The view from your recession (markets in everything edition)

by  Tyler Cowen in

When the concept of starting a valet parking service came up at a
recent Florida Atlantic University Board of Trustees meeting, it seemed
less out of place than one would think. With the number of students
growing, and the number of convenient parking spaces on campus
unchanged, the idea to charge students and faculty for such a
convenience did not seem unreasonable.

Florida Atlantic is just
talking about valet service. Other colleges have implemented it.
Florida International University and Columbia University introduced
valet programs this spring. The University of Southern California has
had a program in place since 2008, and High Point University brought in
valet at the behest of its president, Nido Qubein, to provide a better
student experience. California State University at Sacramento has also
begun a premium parking program.

Here is much more.  Alternatively, you could view this as a behavioral economics attempt to extract surplus from people who are too often late for class.  By the way, Nido Qubein, the cited president of High Point University, runs a motivational speaking business on the side.

Kindle and DRM and Netflix too

by  Tyler Cowen in

After reading this post, I realize I don't understand my status quo DRM rights with Kindle.  That's not a good sign.  I did notice this sentence, which I didn't feel the need to parse any further:

Here is the major problem with this scenario.

As a reader, I find it good policy to keep the number of books on my Kindle to below twenty.  That forces me to read the ones I order and it also protects me from "stranded" consumer durables.  Uncertainty and confusion about my rights only strengthens my desire to keep that policy. 

As a writer, I expect the Kindle is temporarily in my financial self-interest, as it gets more "influentials" reading my work and perhaps talking it up.  In the longer run I suspect it means a lower equilibrium price for books.  One question is whether publishers use "sticky" or inconvenient DRM practices as an implicit collusive method for limiting the spread of Kindle.

Today I was struck by this passage about the origins of Netflix:

Netflix's selection of more than 100,000 DVD rental titles is made possible by the "first-sale doctrine" of U.S. copyright law, which permits buyers of DVDs to lend them out without studios' consent.

In Netflix's early days, its buying team would sometimes purchase DVDs at local Wal-Marts or Best Buys if it couldn't get copies through studios, says Ted Sarandos, Netflix's chief content officer.

In contrast, to deliver movies and television shows over the Internet, Netflix has to license them from studios. So far, it has gotten only about 12,000 titles, a hodgepodge of older films such as "Diehard," episodes of popular TV shows including "30 Rock" and a smattering of new releases.

That's right, we had more innovation because some of the usual copyright strictures about negotiating rights did not apply.  I am pro-copyright, but once again the default settings make it too hard for successful negotiations to occur.

QALY and the Value of U.S. Health Care Spending

by  Alex Tabarrok in

The US spends considerably more per-capita on medical care than other countries, without an obvious increase in life expectancy.  Yet what we make of this depends a great deal on the value of human life.

The value of a quality adjusted life year (QALY) is often set at $50,000 although more recent research puts it at $100,000 to $300,000 or even higher. Kidney dialysis, for example, costs $70,000-$100,000 per year and the quality of a life-year on dialysis is estimated at about half the value of a fully-healthy life-year which suggests that Americans are willing to spend $140,000-$200,000 for an extra quality-adjusted life year.  Let's go with $100,000, you may adjust as you see fit.  

Let's imagine that all of the extra spending in the US adds one QALY to US citizens.  How much is that worth?  Well $100,000*300 million is $30 trillion but we don't all get the QALY at the same time.  We could do some fancy discounting by age but let's instead imagine that the QALY goes annually to the people who are dying – that is, we will assume that the people who died this year lived one QALY more than they otherwise would (since everyone dies this involves no double counting). 2.5 million people die annually in the United States so the total QALY increase per year is worth $250 billion ($100,000*2.5 million). 

US health care spending is around 15% while in many other advanced countries it's 10% so call the extra spending 5% of GDP or $670 billion.  Thus, on this calculation we spend 2.6 times as much as is justified by a one year increase in QALY; alternatively, one QALY must be worth at least $260,000 for our spending to be justified.  The latter number is high but not outside the ballpark.  Of course, if medical spending results in less than one QALY to US citizens the value of QALY must be higher to justify such spending.

More generally, when people say we should cut "wasteful" health spending they should specify what they think a QALY is worth.  Politicians who say that they can balance the budget by elminating "health care waste" are selling the same line as politicians who say that they can balance the budget by elminating "government waste."  In particular, it's naive to think that we can save a lot of money by eliminating spending with 0 QALY.  More reasonably, we can eliminate spending with high costs per QALY.  For example, dialysis for the sickest patients (top 10%) costs more than $240,000 per QALY and some heart pumps costs more than $500,000 per QALY.  

Cutting waste means cutting medical care which costs more per QALY than a QALY is worth.  So what is the value of a QALY?  And who does the cutting?

