Why so many happy returns?

It’s much easier to return a purchase in the United States than in Europe. An old joke has it that Germans are very nice people until you try to buy something from them. Imagine then how difficult it is to return something in Germany. The no questions asked, easy return is not common in most of Europe.

It’s puzzling why this should be so. One explanation offered at lunch yesterday when I raised this question focused on the demand side. Incomes are lower in Europe, perhaps people of lower income don’t demand easy return policies. The theory here is a little odd – an easy return policy is a form of insurance and the poor should demand more insurance not less – but we do observe the poor buying less insurance in other areas so it’s not ruled out completely. The differences in return policy, however, are striking while the differences in income are modest. It’s not like we observe large differences in return policy across the U.S. states, for example, and Germany is among the richer countries in Europe. Return policy has also been relatively good in the United States for a very long time – going back at least to the 1895 Sears Roebuck catalog.

From the supply side the question becomes why is it cheaper for U.S. firms to offer easy returns than it is for European firms? I think part of the answer is suggested by that Sears-Roebuck guarantee. Retailers in the United States tend to be larger than in Europe and because of this they can take advantages of economies of scale both in insurance and in establishing a reputation for quality. European retailers are smaller and have greater monopoly power (even though there are more of them they have local monopoly power that the big boxes in the United States do not.)

If the supply theory is correct then multi-national firms that offer easy return policies in the United States ought to offer similar policies in Europe – the demand theory, in contrast, says that return policy should differ by country according to income. I bet, however, that Ikea offers easy returns in Sweden just as in the United States.

Email me if you have other ideas, experiences or evidence on this question. The return puzzle may seem minor but it has widespread implications. Return policy is not chosen alone but in conjunction with product quality. Easy return policy increases the incentive to produce high-quality products that consumers will not want to return and high-quality products reduces the cost of offering an easy return policy.

John Kerry’s hi-tech plan

Here is one summary of his latest proposals, the bracketed text is my comments:

Sen. John Kerry called Thursday for increased investment and support for America’s high-tech industry. His proposals include:

— Encouraging technological innovation by cutting some capital gains taxes and revising or eliminating regulations that affect competitiveness. [Good news]

— Using tax incentives to expand universal broadband access, which he believes will add $500 billion and 1.2 million new jobs to the economy. [ I don’t see the social benefit here, the private benefits of broadband are largely internalized; it sounds like this is based on a bad economic impact study.]

— Increasing government research funding in science and technology, including money for “pure” science research. [Government subsidies for science should be oriented toward the “pure” side of the spectrum. We need to lengthen our time horizon here, and let’s focus on infectious diseases and non-polluting energy sources. I am much more skeptical about the government’s ability to guide applied technology. Remember Synfuels? But if we are going to do this, we must make real spending cuts elsewhere, most of all in Medicare]

— Improving math and science education at the K-12 level and rewarding colleges for increasing the number of science and engineering degrees they award. [Sounds good, but I don’t expect federal involvement to bring a real improvement. Nor do I think the a marginal increase in science degrees will mean more scientific progress. How good is the marginal science student, and how much does he or she love science?]

The plan also involves spectrum auctions [good] and stem cell research [good].

The bottom line: This is better than I had expected. I do worry that only the worst and porkiest elements will survive the political process.

Missing markets: wireless assistance

The Scandinavian countries all have wireless directory assistance, but the U.S. does not, largely because of privacy concerns and fear of telemarketers. Here is a summary of recent debates.

This week’s Fortune magazine (June 28, p.47) writes:

…directory assistance could be much more than just a repository for phone numbers. She argues that the phone companies, with some new software and employee training, could begin offering new services, such as a system that allows an operator to forward, for a fee, a text message to the unlisted customer you’re trying to reach. And why stop at wireless numbers? Directory assistance could list e-mail addresses, work numbers, website addresses — or any other info-nugget a customer might desire.

What I want: Large numbers of well-educated Indians, standing by a phone in Bangalore, who can use Google for me and answer my queries when I am on the road. Some of these Indians would be conversant with macroeconomic time series data, others would be experts in the use of MapQuest.com.

What will happen with Medicare?

Daniel Shaviro writes:

While the future is inevitably opaque, here is a forecast. The next few years may see the adoption of policies that widen the fiscal gap, including the enactment of unfunded prescription drug benefits that keep getting larger through a political bidding process [good call here!]. By 2010-20, however, the entitlement programs’ fiscal prospects will look grave enough to prompt significant tax increases that are now unthinkable. These will include the enactment of a VAT that is officially earmarked to one or both of the entitlements, because the lure of a dedicated money machine will have grown too great to pass up.

