markets in everything

Interesting links

1. Creativity in the fashion industry might be a more general model for the entertainment industry.  But let us not forget differing levels of fixed and capital costs.

2. People in small, tribal societies have the most violence in their dreams.

3. Richard Epstein’s new book.

4. Markets in Everything, this time Hasidic reggae.

5. "Brincos" are special sneakers, equipped with secret storage compartments, for illegal aliens to cross the border.  Now they are hip.

6. Matt Yglesias on the bureaucratic infighting behind the resignation of Larry Summers.  Here is more.

7. Quantum computers that work even without running.

My bet on oil prices

John Tierney is looking to bet that oil prices will fall.  He can find some willing opponents here, and they will offer him the best odds available.  I’ve been urging Alex to short real estate investment trusts; if he has already done so I fear for his ruin.  Brad DeLong discusses Google.  Jane Galt warns against such bets, on the grounds that timing is everything and no one knows when the bubble will burst. 

It remains an open question why markets don’t sell long-term bets for those people who have "price knowledge" but not "timing knowledge."  The longest-term NYMEX crude oil futures sell for 84 months ahead; admittedly a forward contract can stretch longer.  But why can’t you make a 30-year bet on organized markets?  I see a few hypotheses:

1. There are few if any people who have real price knowledge but not timing knowledge.

2. The disagreement in the market is about timing, so shorter-term contracts attract the attention and volume.  You might disagree about whether something will happen this month or next, but you can’t argue about whether it will happen ten or eleven years from now.

3. Long-term contracts make economic sense and someday we will have them.  Right now we are out of equilibrium.  We await tolerant regulators and heroic entrepreneurs.

4. You can replicate long-term contracts by trading short-term contracts in successive fashion.  The informed traders have enough liquidity and borrowing power to make this work.  (But hey, if that is so easy, why not have even fewer oil futures contracts?)

5. Liquidity is scarce, and involves significant economies of concentration.  Intermediaries limit the number of contracts, just as we have limited trading locales and trading hours.  (Admittedly many of these limits have, for better or worse, broken down.)  Remember when the French used to trade stocks just a few times a day?

Take your pick or add to the list.  Unless you opt heavily for #3, the market is saying that a general knowledge of price — without a knowledge of timing — simply isn’t worth that much. 

My bet on oil prices will be restricted to buying another economy car, next time around.  It is better to spend the money on books anyway, no?

Thanks to Tim Bartlett for the pointer.

Will New Zealand reform any further?

The core outlines of the New Zealand story are well-known: in 1980 the country was arguably the most socialized OECD country and stood on the verge of bankruptcy.  By the early 1990s New Zealand was one of the freest economies and had produced a solid if not spectacular economic performance.  The reforms included near free trade, substantial privatization, elimination of agricultural subsidies, free labor markets based on contract, free capital markets, 0-2 percent inflation as a formal regime, a relatively flat tax, and greater transparency in policymaking.  But the New Zealand economy has not seen major reforms in over a decade and in a few areas, such as labor markets, there has been backsliding.  Will reforms return?  I see a few hypotheses:

1. New Zealand reformed everything short of social welfare spending, education, and health care, which few voters wish or wished to reform.  In fact the point of previous reforms was to preserve (and perhaps extend) previous levels of social welfare spending.

2. Further reforms were thwarted by a move to proportional representation in the early 1990s, which gave minority parties undue influence and weakened threads of accountability.

3. Asset privatizations in particular were oversold — remember the Auckland blackout? — and New Zealanders lost their appetite for further changes.

4. New Zealand policymakers were well ahead of public attitudes, and managed so many reforms only because the country’s (previous) Parliamentary system had few checks and balances.  It is taking public opinion an entire generation to catch up to where policy stands.  Only then might current reforms continue.

5. New Zealanders can once again sit content, since they are no longer in danger of being blown out of the water by Australia.  If they start falling behind again, reforms will resume.

6. Donald Brash will be elected Prime Minister in September, and reforms will resume then.

I’ll give the greatest weight to #1 and #4, and say no to #6, comments are open, Kiwi commentators are especially welcome.

Robin Hanson to Guest Blog

Tyler is in Australia and I am in Mississippi lecturing to judges and eating fried strawberries (yes it’s true, Southerners do like to fry everything!) so we are delighted this week to be joined by our colleague Robin Hanson.  Like Robin, many economists started out in physics but how many continue to publish papers in quantum physics while creating innovative ideas in economics like terrorism futures and improved markets for health care?

I like to say that half of Robin’s ideas are brilliant and the other half are crazy.  I’m just not sure which half is which!  See if you can figure it out. 🙂

Who is hurt by scalping?