Hat tip to Robin Hanson for discussion.

*Create Your Own Economy*, standing on one foot

by  Tyler Cowen in

A number of readers have asked me for a "one-sentence" review of my book to come.  I don't so much like the Amazon summary, so let me try a short enumeration instead.  The book offers:

1. A "big picture" analysis of how current economic, social, scientific, and political trends all fit together.

2. A new vision for how "autistic cognitive strengths" are a major dynamic element in human history and that includes a revisionist view of the autism spectrum.

3. New ways of thinking about what you're really good at (and not so good at).

4. A view of why education is much more than just signaling, but why you should be cynical about most education nonetheless.

5. An unapologetic defense of contemporary web culture and also social networks.  Google is making us smarter, not stupider.

6. How commerce is shaping the culture of the world to come and what I didn't see in my previous writings on this topic.  Why culture is becoming more like marriage.

7. Why the Sherlock Holmes stories are a lot more interesting than most people think.

8. What neuroeconomics should be studying and why.  Instead of just doing more brain scans, neuroeconomists should look more closely at already-understood cross-sectional variations in human neurology.

9. An account of how behavioral economics misses the importance of marketplace competition and how and why some behavioral results need to be modified as a result.

10. The importance of neurology for unpacking debates about aesthetics, especially when it comes to music.

11. A discussion of Milton Friedman's greatest tragedy.

12. A definite prediction about the long-run future of humanity.

Here is the table of contents for the book.  You can pre-order the book here.

Do you believe in Stein’s Law?

by  Tyler Cowen in

Ezra Klein asks:

Do you believe in Stein's Law?

Stein's Law is the dictum named for the economist Herbert Stein.
If something cannot go on forever, he's reported to have said, it will
stop…It cannot be the case that we
will let health-care spending literally consume 100 percent of
America's gross domestic product before the end of the century.
Health-care spending cannot continue to increase at this rate. Thus, it
will stop.

I can imagine health care consuming thirty to forty percent of U.S. gdp at some point well short of the next century.  (When did people first realize that agriculture would fall to such a tiny share?)  In any case, Ezra frames a key issue:

Every year, we contain costs by quietly letting 2 million or so more
people fall into the ranks of the uninsured. And why not? It does not
require an act of Congress. It does not require a war with a powerful
interest group.

Recent polls notwithstanding, I still don't see the median U.S. voter as either a) willing to have his or her own health insurance taxed, b) accepting serious restrictions on Medicare reimbursements relative to the status quo, c) accepting the mix of HMOs and co-ops that could actually control costs, or d) taking lots of money away from "health care" and putting it into arguably-more-effective public health programs.

Polls are tricky.  The HMO revolution of the 1990s did not "poll" well ex post and that is why it is no longer with us.  Remember also that Harry Truman ran and won on a single-payer platform.  That was a long time ago.  That and other health care reform ideas have been popular in this country except when it comes to doing them.

So to answer Ezra's question, no I do not believe in Stein's Law.  The impossible will likely continue (until it stops).  If economic growth exceeds one percent and progress against disease continues, rising health care costs imply a semi-stable equilibrium for a long time to come, even if it's far from an optimum.  Cheaper, uninsured "retail" care, run on a walk-in, Wal-Mart sort of basis, may alleviate the burden on the uninsured to some extent.

Addendum: Read the comment by Garett Jones:

If the median voter hasn't changed her position much in the last
year or two, then by the MVT the policy outcome won't change much.
Whether the median voter is the "median member of Congress" or the
"median voter at the booth" is a minor question at that point.

The Dems have picked up a lot of culturally-conservative seats so
the median member of Congress probably hasn't changed her views all
that much. When you hear "The Dems won a seat that had been GOP for
decades" you should probably think Blue Dog.

And on Krugman's alleged evidence of unmet demand for health care
reform: As Larry Bartels's resarch shows, voters always say they want
more government services and lower taxes: They want more for less, no
surprise to economists. This is true even in Sweden. Voters leave it to
the legislators to figure out how to optimize their re-election chances
subject to those preferences and the government budget constraint. Is
there also a massive unmet need for tax cuts?

As the link..shows, support for massive health care reform
is lower now than in 1993: The median voter—whether in the booth or
on the floor on the House–is probably less supportive of massive
change than in 1993. Bad news for universal health care, if the MVT is
roughly true.

*Disrobing the Aboriginal Industry*

by  Tyler Cowen in

The authors are Frances Widdowson and Albert Howard and the subtitle is The Deception Behind Indigenous Cultural Preservation.  Here is one good two-sentence excerpt:

The "evidence" from "oral histories" is even more problematic when economic interests are involved.  Oral histories have been known to change when a claim is necessary to obtain access to valuable resources.

