“Do you feel lucky kid?”

Brad DeLong offers a useful chart of the U.S. federal budget deficit, obviously the picture is grim.

All will be well, however, if the growth rate of the economy exceeds the real rate of interest (it is a little more complicated than this; Alex and I still cannot agree on the exact conditions required). In economic parlance, “g > r”. We could then simply grow out of our debt over time, here is some heavy lifting on the topic.

Now what is the chance of this rosy scenario?

My stab says 35 percent. g has exceeded r for a good bit of the last dozen years. But will high rates of productivity growth continue?

I guess a 20 percent chance that some catastrophic event, possibly related to terrorism, will bring the world economy to a crashing halt.

I guess a 20 percent chance that aging demographics will return our high rate of productivity growth to earlier levels.

I guess a 25 percent chance that our high rate of productivity growth will disappear for no discernible reason whatsoever.

That gives us a 35 percent chance of the rosy scenario. I once asked Daniel Drezner, Jane Galt, Alex, and Randall Parker their best guesses at the odds; now that was a fun conversation. But in the meantime, we are playing Russian Roulette with our future.

And if that doesn’t worry you, this article about our failing pension systems will.

Haitian update

Can it get worse? With Haiti the answer is always yes. This is from The Independent:

It now looks certain that more than 2,000 Haitians lost their lives in the flooding that followed Tropical Storm Jeanne last weekend. A similar number drowned in floods in May…simply a light rainstorm that swept away their shanty homes.

That is just the beginning. At least a quarter of a million Haitians face two more coming storms. They have no food and many are still living on rooftops. Human and animal corpses are drifting down the dirty river, which currently provides the only source of drinking water. Starving dogs have been seen tearing off the limbs of human corpses. The morgues are not working and there is risk of a large-scale epidemic. And social cooperation has broken down. The Washington Post reports:

Hungry, thirsty and increasingly desperate residents attacked each other in a panic Thursday to get scarce food and water as workers struggled to bury hundreds of corpses five days after the city was struck by Tropical Storm Jeanne.

To make matters worse, radical deforestation, caused by ill-defined property rights, may make Haiti a virtual desert by the end of the decade. In the 1950s, 25 percent of the country was forest, now it is 2 percent. Floods of this kind will only get worse.

Outside of wartime, Haiti represents new depths in how bad things can get. The current standard of living is well below that of most hunter-gatherer societies. We don’t spend much time studying economies with negative real rates of return; I am sorry to report that developing such a theory is becoming increasing relevant.

The Fable of the Cows

Here is a contrasting story about deforestation:

Do cows improve the view? That is a question which interests the Swiss government, given that it subsidises farmers heavily to graze their cows in the mountains. One justification for the subsidy is that cows eat young trees, and fewer trees mean better vistas of the sort beloved by tourists. But just how much do cows improve the view and where do they provide most value for money?

To help answer these questions, Kai Nagel and his colleagues at the Swiss Federal Institute of Technology, in Zurich, have developed computer models of the Alps and populated them with virtual tourists (or “autonomous agents” in computer-speak) that can wander the electronic landscape. The agents are programmed to behave, as far as possible, like real tourists, and to record their impressions as they go.

Here is the full story. I do not favor the heavy burden of Swiss agricultural subsidies, but it is rarely appreciated how much the “pristine” landscapes of that country owe to careful human planning. Thanks to James Barnett for the pointer.

Proxying Human Capital

One of the most puzzling results in the literature on economic growth is that it is difficult to show that increases in human capital increase economic growth. In regressions, sometimes human capital shows up positive and significant but sometimes it’s not significant, sometimes it’s null and sometimes it’s negative depending on the precise set of countries and time periods examined. (See Tyler’s earlier post for further skepticism on the link between human capital and growth).

A team of economists at the University of Ottawa, working with Statistics Canada, has concluded that the problem may be one of measurement. They argue that literacy scores (i.e. actual skills) might be a better proxy for human capital than the typical measure, years of schooling, and furthermore, literacy scores are not subject to the usual problems related to the comparability of education systems across countries. Their human capital indicators are based on the results of the 1994 International Adult Literacy Survey, as nicely explained by The Economist:

They use the International Adult Literacy Survey, which tested 16-65-year-olds in [1994], to estimate the skills of people in 14 countries entering the workforce at different times between 1960 and 1995. This is achieved by looking at tests of different age cohorts. For example, the literacy levels of people aged [51-59 when tested in 1994] are used to estimate the competencies of 17-25-year-olds in 1960, and hence the human-capital investment that had just been made in the course of that cohort’s education.

