Update on housing price insurance
Just in time for the apparent top of the housing market, the Chicago Mercantile Exchange is introducing futures and options on housing prices in 10 cities for the second quarter of 2006. (Here’s an overview of the products, and CME’s White Paper on the topic.)
Here is the Slate article.
Addendum: Here is further analysis, from a new blog on risk markets.
How to interest the public in economics
We should have more debates like this.
Water of Life
While most countries are committed to increasing access
to safe water and thereby reducing child mortality, there is little consensus
on how to actually improve water services. One important proposal under discussion
is whether to privatize water provision. In the 1990s Argentina embarked
on one of the largest privatization campaigns in the world, including the privatization of local water
companies covering approximately 30 percent of the country’s municipalities.
Using the variation in ownership of water provision across time and space generated
by the privatization process, we find that child mortality fell 8 percent in
the areas that privatized their water services and that the effect was largest (26 percent) in the poorest areas. We check the robustness of these estimates using cause-specific mortality.
While privatization is associated with significant reductions in deaths from
infectious and parasitic diseases, it is uncorrelated with deaths from causes
unrelated to water conditions.
That is the abstract to a very important paper, Water for Life: The Impact of the Privatization of Water Services on Child Mortality, by Sebastian Galiani, Paul Gertler and Ernesto Schargrodsky in the February 2005 issue of the JPE. (free working paper version).
In theory, water services are not an easy thing to privatize well because of natural monopoly problems and because some of the benefits of clean water are externalities. In practice, however, governments in developing countries do such a poor job at providing water that there are large potential gains to privatization even given such problems.
See also Tyler’s post Will the Middle East run out of water? for more on where water privatization may have benefits.
Hello, I’m Johnny Cash
I’d always thought that Sun Records and Sam Philips himself had created the most crucial, uplifting and powerful records ever made. Next to Sam’s records, all the rest sounded fruity. On Sun Records the artists were singing for their lives and sounded like they were coming from the most mysterious place on the planet. No justice for them. They were so strong, can send you up a wall. If you were walking away and looked back at them, you could be turned into stone. Johnny Cash’s records were no exception, but they weren’t what you expected. Johnny didn’t have a piercing yell, but ten thousand years of culture fell from him. He could have been a cave dweller. He sounds like he’s at the edge of the fire, or in the deep snow, or in a ghostly forest, the coolness of conscious obvious strength, full tilt and vibrant with danger. "I keep a close watch on this heart of mine." Indeed. I must have recited those lines to myself a million times. Johnny’s voice was so big, it made the world grow small, unusually low pitched – dark and booming, and he had the right band to match him, the rippling rhythm and cadence of click-clack. Words that were the rule of law and backed by the power of God.
That is from Bob Dylan’s Chronicles, volume I. And I am picking the film to win Best Picture this year, whether or not it deserves it.
Europe Central
A generation before, the Iron Chancellor had observed: I’ve always found the word Europe on the lips of those statesmen who want something from a foreign power which they would never venture to ask for in their own name.
That is from William Vollman’s Europe Central, which just won the National Book Award for Non-Fiction [correction: Fiction]. The Amazon reviews make it sound daunting, but so far (p.32) it is great fun. If you’re reading it, add your opinion in the comments.
Tim Harford, Sebastian Mallaby, and Tyler Cowen
At AEI, Tim is the star, here is the video, top right of the link. Here are various blog posts on Tim’s book. Tim will be speaking at GMU on the evening of December 5th (more details to follow.) Sebastian’s The World’s Banker, about James Wolfensohn and the World Bank, is perhaps the best book on a bureaucracy I have read.
Taiwanese national health insurance
Paul Krugman, in a recent column, cited Taiwanese national health insurance as a success. I have been unable to form a clear picture of how the Taiwanese reforms are working (albeit using only Google). Nonetheless Tzuhao Huang, one of my Taiwanese Ph.d. students, sent me the following article:
Once the cornerstone of social development, Taiwan’s National Health Insurance (NHI) will teeter on the brink of demise if public resistance to premium hikes continues, foreign health experts observed at an international symposium to celebrate the NHI’s 10th anniversary in Taipei yesterday.
