How to maximize the return from caffeine (and other stimulants)

Take small sips, and spread them out across the day. Don’t start your morning with too much coffee, yeah that means you too. Here is the full analysis, from the ever-insightful Randall Parker. This result reminds me slightly of the Barro-Gordon model of monetary policy. Don’t take your inflation all at once. If you haven’t had some inflation in a while, a mild dose of inflation can provide a nice stimulus.

The Deficit Gamble

Here is an amusing paper, co-authored about 10 years ago by Greg Mankiw, now chairman of the Council of Economic Advisers. In The Deficit Gamble, Mankiw writes:

The conventional wisdom holds that government budget deficits crowd out capital, reduce national income, and lead to lower living standards for future generations….we propose a new view of budget deficits…a deficit is a gamble. It is an imprudent policy, because it imposes a significant burden on future generations in some realizations of history. But in most possible outcomes, the future effects of deficits are benign….We call the policy a Ponzi gamble.

In essence, deficits are a gamble that g>r, earlier Tyler made exactly this argument (I respond here).

My favorite part of the paper is this:

Our alternative view of government debt may also help explain why Ronald Reagan chose to preside over the profligate fiscal policy of the 1980s. Biographers of Ronald Reagan often note his boundless optimism. This optimism was in part due to his own unlikely rise from an actor in B movies to President of the United States. …Put simply, an eternal optimist like Ronald Reagan may choose to accept a gamble that a realist would deem imprudent.

I ran into Mankiw recently and said, “You must be a gambling man!” He laughed but quickly averred that I shouldn’t read policy into the paper. Clearly, he has learned something from the outsourcing debate. I wonder what future biographers will say of George W. Bush’s optimism?

Panama Canal facts

1. 14,000 ships go through the Canal each year; 2/3 of these are headed to or from the United States.

2. A crossing takes eight to ten hours.

3. The Canal is currently financed by tolls; one luxury cruise ship paid $226,194 for passage, an all-time record.

4. New ships are often forty feet wider than the current Panama locks. Within ten years most new container ships won’t fit through the locks.

5. Any rebuilding would involve considerable flooding of territory and the relocation of Panamanian citizens.

6. The Panamanian economy is relatively healthy, but heavily reliant on canal revenue.

7. Many Panamanians are reluctant to have their country take on the full cost of reconstruction.

Here is one account of how the Canal might be rebuilt.

The bottom line: We have a classic bargaining game here. Building a broader Canal is profitable, but who should pay? The longer the Panamanians hold out, the more likely the U.S. will sweeten the pot for improvements. Since the Canal is an object of national pride, they won’t just sell equity in the project. In the meantime they might give the Chinese a larger hand in the project, just to make us nervous. My prediction? The improvements will take at least five to ten years longer than they ought to.

By the way, if you’ve never seen the Canal, I recommend a trip to Panama. For me it is one of the world’s great wonders and the country is lovely.

Why no battling gods?

Troy, the movie version of Homer’s The Iliad, is out today. Here is one report, from the May 14 Entertainment Weekly:

While Pitt’s character got tweaked, the rest of The Iliad went pretty darn Hollywood. Briseis, a slave girl captured by the Greeks — speechless in Homer’s tale — becomes a royal priestess and love interest for Achilles…More notably, no gods interfere with battles in Troy. “I didn’t want them in,” says screenwriter Benioff.

The screenwriter notes that activist gods would make the movie too much like The Clash of the Titans. My rhetorical question for the day is why clashing polytheistic gods make for a less broadly saleable story than do human heroes. And does this help explain why monotheistic religions have been growing at the expense of polytheism for some time now?

Thanks to Yana for the pointer to the EW article.

Prices versus Costs

Why do we favor free trade? Is it because prices are lower in other countries? No. It’s because costs of production are lower in other countries. Prices and costs are not the same.

Consider, for example, the issue of drug reimportation. Why do politicians and some consumers want to reimport drugs from other countries? Is it because costs of production are lower in other countries? No. It’s because prices are lower in other countries. Once one realizes this it should become obvious why drug reimportation is not “free trade” and promises little or no net benefits – drug reimportation doesn’t lower costs and thus there are few efficiency gains to be had by reimportation.

Addendum: A more complete analysis of reimportation would look at the effects on consumption (slight increase in the US, potentially large reduction in the “exporting” countries) and the effects on innovation (reduced).

Outsourcing: the death of us all?