The biggest flaw of that study is that the indicators impute levels of literacy to individuals earlier in their lives, without correcting for the adjustement in the quality of human capital that occurs during an individual’s lifetime through learning and human capital depreciation, however, as The Economist notes, “the fact that it finds such a strong correlation between skills and growth gives a significant boost to human-capital theory”. Click here to read the executive summary or click here to read the entire study.

More on what Prediction Markets Mean

Michael’s post on Charles Manski’s paper challenging prediction markets has been widely discussed. Manski’s paper is difficult and a number of people wrote asking me for further explanation. Luckily, Daniel Davies has done some of the heavy lifting. Michael also offers further comments here.

My take: Manski shows that the market price is not, for example, the mean subjective belief of the market participants. But who said it was? The argument of prediction market proponents is that the market price is a good, perhaps the best, predictor of the future event. Manski does not challenge this argument. In particular, Manski does not show (or try to show) that there is an alternative way of aggregating individual information that results in better predictions. In this sense, I think the Manski paper is something of a red herring.

I would not claim, however, that information markets cannot be improved. Movements in the price of oil tell us something about trouble in the Middle East. But the oil market was not designed to elicit information about the Middle East. The information in markets is an accidental byproduct of trading. It would be a real surprise if the rules that make for good oil trading are the same rules that make for good prediction of events in the Middle East. Sundering information markets from trading markets, therefore, is a big advance and one that is likely to lead to better market design for information revelation, perhaps with help from papers like Manski’s (contra Daniel, who argues that to work well information markets must be tied to trading markets).

Addendum: Victor, a former student of Manski’s, at the Dead Parrots Society adds considerable wisdom to the discussion.

Who volunteers the most?

The Norwegians come in a clear first, with 52% of their adult population doing volunteer work in a significant way. The UK and Sweden come in second and third, with 30% and 28% rates of volunteering. Uganda is next with 23% and then the United States with 22%.

Of the cited countries Mexico comes in last with a volunteering rate of 0.1%. Eastern Europe, Egypt, and Japan fare poorly as well. I would like to see follow-up work on whether these low rates are correlated with tight family structures, or whether they simply represent a low rate of cooperation overall. Might a high aggregate level of volunteering be a response to loneliness and lack of community within the family, or are the two forms of cooperation complements?

The information is from Global Civil Society, by Lester Salamon, S. Wojciech Sokolowski, and Associates. Here is the home page of the research project, with links to data as well.

The same volume (p.78) offers a carefully constructed “civil society index,” although for my tastes it does not distinguish enough between private and public sector efforts. The top five countries for civil society are Netherlands, Norway, U.S., Sweden, and the UK; some of the East African nations (Tanzania, Uganda) score surprisingly well. Mexico, Romania, and Pakistan do poorly.

How the Chinese will corrupt Hong Kong cinema

Hong Kong produced many of the coolest movies of the 1980s and 1990s. But we have entered more troubling times:

…the mainland Chinese government passed an initiative called the Cooperative Economic Partnership Agreement. CEPA was basically a bone-toss to various Hong Kong industries–it offers them small tax breaks on their imports to the mainland. But to the Hong Kong film industry, CEPA offered more: the chance for Hong Kong films to be considered “local” (as opposed to foreign) for the purposes of mainland Chinese distribution. This is a big deal, because China imposes limits on foreign films–only about 25 are allowed in each year. On paper, at least, CEPA looks to be a lifesaver for Hong Kong film.

But there’s a catch–a big one–which Pang explained to me when we spoke in his office. “In order to get in with CEPA, one-third of your cast has to be mainland actors, and you have to have a mainland production partner. OK, but then, you have to submit your script to the Chinese censorship guy. And you submit your film after you make it. They have rules: You can’t make movies about ghosts. You can’t have sex. Forget about politics. And bad guys always have to lose; good guys must always win.”

