How well do they feed the Marines?

I do not know.  Or how about the Army, Navy, or Air Force?

But my suspicion is this: if you are in the Armed Services, you have the chance to eat better than the average American.  Not at gourmet levels, but better than the median.  Better taste and better nutrition.  The median person in the United States eats some pretty bad food.

And how much does this food cost our government and thus our taxpayers?  Again, I am curious to hear what you know.  But I’ve read lots of stories about thousand dollar hammers and toilet seats, but I have never heard a peep about the Pentagon paying $70 for a Brussels Sprout. 

So, I’ll also predict that this food comes at reasonable cost.  We therefore seem to have above-average food service at OK prices.   

Given that possibility (fact?), how many of you would advocate government provision of food for the entire economy?  How many of you would advocate government-run food finance for everyone, and not just for the poor?

Show of hands? 

How many of you know what I am really talking about in this post?

Don’t forget this post either.

Addendum: The successes of the VA system stem most of all from avoiding the cost-escalating features of "fee-for-service" for medical suppliers, and not from its single-payer features.  Not so many people are willing to advocate abolishing fee-for-service for most of the medical sector; here is further discussion.  But unless you abolish fee-for-service, the successes of the VA system are not a replicable model on a larger scale.  And it is much easier to workably abolish fee-for-service within the Armed Services than across the entire U.S. medical sector.

New money does not have to enter the loanable funds market

It is one of the standard claims of Austrian business cycle theory that the "new money" enters the economy through the loanable funds market.  Yes it usually does, but it is important to recognize that this happens because of decisions by banks, not because government somehow forces the money to go there.

Consider an expansionary open market operation.  Banks now hold fewer T-Bills and more cash.  Presumably the cash is more liquid (though if you are puzzled by this assumption in the context of a bank, join the club, Brad DeLong is a member too), so the banks will do something liquidity-like with it.  That could mean making a loan, but it also could mean spending the money to refit the ATM machines, or for that matter increasing dividends to bank shareholders.

But no, bank managers make an independent judgment that there are loans worth making.  Of course sometimes they are wrong.  But they know they got this new money through open market operations.  And they decided to go ahead and make the loans anyway.  They didn’t have to.  They could have re-routed the new money to some other injection path altogether.  But they didn’t.

That is another reason why the Austrian theory of the trade cycle is as much a market failure theory as a government failure theory.

The Economics of Religious Innovation

Here’s a story from the WSJ about a temple in Hyderabad, India that capitalized on the growing IT industry.

Hoping to capitalize on all the activity, technical colleges
sprouted up in the city’s outskirts near Mr. Gopala Krishna’s temple. Students
started trickling by on their way home from school; many complained about their
failed attempts to secure U.S. visas. That gave the priest an idea to sell the
students on the deity by giving him a new persona, "Visa God." Mr. Gopala
Krishna counseled the students in English, then told them to walk around the
temple 11 times to get their wish. "I used to say, ‘Go, this time you’ll get
it,’" he recalls.

Soon, Mr. Gopala Krishna started seeing dozens — then hundreds
— of new visitors a day. In 2005, some local newspapers wrote about the Visa
God, just as new U.S. visa restrictions were taking a toll. Mr. Gopala Krishna
and his relatives also launched a Web site and a newsletter called Voice of
Temples, with features like a primer of sample prayers for help in visa
interviews.

…Now devotees of the Visa God say they have to reach the temple by 6
a.m. to avoid the daytime rush.

The return of Hayek?

Except his name is John Taylor:

Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.

Here is the paper.  A Hyman Minsky fan, however, might challenge whether this data really supports Hayek’s theory.  An alternative theory is that markets are bubble-prone and that easy monetary policy was simply a trigger that set off an irrational speculative excess.  The Austrian story is that "the government distorted price signals to the market."  Are those two accounts really so different?  Do we need metaphysics to resolve that question?  Take the classic "thin skull" case in the law.  Austrians won’t describe it this way, but they are postulating a very thin skull for markets and then blaming government for the disaster which results from government’s glancing blow to that skull.

Keep in mind that no entrepreneur looks at price signals exclusively, rather they interpret prices in the context of the real economy and other bits of knowledge  Was it so hard for investors to say to themselves?: "I see that one price (short-term rates) has changed in favor of greater housing investment.  But other parts of my brain tell me that real estate prices won’t go up forever, levered positions are dangerous, and that I should be cautious."

Let’s say that the government subsidized the price of bananas, you bought so many bananas, put them on your roof, and then the roof collapsed.  Is that government failure or market failure?  The price was distorted, but I still say this is mostly market failure.  No one made you put so many bananas on your roof.

If Minsky and Hayek are running in a race for interpreting the last two years of the U.S. macroeconomy, Hayek has something to offer but so far Minsky is in the lead.

Planes to Nowhere

Imagine an aviation system in which planes fly
two-thirds empty, fares are as low as $46 and the government pays up to
93% of the cost of a flight….that system exists in the USA – and quietly is expanding…

That is from USA Today talking about the millions spent on the "Essential Air Service" program.  Do you think that the program protects small rural communities?  Nah, try small community airlines. 

