Positive feedback in inequality

by  Alex Tabarrok

Here is a very nice summary of some important trends from Arnold Kling.  Arnold buried the lede on this one so a hat tip to Tim Kane at Growthology.

I think that perhaps the most important trend of the past thirty years is the
increased importance of cognitive skills relative to physical labor. Obviously,
this has been going on for more than just the past thirty years, but during the
past thirty years we saw an acceleration. This has had a number of
consequences:

1. It changed the role of women. Their comparative advantage went from
housework to market work.

2. This in turn, as Wolfers and Stevenson have pointed out, changed the
nature of marriage. Men and women look for complementarity in consumption rather
than in production.

3. This in turn leads to more assortive mating, with achievement-oriented men
looking for interesting mates rather than for good maids.

4. This in turn leads to greater inequality across households. It also
fosters greater inequality among children. The children of two affluent parents
are likely to have much better genetic and environmental endowments than the
children of two (likely unmarried) low-income parents.

5. Inequality is exacerbated by globalization and technological change. If
your comparative advantage is basic physical labor, you have to compete with
machines as well is with workers from the Third World.

The net result is an economy that has improved considerably for people with
high cognitive skills, but which has improved only somewhat for people with
relatively low cognitive skills.

I have a bad feeling about this

by  Tyler Cowen in

Here is the latest on Tysons redevelopment:

Remaking Tysons Corner
into the second city of Washington will take a lot more than a new
Metro line and a downtown of tightly clustered buildings designed for
walking. It will take almost $15 billion in new roads and public
transportation.

Even in this age of sticker shock, that's a lot of money for a local project.  You'll recall my earlier prediction that Tysons will get the road widenings but not enough of the other changes needed to make it a walkable downtown; the road widenings will on net make things worse. Call me an apologist for suburbia if you wish, but I sooner view myself as an apologist for public choice theory.  Some parts of the redesign will be more popular than others and we will get a very unbalanced mix of reforms.  This is indeed what I predict:

The numbers also have prompted some proponents of dense development in
Tysons to argue that if the county pushes too many costly road
improvements and makes room for more cars, the vision could unravel. 

To simply insist that it "should be different," or to charge that I do not spend enough time criticizing interstate highway subsidies, is to miss the public choice point.  Now that the stimulus is up and running, you can see road widenings all over NoVa and they will be finished.  Who will put up the money for the rest of Tysons reform?

For funding, Fairfax officials say, they will look to the Obama
administration, which is committed to subsidizing growth projects in
urban areas. They hold out little hope from the Virginia Department of
Transportation, which this year slashed the county allocation for
secondary roads to zero. Given the millions of dollars Northern
Virginia has gotten for big projects such as the HOT lanes and new
Woodrow Wilson Bridge, "More state funding is pretty much politically
doomed," said Kathy Ichter, the county's chief of transportation
planning.

Stay tuned…

How well with the public option work?

by  Tyler Cowen in

Austin Frakt has a good post on this topic, excerpt:

I wonder how optimistic we can be about the degree of variation in
spending predicted by risk adjustment models. I think the answer is
“not very.” From the literature on health care risk adjustment (via this post):

Statistical models developed by scholars have relatively
low predictive power. Predicting ten percent of the variation in
[health] expenditure is considered good (e.g., Medicare Advantage’s risk adjustment model).
That means ninety percent of the variation is unexplained by the model
or chalked up to random error. An individual ought to be a better
predictor of his or her health expenditures than a model that cannot
include measures unobservable to the researcher. (How much better? I
don’t know.)

Expenses for some specific services are more predictable. Drug
expenses, for example, are persistent because individuals tend to use
the same medications year after year. The best statistical models of drug spending can predict about 55% of the variation in next year’s drug expenses, leaving 45% to random error.

That puts a reasonable cap at 55%, but only for very persistent
services, like drugs. Expect the best overall risk adjustment to be no
worse than 10% and no where near as good as 55%.

Private insurers should not be so worried but taxpayers should. The public plan looks game-able.