Pang’s Men Suddenly in Black is about four errant husbands who go out on a yearly mission to get themselves laid. They romp through Hong Kong’s brothels and nightclubs, swapping juicy Cantonese double-entendres as they go. I’m shocked when Pang tells me that this film actually got screened in mainland China. “They dubbed it into Mandarin and just wrote new dialogue over the parts that were too heavy. Like when they were in the massage parlor in Mongkok, in the new version they were just someplace waiting for a friend. I couldn’t believe what I was hearing.”

Here is the full story.

Bonuses for good doctors

1. Over the last year, six California health plans have been monitoring the performance of 45,000 doctors. The top performers will split a bonus pool of $40 to $60 million

2. 35 health plans, covering some 30 million patients, now tie doctor bonuses to performance. Preventive care and measure to encourage “patient follow-up” receive special rewards.

3. Bonus-based coverage is expected to double in size over the next year.

4. Some experts predict that pay-for-performance eventually will account for 20% to 30% of what the federal government pays health care providers.

The insurance companies feel that better doctor performance will lower their long-run costs. Many doctors don’t like these incentives. Their financial risk is increased, and they cannot always control how well the patient sticks to the prescribed regimen. Still, if greater medical skill does not show up in the numbers, over a reasonably large sample of patients, why do we spend so much time and money educating doctors?

I predict that as information technology progresses, and performance becomes easier to measure, the American economy will resort to many more bonuses of this type, across many professions.

Here is the story, WSJ subscription and password required.

By the way, regular MR readers will not be surprised to learn who first wrote up the idea of rewarding doctors for superior performance: our ever-inventive colleague Robin Hanson. More recently Harvard economist David Cutler has promoted the idea as well.

For those who care: Here is a thorough AEI estimate of the cost impacts of the Kerry and Bush health care plans. If you are concerned about our fiscal future, this makes for scary reading.

The growing cost of textbooks

As many textbooks now break the $100 barrier, complaints are rising

Some college and public-interest groups charge that the publishing industry is forcing textbook prices higher by introducing unnecessary new editions and packaging books with expensive study materials that not all students want or need. The National Association of College Bookstores says wholesale prices of college textbooks have risen nearly 40 percent in the past five years.

And students are finding that many of the same books are sold overseas at much lower prices.

Note, by the way, that textbook prices have not risen as rapidly as tuition and fees (admittedly the latter is difficult to calculate in real terms, given different way of valuing financial aid). This makes it harder for universities to make a stink.

The economic problem is simple: professors assign a book without worrying much about the cost that students will pay. In fact a pricey book might be a nice way to drive down your enrollment and lower your workload.

But do we really need Congressional hearings on the matter?

How about this for a simple solution? If a professor can lower the price of classroom materials, the university adds one-tenth of the class’s gain to that professor’s salary or research account. Yes in the short run there might be inefficient skimping but in the longer run prices should come down. Some professors, of course, might resort to teaching their classes through blogs. As the subtitle of this blog notes, “Small Ideas for a Much Better World.”

Arnold Kling, a master expositor of economics, has another excellent solution.

Bounty hunters for the IRS

Here is an interesting tidbit from the FTC report on spam bounty that I discussed earlier this week. The IRS has had a bounty system for tax cheats since 1967. In the first thirty years of the program more than seventeen thousand infomants earned $35.1 million, in the process helping the IRS to recover $1.2 billion. That’s a pretty good return, even if some of the ex-wives would have snitched anyway.

You can’t take it with you

False. The owner can sell the forest. As a result, the owner of a forest has an incentive to continue to seed it even if seeds planted today won’t produce trees until after the owner is dead. The same idea applies to any long-lived productive asset.

I think this insight is very beautiful. It’s precisely the fact that the forest is owned that gives the owner an incentive to take into account how other people value the forest.

The basic logic doesn’t require perfect competition or fully efficient markets but if these assumptions do hold then the private owner will choose investment decisions exactly as would a “social planner.”

Bonus questions: What does the logic say about the argument that managers of publicly owned corporations will focus too much on quarterly earnings and not enough on investments that only pay off in the long-run?