Wherein lie the limits to outsourcing?

[German] families have to pay for either a cemetery plot or for cremation. Here, too, Woite has found a way to avoid the high price Germany’s cities and towns charge for such services. He sends corpses for cremation to the neighboring Czech Republic, where costs are significantly lower. Or customers can have their deceased buried in a Czech cemetery.

Three times a week Woite’s employees drive back and forth between Germany and the Czech Republic. And although German law requires corpses and ashes to be kept in graveyards, Woite takes advantage of a loophole in the law so his customers can take their loved ones home in an urn.

“Earth mixed with ashes, there’s no law about that in Germany,” Woite explained. “We bury over there and bring back the earth mixed with ashes, and that’s what I hand over to the people.”

Woite has been heavily criticized by competitors for his Czech business. They say he’s irreverent, and they call the journeys to the Czech Republic “corpse tourism.” But that hasn’t stopped the undertaker. He’s planning an organized bus trip to the Czech Republic in April so customers can see for themselves where they or their loved ones may one day be cremated.

Here is the full story. Thanks to Michael Ward for the pointer.

The optimal gas needle

I learned yesterday that my gas needle is broken. It moves rather quickly to three-quarters of a tank, but is very sticky once it gets to half a tank. It used to be very sticky when it started on full. I could drive for two hours and it would remain on full the entire time.

I started wondering (actually I’ve been wondering this for years now) how an optimal gas needle should be structured. Assume that if a buyer has a bad experience with a car, such as running out of gas, he blames the car manufacturer with some probability. You might then expect that a car needle will stand on “Empty” long before the tank is empty. The needle makes you prematurely fearful and you are less likely to run out of gas.

You also might expect that the needle will be sticky at the top end of the register. Why?

When you fill your tank with gas, you have the clearest idea of exactly how much is in the tank. You are most likely to use observations from that point to gauge the fuel efficiency of the car. All other observations will be noisier. So the automaker wants to make a good impression about fuel efficiency right off the bat. This doesn’t require driver irrationality, only that you measure fuel efficiency with some imperfection. You’re never sure if the car gets great mileage or if the needle is just biased. But you attach some probability to the former. Economists call this a “signal extraction” problem. You suspect the needle is biased but you never know quite how much. (The technically-minded will note that once you introduce these information asymmetries, the assumption of rational expectations no longer rules out all kinds of errors; I first learned this from reading Joe Stiglitz.)

Furthermore some people refill their gas tank well before it gets to the bottom; they are just nervous nellies. These people will rarely observe the needle when it is on its path of swiftest descent. They observe how much they pay at the pump, but of course gas prices change all the time. They too will face a signal extraction problem and may overestimate the fuel efficiency of their car.

Some people will see through this entire business. But for them it doesn’t matter how the needle is structured. So a “sticky at the top” needle is most likely to induce a repeat purchase of the same kind of car.

Is this good? It may slightly limit competition in the car market. People stick with a brand because they think it offers better gas efficiency, when in fact it doesn’t. On the other hand, the practice makes the buyer feel good about his purchase. People think they bought a car with good mileage. The nervous nellies can rest easy. And the more irresponsible types are less likely to run out of gas.

So don’t forget the subtitle of this blog: Small ideas for a much better world.

Addendum: Of course as in most game theory you can spin alternate stories. Does this tempt you to switch disciplines? Just read Thomas Nagel’s recent essay on why there is something rather than nothing. Nagel is extraordinarily bright, but this is enough to bring you back into the fold.

Cognitive Liberty

Freedom of thought is the most fundamental right. Fortunately, it has been nearly impossible to invade the mind. New technologies, however, do threaten freedom of thought, raising many difficult problems. Should children diagnosed with ADHD who refuse to take Ritalin be refused an education? Should a mentally-ill person be drugged so that they can stand trial? Is hypersonic advertising an invasion of mental privacy?

Here’s an interesting interview on these and related issues with Richard Glen Boire co-founder of the Center for Cognitive Liberty and Ethics.

Index funds, still the way to go

If the market is efficient then without an information advantage (non-public information) you can’t expect to beat the market and thus index funds are a good way for the average investor to invest. Behavioral finance has put some dents in efficient markets theory but just because a market is inefficient that doesn’t mean that beating the market is easy. Even if you knew that firm X was way overvalued, for example, shorting the stock would expose you to great risk – the price could become irrationally higher before the bubble bursts, unexpected events could increase the fundamental value to match the bubble, your capital could run out before the price drops and, of course, you could be wrong.