The middle, double-indented quotation is also from Frakt.

I also view the public plan as game-able, though through a slightly different mechanism.  I don't think individuals are such good judges of their future health expenditures (self-deception) and in this regard the adverse selection model has been over-promoted.  That said, private insurance companies can and will find ways of keeping these people off their books — poor service anyone? — and many of them will end up in the public plan.  The CBO confirms that the public plan will not be a major force for cost reduction.  And if you think we will succeed in using taxes and fees to get the private insurance companies to take on their share of these people, as they do in the Netherlands, well…I believe that is a battle they will win, after the fact, when the public is no longer watching the implementation of the details of the legislation.  It's one easy way of buying them off as a lobby.

Florida’s Public Option

by  Alex Tabarrok

Florida has a public option for property insurance.  Here is Randy Holcombe writing at The Beacon:

After Hurricane Andrew hit Florida in 1992 some Floridians were having difficulty purchasing homeowners’ insurance. (The reason: rates are regulated, and at the regulated rates some properties are too great a risk.) So, the state government formed Citizens Property Insurance Corporation, which is owned and operated by the State of Florida.

As originally envisioned, Citizens would charge rates above those charged by private insurers, to make Citizens the insurer of last resort. Nevertheless, Citizens found plenty of customers.

After two bad hurricane seasons in 2004 and 2005 property insurance rates in Florida rose, and in his campaign for the office, current Governor Charlie Crist promised voters that if elected he would see that their property insurance bills “dropped like a rock.”

One tactic he used was to change Citizens’ rate structure so it was competitive with private insurers. His idea, like President Obama’s idea with health insurance, is that with a public option, private insurers would have to keep their rates in line or risk losing customers to the government insurer.

…Today about 30% of homeowners’ policies are written by Citizens, which is the largest property insurer in the state. It’s about to get bigger too. The largest private insurer, State Farm, had a rate request rejected last year, and now is pulling out of the state altogether (for property insurance; they’ll still insure your car)….

Everybody in Florida knows Citizens is a fiscal time bomb. Already, every Florida insurance policy (on homes, boats, cars, etc.) pays a surcharge that goes to Citizens, but Citizens still doesn’t have sufficient reserves to weather a major hurricane. When one comes, Florida taxpayers will be on the hook for the bill.

The legislature knows this, and actually passed a bill last year that would have done a great deal to solve the problem by partially deregulating rates private insurers could charge. State Farm would have stayed in Florida had that bill taken effect, but it was vetoed by the Governor. The public option is displacing private insurance.

In Florida, the public option has meant a substantial socialization of insurance, subsidization of the public option by those who take a private option, and the creation of a fiscally-unsound public insurance company despite the subsidy.

What I’ve been reading

by  Tyler Cowen in

1. The Book of Basketball: The NBA According to the Sports Guy, by Bill Simmons.  Could this be the best 736 pp. book on the diversity of human talent ever written?  It starts slow but eventually picks up steam.  It's also devastatingly funny.  That said, if you don't know a lot about the NBA, it is incomprehensible.  (I could not, for instance, understand the section of Dolph Schayes because that was not the NBA I know.)  In the historical pantheon, he picks David Thompson, Bernard King, and Allen Iverson as underrated.  The 1986 Boston Celtics are the best team ever, he argues.  And so on.  I found this more riveting than almost anything else I read and yes I think it is very much a work of social science, albeit in hermetic form.

2. Paul Auster, Invisible.  Auster is back in top form.  The French, of course, think of him as a deeper writer than do most of his American critics and readers.  Is he more like Hitchcock (also appreciated early on by the French) or more like Starsky and Hutch?  Read this book and decide.  As usual, the truth lies somewhere in between.

3. Delirious New Orleans: Manifesto for an Extraordinary American City, by Steven Verderber.  An excellent photo-essay on all the marvelous signs and small architectural wonders trashed by Hurricane Katrina.  This book goes micro, not macro, and it catalogs a now-disappearing America from the age which I find most precious in our history.