…as Congress has escalated subsidies through the years, the program has
increasingly paid for flights between major airports and places that
are neither rural nor isolated.  [For example,] in October, the DOT agreed to one of the
program’s largest subsidies ever – $2 million a year to Atlantic
Southeast Airlines. That pays 60% of ASA’s cost to fly two round-trips
a day between Macon, Ga., and Atlanta’s Hartsfield-Jackson
International Airport, 81 miles away. The airline projects that passengers will pay an
average of $78 for a one-way ticket – and that flights, typically on
planes with fewer than 70 seats, will run 83% empty.

Need I tell you that the program was supposed to be temporary?  Here’s some more data from USA Today.

Community Destination Annual subsidy Subsidy per passenger Average pass. per flight
El Dorado, Ark. Dallas/Fort Worth $923,456 $250 3.1
Devils Lake, N.D. Minneapolis $1,329,858 $203 5.7
Worland, Wyo. Denver $797,844 $187 4.2
Bradford, Pa. Pittsburgh $1,217,414 $174 3.6
Jamestown, N.Y. Pittsburgh $1,217,414 $135 4.7
Salina, Kan. Kansas City $487,004 $131 2.1

Sources: Department of Transportation, USA TODAY analysis of DOT and airline data

Daniel Kahneman on happiness and wealth

We had thought income effects are small because we were looking within
countries. The GDP differences between countries are enormous, and
highly predictive of differences in life satisfaction. In a sample of
over 130,000 people from 126 countries, the correlation between the
life satisfaction of individuals and the GDP of the country in which
they live was over .40 – an exceptionally high value in social science.
Humans everywhere, from Norway to Sierra Leone, apparently evaluate
their life by a common standard of material prosperity, which changes
as GDP increases. The implied conclusion, that citizens of different
countries do not adapt to their level of prosperity, flies against
everything we thought we knew ten years ago. We have been wrong and now
we know it. I suppose this means that there is a science of well-being,
even if we are not doing it very well.

Here are Kahneman’s full remarks.  He also presents a more complete theory of happiness, namely that is determined by basic personality type and which activities you are able to do during the course of your day, the latter being a function of wealth.  That excerpt is from this post by Arnold Kling, on how people have changed their minds, read this one too.  Here is the core source, highly recommended, it is one of the best hour-wasters you will get this year.

Racial mortality gaps

I show
that quality of the clinics or doctors is not the underlying reason for racial differences in black and
white mortality….Differences in patient self-management trigger a racial mortality gap even
when access and treatment are equalized.

But does that paper arrive at a sensible conclusion?

Considerable reductions in medical costs could be achieved
by instructing patients about the importance of strictly following the therapy regimen.  A special
emphasis on educating minorities will have the added benefit of reducing the black-white mortality gap
by at least two-thirds.

I am more likely to think that peer effects from the early years of life are difficult to reverse by education and persuasion alone.  Here is the paper.  That’s from Emilia Simeonova, who is on the job market this year from Columbia.

Los Angeles fact of the day

With less than two weeks left in the year, Los Angeles is on track to record its lowest homicide rate since 1970.

   

That year, 394 people were killed in the city as the war in Vietnam raged on and the Beatles called it quits.

   

As
of Dec. 15, 379 people had been killed in Los Angeles this year, with
about 200 of those incidents gang-related. The overall homicide rate is
down 17 percent from last year.

One of the sharpest declines is in gang-related killings.  Here is the link, hat tip to Angus, and no, this is not a pre-timed post.

How To Spend It

Have you ever read that FT supplement and wondered how and why the mix of products is changing with increasing income inequality?  Anna Yurko tackles this question:

The
distribution of consumer incomes is a key factor in determining the structure
of a vertically differentiated industry when consumer’s willingness to pay
depends on his income. This paper computes the Shaked and Sutton (1982) model
for a general specification of consumers’ income distribution to investigate
the effect of inequality on firms’ entry, product quality, and pricing
decisions. The main findings are that greater inequality in consumer incomes
leads to the entry of more firms and results in more intense quality competition
among the entrants. This is due to the elasticity of consumer demand for
quality being higher in more inegalitarian economies. More intense quality
competition among firms causes them to locate their products in higher ranges
of the quality spectrum, closer to each other, decreasing the degree of product
differentiation. Competition between more similar products tends to reduce
their prices. However, when income inequality is very high, the top quality
producer chooses to serve only the rich segment of the market, and the low
price elasticity of demand of these consumers allows him to charge a higher
price. The conclusion is that income inequality has important implications for
the degree of product differentiation, price level, industry concentration, and
consumer welfare.

My version of the argument is this: growing income inequality means greater elasticity of demand, thus causing quality competition to displace price competition for some market segments.  More concretely, there is often more profit from serving the very top, who will always pay more for something just a wee bit different or a wee bit better.  So stay away from producing the mid-level cheeseburger, where price elasticity of demand will kill your profits.  You can’t charge the rich very much for it, and the presence of the poor keeps the price down for the middle class.  Here is the paper.  Anna is currently a job market candidate at the University of Texas, here is her CV.