When you hear the term inefficient market don’t think $500 bills lying on the sidewalk, think $500 bills swirling around you in a vortex of wind…at night. Inefficiency is out there but it’s hard to find.

The bottom line remains that most professional money managers don’t beat the market. Here’s a recent reminder from James Glassman of this fact:

Charles Allmon points out that last year the poorly rated stocks of many research services outperformed their highly rated stocks. For example, Standard & Poor’s one-star stocks returned 57 percent while its five-star stocks returned 43 percent. Merrill Lynch’s sell-rated stocks returned 46 percent while its buy-rated stocks returned 30 percent. Schwab’s F-rated stocks returned 70 percent while its A-rated stocks returned 66 percent. The biggest discrepancy came with Value Line, whose 5-rated stocks (the 100 companies with, supposedly, the worst prospects for the year ahead) returned an incredible 90 percent while the 1-rated stocks (the top prospects) returned 40 percent.

Radical Prescription

A recent Rand study of 25 large firms found that raising the co-pay for pharmaceutical claims by just $5 reduced yearly drug costs per worker by $163.*

An interesting piece in the WSJ (“A Radical Prescription,” May 20, 04, R3) suggests that this logic does not always hold. Higher co-pays can cause consumers to cut back on prophylactic and maintenance medicines. Pitney Bowes, for example, found that high-prices caused their diabetic and asthmatic workers to take their medicines irregularly resulting in sudden and expensive attacks. So Pitney Bowes took a counter-intuitive strategy – to save money they would pay for more of their workers prescriptions.

On the new plan workers began to switch to more expensive but more convenient and thus easier to maintain drugs and within a year the company was saving money.

the company was paying more for maintenance medications… [but] it was spending significantly less on rescue medicines…

[S]ignficant saving has come from fewer emergency room visits, which dropped 35% among diabetes patients and 20% among asthma patients…there were also fewer hospital admissions and doctor’s office visits.

The strategy won’t work for all drugs but it shows how much care must be taken in devising optimal insurance plans.

* Originally, I had said this implies a cost to benefit ratio in excess of 30 (163/5). Robert Ayers pointed out, however, that the co-pay is per drug while the savings are per year. Thus the cost-benefit ratio must be lower than 30. The original source doesn’t provide the data to calculate it exactly, however. Thanks Robert!

Indian voters reject high-tech

India appears to take a turn for the worse:

The government in Andhra Pradesh state, headed by the coalition’s second-largest member and a leading proponent of India’s technology revolution, was routed by the Congress party, which is also the main opposition on the national stage.

Besides signalling that high-tech prowess had not impressed the millions of rural poor, the result suggested the national election could end in a hung parliament and likely political turmoil as parties searched for new allies.

Votes from the marathon national election will be counted on Thursday but financial markets have already tumbled on fears that India’s crucial economic reforms could be delayed if a weak government comes to power.

Here is the full story.

Let us not forget that India remains a badly messed-up economy. I found the following passage, from William Lewis’s The Power of Productivity, illuminating:

…India has a special problem. It is not clear who owns land in India. Over 90 percent of land titles are unclear…Unclear land titles most affect industries which use a lot of land. These industries are housing construction and retailing. The result is that there is huge demand for the very little land with clear titles. Not surprisingly, the ratio of land costs to per capita income in New Delhi and Bombay is ten times that ratio in the other major cities of Asia…Also not surprisingly, India has very few supermarkets and large-scale single-family housing developments.

But it gets worse: Stamp taxes on land sales run at least ten percent. Furthermore you are often expected to pay real estate taxes, even if you will never be granted title to the actual land. It is said that the money is accepted “without prejudice.” Here is a short article on how to make things better.

Map the Power Elite

They Rule is a very cool website that uses flash player as a front-end to a database on corporate boards. Find out who is on the board of any of the largest publicly held corporations, choose two firms and find the connections between their boards (ala six degrees of separation), map the power-elites. The map below (click to expand) gives an idea of what the site is all about.

The author, Josh On, is an odd-mix of old-style lefty and cutting edge technologist. When he’s not putting together websites like this what does he do?

Twice a week I stand outside on a street corner and try to engage strangers in conversations about politics. This would be much harder without a copy of Socialist Worker in my hand.

Hat tip to Boing Boing Blog.