4. Derrida, an Egyptian, by Peter Sloterdijk.  I'm spending some of next summer in Berlin so I've been trying to catch up on what they're reading over there.  (Any recommendations?)  On every page it feels as if Sloterdijk is intelligent, yet I came away empty-handed and feeling like a frustrated Robin Hanson ("why doesn't he just come right out and say what he means?).  No way should you buy the hardcover for $45.00, in return for 73 pp. of actual text.  Ultimately he's writing about the boxes, not writing about the world.  Yet at least three Germans loved it.

“The GDP Mirage”

by  Tyler Cowen in

The story, by Michael Mandel, is here.  Excerpt:

While the statistics don't account for it, there's good reason to
suspect intangible investments are falling. Companies are under
pressure to cut costs by reducing R&D expenditures and deferring
other crucial intangibles, notes Hulten. "Because these are expensed,
it looks like a pure win," he says. "You are not seeing the benefits of
the intangibles in the financial statements–only the costs."

There is much more of interest in this article.

Zimbabwe Inflation: The End of the Story

by  Alex Tabarrok in

As we went to press with Modern Principles: Macro we kept having to add zeroes to Zimbabwe's peak hyperinflation rate and move it up the table of world leaders.  In our final revision, Zimbabwe's inflation rate had hit 79,600,000,000% per month putting Zimbabwe in second place.  We wondered whether in our  second edition Zimbabwe would overtake the all time hyperinflater, Hungary (1945-1946) at 41,900,000,000,000,000% per month, but it was not to be.  As it turned out, we went to press just as the hyperinflation peaked and Zimbabwe's currency ceased to exist as a medium of exchange.  Steve Hanke at Cato has the end of the story: 

Ashes are all that is left of the Zimbabwe dollar – a remnant of
paper money. During Zimbabwe’s hyperinflation, foreign currencies
replaced the Zimbabwe dollar in a rapid and spontaneous manner. This
“dollarization” process was legalized in late January 2009. Even though
the Zimbabwe paper money remnant circulates alongside foreign
currencies, its real value is tiny, its use is limited, and its value
against the U.S. dollar is cut in half every two days.

Zimbabwe failed to break Hungary’s 1946 world record for
hyperinflation. That said, Zimbabwe did race past Yugoslavia in October
2008. In consequence, Zimbabwe can now lay claim to second place in the
world hyperinflation record books.

Final Postscript: In 2009, Zimbabwe's central banker, Gideon Gono, was awarded the Ig Nobel prize, not, as expected, in economics but in mathematics for, in the prize committee's words, "giving people a simple, everyday way to cope with a wide range of numbers – from very small to very big – by having his bank print bank notes with denominations ranging from one cent ($.01) to one hundred trillion dollars ($100,000,000,000,000)."

Two factors shaping the economics profession today

by  Tyler Cowen in

I see two significant long-term trends, both of which are probably unstoppable:

1. In percentage terms, fewer and fewer economists are Americans by birth and upbringing.  Non-Americans are less likely to be fully fluent in English, which encourages mathematics.  Non-Americans also tend to be less market-oriented in their thought.  In any case they are less likely to stand along traditional U.S. ideological fault lines or even share ideological fault lines with each other.

2. Empirical work has a shorter half-life than does theory, at least on average.  Yet most people today, including at top schools, do empirical work.  There will be fewer giants and more middling-size figures of temporary import.  If you tenure a top empirical economist, what does your department look like when he or she is 60?  What percentage of these people are skilled enough, or care enough, to continue reinventing themselves?  Maybe some top departments won't look so top in twenty years' time.  

I believe also that the higher relative status of empirical work favors the status of women in the economics profession.

Field experiments have a longer half-life than regressions, precisely because they are so costly to redo.

Why do other countries care more about health care cost control?

by  Tyler Cowen in

Ralph Sisson, a loyal MR reader, asks me:

Why do the other first world countries focus on costs more than we do? They also pay for care, for the most part, via insurance. Even countries with the same level of personal income focus more on costs.

