Sherman Act, which reads as follows:

Every person who shall monopolise, or attempt to monopolise, or combine or conspire with any other person or persons, to monopolise any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony,…

Here it is critical to note that Section 2 only deals with criminal responsibility. The right to bring private actions was only added into the Clayton Act some 25 years later. But that switch makes all the difference. Looked at through the prism of criminal law, Section 2 could be read to import the criminal law of attempts into the antitrust law. Anyone who tries to form a cartel but fails can be hit with heavy criminal sanctions, on the simple parallel to the law of attempted murder or attempted robbery. The only thing that distinguishes the attempt from the success are circumstances beyond the control of the actor; and if the level of punishment is insufficient for successful wrongs, then we get a bit more deterrence by allowing punishment for the attempts that did not hurt anyone as well.

Unfortunately, the introduction of private actions has worked a real revolution in the theory of antitrust, as Section 2 liability is paraded in all sorts of cases, in both high-tech and traditional industries, in which the unilateral decisions of companies on pricing and marketing are said to support hefty treble damage actions. Here the cold logic of cartels does not identify the misallocations that the law seeks to correct. Rather, the tough-minded structural thinking of the antitrust lawyer yields to so-called “intent” evidence, which usually amounts to some incautious statement or e-mail to the effect that some large company such as Microsoft is out to “crush” its rivals by adopting such nefarious strategies for its product as lower prices, better services, or more convenient terms. After all, the most effective way to exclude a rival is to offer a good or service for free.

In this new non-Euclidian world of potential liability, harm to competitors is no longer treated as a sure sign that market processes have weeded out inefficient competitors. Now a low cost for goods becomes a form of predation, the language here suggesting that a company that goes after another is like a wolf that chases a rabbit. Low costs, or zero costs, which provide immediate short-term benefit for consumers, are treated as though they hold a long-term peril to our general economic well-being. The upshot is that we develop fine-spun theories to explain why Microsoft has committed some ultimate market sin by securing a prominent place for its Internet Explorer icon on its desktop. All this is not to say that there is not some place for state intervention in network industries, because mandated interconnections on non-discriminatory terms seem to be as important here as they are in telecommunications and transport. But once we get beyond that important set of obligations, then the relentless application of the antitrust laws will sap the vitality of the very competition that these laws are supposed to preserve.

The simplest way to see the point is that it is always costly to find any set of business practices that violate Section 2. The types of arrangement used by the dominant company are often identical to those used by its other rivals. Their common use therefore provides us all the evidence of their efficiency we need. When we prevent dominant companies from using these practices, then from the start we make them balkier than their rivals. Consumers have to pay a hefty price. Yet it is most unclear that they receive anything in return.

My take: His take.

Here is the link.

And you can’t go wrong with this conclusion:

The most dangerous threats to market innovation are government restrictions on entry, which are always difficult to erode even over time.

On an average day, about 25 percent of Norway’s workers are absent from work, either because they have called in sick, are undergoing rehabilitation or are on long-term disability. The rate is especially high among government employees, who account for half the work force.

The average amount of time people were absent from work in Norway in 2002, not including vacations, was 4.8 weeks. Sweden, its closest competitor, totaled 4.2 weeks, while Italy came in at 1.8 weeks and Portugal at 1.5 weeks, according to the Organization for Economic Cooperation and Development.

Throw in vacation time (five weeks for most people), national paid holidays (11 per year) and weekends, and Norwegians take off nearly half the calendar year, about 170 days, a figure that does not include time off for disability and rehabilitation, according to Bergens Tidende, the newspaper that made the calculations. Long-term disability leave, up 20 percent since 1990, is growing at an even faster rate than sick leave.

Why?

There are few penalties for chronic absenteeism. Most people who take sick leave receive 100 percent of their pay for a year, though the level dips to 60 percent in the second year under a job rehabilitation program. Few employees get fired, but, if they do, unemployment benefits are generous.

The unions, by the way, claims there has been a “brutalization of the work force.” How so?

International companies, some of them American, have bought or merged with Norwegian businesses in the last decade, which has exposed workers to job insecurity for the first time. The unions contend that that has made workers reluctant to take sick leave when they should. Instead, they stay on the job and hurt themselves more seriously, which forces them into long-term disability.

LOL.

Here is the full NYTimes story. Here is an earlier MR post explaining why the number of disabled in the United States is increasing rapidly. Here is the disability lowdown on the Netherlands.

Arnold Kling holds serve:

Hal Varian once sent me a note about one of my essays in which he said that rather than a distinction between “haves” and “have-nots,” the real digital divide is between “information wants” and information “want-nots.” Is there a paternalistic solution for this?

That is the recipe of Jeffrey Sachs:

Latin American countries have not yet tried to foster a technological revolution, certainly not with the focus, skill, commitment, and financing that Asian countries have shown. Such a push could play a major role in jump-starting economic growth.

Such a policy would entail committing to a major increase in spending on research and development, as Asian developing countries have done. Latin American countries should aim to increase spending to around 2% of GNP (from 0.5% currently), partly through public support for laboratories and universities and partly through incentives for private-sector R&D. They should roll out the red carpet for high-tech multinational firms, just as Asia has done.

They should also increase their focus on scientific and technological training and encourage a higher proportion of students to go on to university education. Government stipends for tuition and for new and enlarged universities can play a big role, as can investment in computers and information technology in schools and communities.

My take:

I worry that this is putting the cart before the horse. Many of the public sector universities in the Latin countries are disasters. They are good places for left-wing politics, bad places to drive economic growth. Tech prowess has tended to come from the private sector and then the tuition-driven private institutions, not the subsidy-driven state universities. And Asian higher education did not play a major role in the Pacific successes, unless of course you are referring to MIT and Stanford.

Should the Latin countries be “home-breeding” their R&D? In other contexts economists insist that R&D is a public good. Why not borrow R&D from Europe and the United States and look elsewhere for comparative advantage? Process innovations might suffice, yet they typically arise from practice rather than from science in the narrower sense. Mexico is succeeding with this tactic. Furthermore process innovations, by their nature, are best implemented in decentralized fashion.

Most of all, the Asian technological revolution worked because the success stories made themselves relatively free of corruption. Effective technology arises from incentives, rather than from the mere desire to be technological. The Latin economies will grow faster once they can offer greater legality and predictability. The path here is slow but not impossible. Strong penalties against corruption, and non-tolerance of the idea, combined with higher public sector salaries, are moves in the right direction. But penalties alone do not suffice. Most of all a country needs a culture of trust, including trust in government, and for this there are no rapid solutions.