Quiggin admits that resale possibilities will increase the overall demand for tickets and thus increase the overall revenue for charity.  But he sees a caveat:

Geldof is relying on donated services from musicians who would otherwise be selling them. To the extent that lottery tickets go to people who could not otherwise afford to pay, the musicians are giving up time, but not money (and getting good publicity). But with resale, the charity concert becomes a substitute for attendance at a standard concert. Musicians might reasonably change their minds about participation.

In other words, a charity concert — with tickets allocated by non-price mechanisms — might cannibalize the demand for other concerts less than would a market-clearing price event.  So the musicians can be better off with no ticket resale. 

But keep the following in mind.  Let’s say it is feasible to prevent or at least limit resale (otherwise there is nothing practical to argue about).  Any musician could limit resale for a selected non-charity concert, and allow resale for a charity concert.  The resold charity tickets would then be reaching a new group of buyers, rather than cannibalizing demand.  If you are not selling your tickets at market-clearing prices, why not allocate some of that surplus to the charitable event, rather than to scalpers for the non-charitable concert?

At the very least, Geldof is being hypocritical.  First, his rhetoric does seem to be simply anti-capitalist.  Second, he claimed that the ticket resale was being funded off the back of the world’s poor.  That is not true.  Most likely resale boosts charitable receipts, increases consumer welfare, and maybe lowers the future income of the participating musicians.  Those musicians are the backs in question, and no those people are not the world’s poor.

Arms-length government investment in equities?

1. An independent Fed works because the American public fears inflation.  If anything, the data suggest that people are too afraid of inflation.  American voters do not have similar instincts about an independent investing trust.

2. It is harder to maintain political independence when large amounts of money are being allocated or invested.  Note that seigniorage is no longer a significant source of revenue; central bank performance has improved accordingly.

3. If we reform social security, it will lose its status as a "sacred cow."  This is not objectionable per se.  But it will make it harder to treat an independent investment board as a sacred cow.

4. It took long periods of experimentation and meddling to establish the independence of most central banks.  What is the learning process for these investment boards?

5. Most state pension funds (Calpers is one notable exception) are not big enough to influence corporations as the federal government could.  Furthermore state pension funds are much less visible than is social security.  That being said, state pension funds are starting to meddle.

6. What if Brad DeLong is right that the Bush Administration manages to politicize everything?  What if the Democrats learn the same?

A core question is why we don’t run our entire government by independent experts, insulated from political pressure.  The answer, in short, is twofold.  We both require some degree of accountability, plus our government (and yes I include voters under that designation, not just "evil politicians") cannot precommit to leaving things alone.  The Fed works because of a relatively high coincidence of interests in its topic areas, namely monetary policy and bank regulation.

When it comes to the investment board, the greatest danger is simply that voters will get upset if returns are low for a ten or fifteen-year period.  They will demand a change — any change — and I fear how this pressure will work its way through the political process. 

The bottom line: There is nonetheless a good chance that the independent panel idea could work.  Maybe a fifty percent chance.  But still I would not do it, as the downside is higher than the upside.

My general perspective is simple.  Social security will bring some form of big government, whether we like it or not.  Let us do our best to keep private capital markets free to outrace the size of that government.  I am confident that markets are up to the task, and afraid of tinkering with this basic fact about our world.

Why is private health insurance such a disaster?

Why does private health insurance perform so badly in holding down costs? (Here is one story.) I can think of a few hypotheses:

1. Medical ideology portrays doctors as a priestly caste, accountable to no one.

2. The observed cost increases are driven primarily by government reimbursements and purchases.

3. The tax-free nature of employer-supplied insurance benefits encourages wantonness. (TC: Why? You can subsidize the purchase of apples, that doesn’t mean apples will be produced inefficiently or at “excess cost” for that level of apple output.)

4. The tax system discourages insurance policies with higher copayments. (TC: But if copayments are so great, companies today could offer higher-valued benefits along other dimensions, while increasing the copayment rate.)

5. Malpractice suits. This one is true for sure, but put it aside since the problem goes much further.

The most plausible answer is:

6. It is hard to contract in advance for which services should be covered. If you let everything be covered, costs skyrocket. If you allow for “outs,” insurance companies will use these loopholes to cut off high cost patients, thereby eliminating the benefits of insurance.

But why should this be such an insurmountable problem? Why can’t impartial third-party arbitrators arrive at a coverage solution that is reasonably efficient? After all arbitrators settle millions of legal disputes, issues where conflicts of interest could not be more pronounced. Or imagine third-parties that evaluates whether an insurance company covers reasonable expenses or instead screws over its customers?