This book is too polemic for my tastes and it doesn't try hard enough to understand the other side of the issue.  But it makes many very good points backed up by many very real examples.  It is strongest when arguing against the lowering of intellectual standards for arguments made on behalf of indigenous groups.

What will drive future growth?

by  Tyler Cowen in

Simon Johnson asks:

…if finance doesn’t drive growth, what will…?

You'll
also read many commentators breaking national income into its components of C,
I, G, and X-M (consumption, investment, government spending, and net exports) and asking where the growth will "come from" to "drive"
the recovery.  Of course national income accounting is an identity, so this cannot be a nonsensical question.  Yet when the word "drive" is used, we are smuggling in a causal category.  There is no guarantee that any particular decomposition of the national income identities the relevant causal components for what will "drive" recovery.  How would it sound if you aggregated national income by zip code or county (or household) and asked where the boost to drive recovery would come from?  Such an approach might not be on the right conceptual track.

You'll also see discussions of how exports or real estate construction usually precede a more general recovery.  There is then a fear of when or how those trends will come about.  But again, are those the causal factors for thinking about economic recovery?  It was Chinese demand for exports which pulled Japan out of its lost decade but overall I am less convinced of the causal role of exports per se.  Healthy exports are often a symptom of good outcomes, not a cause.

Slipping back and forth between national income identities and causal relationships was one of the big problems in Keynes's General Theory.  I worry that we still see this tendency in macroeconomic thinking.

There are two key questions I ask in a downturn: what will boost aggregate demand? and what will cause a better matching of the particular components of C and I?

The answer to the first is usually "nominal money."  The answer to the second is trickier and harder to encapsulate in a few letters (C, I, G, X-M) or in the mention of an economic sector or two.

A third question might be: which factors are hindering confidence and thus recovery?  Sometimes the answer to this question works through the channel of monetary velocity and the relaxation of "wait and see" investment strategies.

None of these questions deny the relevance of aggregate demand macroeconomics.  But also none of these questions focus our attention on the C, I, G and X-M aggregates per se, except of course for nominal money.

These questions offer a framework for thinking about fiscal policy.  By mobilizing new M into a more rapid V, fiscal policy can boost aggregate demand.  And maybe you like how the money is being spent by the public sector (that's a separate debate).  But unless the new flow of spending is permanent, or can be turned off in a very smooth fashion, it creates temporary bubbly-like conditions in the recipient sectors and that is cause for concern.  You get a better matching of C and I in the short run, but maybe not a better matching for the longer run.

Carrying costs > liquidity premium, a continuing series

by  Tyler Cowen in

The white-haired parking meter repairman who, little by little, stole
more than $100,000 in coins from meters in Alexandria [VA], pleaded guilty
today to two counts of embezzling public funds, and faces a maximum of
40 years in prison.

Police caught William Jonas Fell, 61, in April, and when they searched
his house they discovered about $100,000 in paper money and $7,100 in
nickels, dimes and quarters stashed in rolls, a bucket and a silver
cup.

Fell's lawyer, Greg English, said that for more than a year, Fell
would ferry the coins home and exchange them for bills at a supermarket
near his home in Stafford county.

"What else do you do with it?" English said after the hearing in
Alexandria Circuit Court. "You can't put it in your checking account."

Here is more.

What I’ve been reading

by  Tyler Cowen in

1. Addiction: A Disorder of Choice, by Gene Heyman.  This book overstates its claims, but if you wish to see a non-economist defending a (broadly) Beckerian model of addiction, here you go.  I couldn't put it down!

2. Jodi Picoult, Handle with Care.  I felt I should try one by her to stay in touch.  It was better than I had expected though not really smarter than I had expected.  Here is an NYT article about her.

3. Les Miserables, by Victor Hugo.  This new translation by Julie Rose is more or less definitive.  But it is heavy.  If any book ought to be on Kindle…

4. Our Lot: How Real Estate Came to Own Us, by Alyssa Katz.  There is lots of good material about our social and policy infatuation with housing, but she commits a mistake that I have been "waiting for" — she blames part of the housing bubble on the decline of rent control

5. Javier Cercas, Anatomía de un instante.  A micro-study of one moment of time (Feb.23) when, post-Franco, Spain ended up sticking with the path to democracy rather than falling back to autocracy.  The focus is on conservative Prime Minister Adolfo Suárez and the book blends fictional and non-fictional narrative techniques very effectively.  Here is one review.  This is a very strong book also with relevance to current events in Iran.

6. Arnold Kling and Nick Schulz, From Poverty to Prosperity.  I've only been reading the Amazon blurb for it — the book isn't out yet — and here is Arnold on the book.