What does the logic say about the incentives of a politician who controls an asset like a forest but doesn’t own it?

As usual, and in advance of the Crooked Timber complaints, the points are for thinking about the problem in a logical way, laying out the assumptions and weighing which may or may not hold in various circumstances, and not for arriving at “the answer.” Sorry for being pedantic, but I am a professor.

Why reading Homer’s Iliad is good for you

Reciting the Iliad could have epic effects on your health. German physiologists have recently shown that such poetry can get your heart beating in time with your breaths. This synchronization may improve gas exchange in the lungs as well as the body’s sensitivity and responsiveness to blood pressure changes.

The poem’s use of hexameter — six rhythmic units per line — is seen as especially important to this result.

Here is one brief account, see also the October issue of Scientific American, p.29.

Erratically Changing Labor Market Expectations

In From the Valley to the Summit: The Quiet Revolution That Transformed Women’s Work, Claudia Goldin informs that

…in the early to mid-1960s the labor force plans of young women, 14 to 21 years old, reflected the current labor market work of their mothers, their aunts, and possibly their older sisters. The expectations of young women regarding what they planned to do when they were 35 years-old were more in line with what older women were currently doing than with what the younger women would actually be doing in 15 to 20 years. Their expectations about their future employment were inconsistent with what they eventually did. But in the late 1960s and the early 1970s something began to change. Young women (14 to 21 years old) when asked by the NLS Young Women (1968) what they would be doing at age 35 began to offer answers that were more consistent with their actual futures. In 1968, independent of their age at the time, about 30 percent said they would be in the labor force at age 35. But in 1975 about 65 percent said they would be [see figure].

This change in labor market expectations was accompanied by an increase in educational investment and radical changes in educational concentrations as women shifted from majors that were job- or consumption-oriented to those that rewarded long-term investment in a career.

So what was the main driver behind those changes? According to Goldin, it was the birth control pill:

…the Pill lowered the costs to young, unmarried women of pursuing careers, particularly those involving substantial, upfront investments of time. The Pill fostered women’s careers in two ways. A young college woman in the mid-1960s who was considering whether or not to enter a program involving a considerable investment in her time had to factor into this decision its impact on her personal life (e.g., social life, marriage chances after the career investment period). Sex was highly risky in a world without a highly effective, female-controlled, and easy to use contraceptive such as the Pill. A pregnancy could derail a career. The Pill had a direct effect by reducing the risk, and thus the cost, of having sex. The Pill also had an indirect effect because it led to an increase in the age at first marriage and thereby produced a “social multiplier” effect. The Pill virtually eliminated one potent reason for early marriage and for many of the social trappings (e.g., going steady, engagements) that led to early marriage. With more men and women delaying marriage for many years after college graduation, the decision of any one woman to delay marriage to pursue a career meant that she would reenter a marriage market that would not be as depleted.

via The NBER Digest

Queue Jumping in Canada

The Canadian health care system is falling apart. Bill Binfet needs both knees replaced. He waited 4 months to get an appointment with a specialist who then put him 290th on a waiting list. It’s been a year and still no surgery despite the fact that his arthritis is now so bad he has bone grinding on bone.

In desperation, Binfet has placed an ad in the local paper offering to buy someone else’s place on the waiting list. The provincial health care minister tut-tuts and says “it would be unethical for a doctor to trade places on a surgical wait list for an exchange of money.”

But as Colby Cosh points out that’s not what Binfet proposes:

…the established bioethics of medicare – whether you approve of them in general, or not – forbid us from allowing patients to queue-jump using inducements to physicians. There is a theoretical hazard, the story goes, that too much of that sort of thing would cause the best doctors to abandon public-funded practice altogether. Fair enough. But Binfet’s offer creates no such danger. He proposes a zero-sum, wholly voluntary exchange between patients for access to the rationed, public, monopoly service. Where’s the ethical problem?

I agree, adding only that what Binfet proposes is positive sum not zero-sum! Binfet will be better off, the recipient of the cash will be better off and no one will be worse off. Contrary to the assertions of economist’s, however, even Pareto optimal policies are sometimes opposed. Try it out on your students.

Thanks to Eric Crampton for the pointer.