Yes this does mean a cost-monitoring bureaucracy. But surely under all health care systems someone must decide which treatments are worthwhile or not. Why cannot markets allocate this function to the least cost decider? Why does the usual solution — intermediation — appear to be working so badly?

Inquiring minds wish to know. And simply citing the very large role for government in the American system does not do the trick. Here is one Cato account, you can agree with many of the points but it doesn’t answer my question. Here are some broader market-oriented links.

And this is why I find it so hard to come up with a good plan for health care reform. If we don’t understand why private health insurance functions so badly in our mixed system, we won’t understand how to fix things.

The cost of dieting

Why are Americans so obese? One factor is surely the decline in the relative price of carbohydrates. In hunter-gatherer society, you couldn’t get pasta or bread at all. But how about today?

“What’s really cheap are foods made with refined flour, added sugar and corn syrup and added fat.” People with limited income, he says, “buy foods that fill them up, and who’s to blame them? They get the most calories for their money.”

Not everyone is willing to pay for a good and tasty diet. Christine Davies speaks:

“I tried both the Atkins and South Beach diets, but pound for pound, protein is a lot more expensive than carbs,” she says. “The South Beach diet recommends fish about three times a week. I’d have to eat canned tuna three times a week to afford it, and I get tired of eating the same foods.

“Plus, you have to cook everything yourself,” she says. “Following it on a day-to-day schedule would be completely impossible because of the complexity of the recipes and the cost of the foods.”

She’ll get little argument from Phil Lempert, one of the nation’s leading experts on food prices and grocery-store shopping. Using exclusive data from AC Nielsen and menus from the best-selling diet books, Lempert calculates that strict adherence to the low-carb, meat lovers’ Atkins diet would cost about $100 a week (presuming you eat all meals at home). The salmon-rich South Beach diet priced out at almost $90 a week. That’s far more than the $35 that Davies spends at the grocery store each week to feed herself.

Many other people live in “food deserts,” where supermarkets with fresh vegetables are a long distance away. Of course all this holds only for North America. The world’s very poor find calories hard to come by, engage in hard physical labor, walk much more, or have better access to home farmed fresh foods. Only in the U.S. are carbohydrates so cheap.

Here is the full story. Here is a related article on the cost of dieting. Here is Bruce Bartlett’s excellent short piece on the economics of obesity, with links to the academic literature.

As for me, if you ignore price and delivery costs, I would gladly eat sashimi for at least half of my meals.

What’s wrong with perfection?

That’s the self-appointed topic of philosopher Michael Sandel. What if we could genetically engineer ourselves to be far “better” human beings? What would be wrong with that? Here is his answer, writ short:

A lively sense of the contingency of our gifts–a consciousness that none of us is wholly responsible for his or her success–saves a meritocratic society from sliding into the smug assumption that the rich are rich because they are more deserving than the poor. Without this, the successful would become even more likely than they are now to view themselves as self-made and self-sufficient, and hence wholly responsible for their success. Those at the bottom of society would be viewed not as disadvantaged, and thus worthy of a measure of compensation, but as simply unfit, and thus worthy of eugenic repair. The meritocracy, less chastened by chance, would become harder, less forgiving. As perfect genetic knowledge would end the simulacrum of solidarity in insurance markets, so perfect genetic control would erode the actual solidarity that arises when men and women reflect on the contingency of their talents and fortunes.

Here is the longer argument.

In other words, Sandel is saying that if we bring about a world where everything is the result of genes, people will be less caring. Social solidarity will diminish.

I doubt this. If you want to drum up sympathy, hold up a picture of a young child with birth defects.

And at what margin is contingency good for us? Would it also increase social solidarity to have our lives “contingent” upon diarrhea, malaria, and tuberculosis?

Going out on a limb:

The future of solidarity may be up for grabs, but for different reasons than Sandel recognizes. The real question is whether parents will prefer to genetically engineer children with more or less social solidarity. I’ll predict more. The benefits of sexual selection (attracting a quality mate) will outweigh the shorter-run benefits from greater selfishness. Don’t parents already scold their children to have a stronger social conscience? Wouldn’t caring kids also be more…obedient? Now you might try to breed a kid who loves only his spouse and children, and cares about no one else. How good a job will this person get? Remember, this future world may also allow us to test for what genes people have. What better for a job interview than to take a piece of hair and see how much the person is a cooperator? I expect genetic engineering to increase the gains from trade. As for politics, imagine if candidates had to reveal their genetic profiles.

Genetic engineering also will accelerate the pace of evolution. Given that birth control is cheap, the women on the future will love children more than do the women of today.