Medigap will be addressed at some point, because cross-subsidization is so hard to defend, but the impact of the change will be unduly deferred. Copayments will increase and the Medicare eligibility age be postponed, though again with a deferred effective date. Explicit means-testing within Medicare is unlikely…And Medicare will continue to misdirect its insurance coverage toward the low end as opposed to the high end…

Inflation will be used to narrow the fiscal gap…these might include eliminating or reducing the indexing of income tax rate brackets and Social Security benefits. Medicare will benefit fiscally from inflation because it permits payments to providers to decline in real terms without declining nominally. Indeed, doctors will drop out of Medicare in increasing numbers as its payment fees shrink relative to those that patients with the cash are willing to pay…

We are then told that we will see health care rationing, lower investments in health care human capital and technology, and growing disparity between rich and poor in terms of health care access.

For a useful comparison, here is Shaviro on what should happen.

The bottom line: The fiscal burdens of Medicare are, by far, the biggest economic problem in today’s America. David Cutler (p.77 of the book) estimates that restoring long-term fiscal balance to the program would require immediate benefit cuts of 38 to 61 percent. That’s not going to happen.

What should we do with Medicare?

Daniel Shaviro offers the following suggestions:

1. Reduce Medicare’s low-end coverage of routine expenditures, and use replace deductibles with lesser copayments that extend over a broader range.

2. Provide prescription drug and catastrophic care coverage without increasing the overall value (net of premiums and copayments) of Medicare [Ha!, interjects TC, this must have been written before the Bush bill passed]

3. Impose a tax on Medigap coverage of Medicare copayments, or else bar such coverage altogether.

4. Make copayments income-related…[“means-tested”]

5. To the extent that income tax increases are needed, use base-broadening in lieu of rate increases to the extent possible.

6. Enact a consumption-style VAT without transition relief for old wealth.

7. Use accounting rules to discourage Congress from dissipating the net revenue from tax increases that are meant to help meet future Medicare liabilities.

8. Attempt to realize cost savings by modifying Medicare’s current fee for service structure. While managed care has had disappointing results as applied to workers under age sixty-five, this may reflect the political and legal obstacles to imposing rationing.

My take: This is a serious effort to solve a real problem. I’ll endorse 1-4 and 7. When it comes to higher taxes, let’s just hope that productivity growth remains high. If I have to, I’ll get out and push. #8 sounds too much like putting old people out on ice floes, but it would solve at least twenty percent of the problem with only minimal impact on life expectancy. And for the proposal to be effective, how voluntary would managed care be? For those reasons, I can’t press the “do it” button on #8; I’ll give it a pass and plead political infeasibility. And while I am fully aware that Medicare is the fiscal train wreck, compared to which most other economic problems pale, shouldn’t the words “cut spending” somehow play a role?

Here is my previous post on Shaviro’s illuminating book. Today was Shaviro on “what should happen.” Stay tuned for Shaviro on “what will happen.”

Who are Britain’s most influential public intellectuals?

Here is one list, from Prospect magazine. Here is some discussion. Economists include John Kay, Samuel Brittan, Martin Wolf, Adair Turner, Robert Skidelsky, Amartya Sen, and Richard Layard. You have a chance to vote for the top five of the one hundred. Here is a Richard Posner list of public intellectuals, not restricted to the UK. Here is a related review of Posner.

Are trains environmentally friendly?

“I know this will generate howls of protest, but at present a family of four going by car is about as environmentally friendly as you can get.”

Can this be true?

They [researchers] calculate that expresses between London and Edinburgh consume slightly more fuel per seat (the equivalent of 11.5 litres) than a modern diesel-powered car making the same journey.

It gets even less politically correct:

Roger Ford, of Modern Railways magazine, said one reason for declining energy efficiency [of trains] was the impact of health and safety and disability access regulations.

Here is a relevant Telegraph article. Here is David Nishimura’s post, my source on this matter. Here is the researcher’s home page. Here is The Transport Blog, perhaps they will offer comment.

N.B.: I have not seen the underlying data, and cannot find the study on the web. In the meantime, for some further revisionism, read Eugene Volokh on the myths of the Cuyahoga River Fire.

Mellencamp on Payola

Following my earlier post on payola, Les Jones points me to an interview with John Cougar Mellencamp. Key quote:

Look, in the ’80s when people were paying openly to get songs on the radio, here’s the way it worked. “We want you to play this record and we’re going to give you a spiff [kickback] of $100 to get it on the radio.” OK, the guy plays it for a week and says, “I’ve been playing the song for a week and nobody likes it.” “Well, here’s $200 to play it next week.” They’ve been playing the song for two weeks and nobody likes it. Guess what, they’re done paying. It’s over at that point. You cannot pay your way into having a hit. It won’t happen. The only thing you can pay your way into is having the opportunity to have a hit. If you don’t pay, you don’t even have the opportunity. That’s the way it should be done.

NBA economics

Read Mark Cuban’s thoughts on the Detroit Pistons, and why the Lakers lost. Mark Cuban, in case you don’t already know, is the owner of the NBA’s Dallas Mavericks. His blog pretends to be about basketball but like so much of the best sports writing it concerns personnel management, human motivation, and how to measure achievement. I loved this line from yesterday: “Believe it or not, even in the NBA [trade] discussions start based off of what we read in the newspapers.”