Putting normative questions aside, let's focus on the positive comparison.  I can think of a few factors here:

1. Americans have the "anything I want, whenever I want it" mentality of consumer spending.  Look at Sunday closing laws in Europe.

2. Because of an accident of history, we covered old people first with government $$ and that set a precedent.  It's especially hard to say no to people who are close to dying and that got us out of the habit of saying no.

3. Americans are more likely to have a "can do" mentality than are people from most other countries.

4. Americans are more likely to have a self-image of being the richest people in the world and not facing financial limits.  We derive more of our self-esteem from this self-image.

5. Compared to some Asian cultures, the more individualistic American approach lends itself to the view that an individual life must be extended at all costs.

6. The U.S. regulatory climate tends to be more pro-business, which in this context means pro-doctor and pro-hospital.  Those people are always willing to tell us to do more and spend more and we seem always willing to listen.

7. Tying health insurance to employment makes it harder for people to see what they are really paying and how much it lowers their net wage.

You can try the cross-sectional approach but with France and Switzerland as other big per capita spenders, I am not sure where this leads.  The fully governmental systems, such as in the UK, have low expenditures but it's also an open question whether low prices and low quantities will follow from the same explanatory factors.

Any thoughts?

How to improve basketball

by  Tyler Cowen in

Tim Miano writes to me:

I am a longtime MR reader. I have a hypothesis about how basketball could be much more exciting, and I can't for the life of me figure out why people who are into sports haven't widely considered it (as least as far as I know).

Here is my simple thought: games should be played as best 4 out of 7 periods — perhaps 7 minutes each or perhaps slightly varied period lengths, 6 – 8 minutes long. Maybe the number or usage of timeouts or foul-outs would need to be fiddled with. Maybe playoffs would be slightly different. But that's pretty much it. The best part of a basketball game is almost always the last few minutes, and it seems like the incentives for exciting play would persist more throughly under this design. Teams would need more endurance and deeper benches, but that seems like a good thing. Other than obsoleting old records and the tradition of the game, I can't think of any downside. Maybe marginal cost v. marginal benefit, à la owners/players wouldn't extract much more money from fans but would have to work harder? Maybe the length of games would vary too much for broadcasters to be happy? But still, a *much* more exciting game.

My Hansonian observation is that fans seem to prefer basketball seasons with a dominant player (Jordan) or perhaps a dominant match-up (the old Lakers vs. Celtics rivalries).  For the season as a whole, we don't seem to want too much suspense.  Does suspense distract us?  Are we really more interested in multi-tasking?  Or does suspense make it harder to affiliate with the idea of truly skilled and noble players?  If we are suspicious about having too much "suspense" across the course of the season (call it parity, if you wish), might we be suspicious about having too much suspense in the course of a single game?

What's so great about suspense anyway?

Here is Jeff Ely on related issues.

Why are Americans more risk averse about medicine than Europeans?

by  Alex Tabarrok in

The stereotype is that Americans are more risk-loving and entrepreneurial than the less-rugged Europeans who instead seek shelter under the umbrella of the welfare state.  Yet when I talk about the FDA I point out that for many decades (from say the late 1960s to PDUFA in 1993 and perhaps again more recently) the FDA lagged behind its European counterparts in approving new drugs.  U.S. risk aversion in drug approvals is especially peculiar since the major scare which increased FDA powers and slowed down approvals was the thalidomide disaster but thalidomide was approved in Europe not in the U.S.  Nevertheless, we were the ones who got scared.

More recently, Scott Gotlieb argues that the Europeans have pushed H1N1 vaccine production forward using adjuvants and novel production techniques while the US has chosen less risky (some might say less entrepreneurial) older approaches.

The tort system is sometimes blamed for excess U.S. risk aversion but in both these cases it's mostly the U.S. government which is more risk averse than its European counterpart.  Moreover, the US government is more risk averse over medical matters and not say about sending troops abroad or about providing a safety net for other risks.

I think this is a puzzle.  Why has the U.S. government been more risk averse with regard to medicine than European governments but less risk averse in other areas?