Although the rest of the world envies Taiwan for its success in providing easy, affordable and universal healthcare, Taiwan’s NHI is suffering from a recurrent financial crisis that also besets other nations like the UK, US, Germany and South Korea. As in these countries, health insurance is a highly politicized issue in Taiwan.
"Taiwan NHI’s financial problems stem from two factors: people’s mindset and politicians’ intervention," said William Hsiao, a professor of economics at Harvard University who helped design the NHI a decade ago.
In Hsiao’s opinion, the government failed to incorporate public participation at the launch of the NHI a decade ago. Deprived of adequate information, Hsiao said, people soon developed "free-lunch syndrome" and go doctor-shopping. "Taiwanese people think that they don’t need to pay more since they’ve got NHI. In fact, the rise of insurance rates is an inevitable trend as the society grows older, richer and demands more medical care," Hsiao said.
As Taiwan matures from a one-party state to a vibrant democracy, the insurance rate has increasingly become a bargaining chip in party politics, according to Hsiao. When the financing of the NHI was legislated under an authoritarian system, the executive branch was empowered to raise the premium rate whenever the program faces a deficit. But when faced with the opposition-dominated Legislative Yuan that now exists, the executive branch has lost its power and political conflicts flare up.
Here is information on the origins of the system. Uwe Reinhardt suggests that premium hikes will keep the system solvent, so file this under "Developing…" But keep in mind:
a) these strains are arising while Taiwanese health care is only 4.6 percent of gdp, and,
b) politicians are resisting necessary premium hikes
My worry is that U.S. national health insurance will be used to win votes, and not to correct micro-imperfections in the insurance market. Let’s say that you are a left-wing blogger, and, for purposes of argument, that your entire critique of the Bush Administration is correct. Remember, this guy was re-elected. You are relying on these very same voters, and this very same "policy correction mechanism" to make politicians accountable for a well-functioning health care system. You should hear my in-laws or my mother complain about the Medicare prescription drug bill, and that was supposed to help them. Scary, no?
Comments are open, especially if you know more about Taiwan.
The roots of European success
The rise of Western Europe after 1500 is due largely to growth in countries with access to the Atlantic Ocean and with substantial trade with the New World, Africa, and Asia via the Atlantic. This trade and the associated colonialism affected Europe not only directly, but also indirectly by inducing institutional change. Where "initial" political institutions (those established before 1500) placed significant checks on the monarchy, the growth of Atlantic trade strengthened merchant groups by constraining the power of the monarchy, and helped merchants obtain changes in institutions to protect property rights. These changes were central to subsequent economic growth.
That is from "The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth," by Daron Acemoglu, Simon Johnson, and James Robinson, American Economic Review, June 2005; here is a longer and earlier version of the paper.
Query about non-farm employment
One of my macro students asks: "Why there is such a focus on nonfarm employment in statistics?" As opposed to total employment, that is. If you know why, comments are open.
Favorite headlines
How should Bernanke speak up about deficits?
…our current fiscal policy has the potential to make it much more difficult for the Fed to carry out its job. Senator Chuck Schumer (D-NY) recently expressed his enthusiastic support for Bernanke on the expectation that Bernanke would speak out about the need to reduce deficits. Indeed I think Bernanke will do so. But one can speak about the need to reduce deficits (something on which I would like to see both parties come to an agreement) without taking a stand on exactly how that should be done (something on which feathers in the political fight will continue to fly). If Bernanke does speak up on deficits in this limited, bipartisan way, the influence of the Fed Chair’s tongue could grow even greater and the deficit problem might be raised front and center.
That is from EconBrowser. Nouriel Roubini also offers an excellent analysis.
I think Bernanke should tread very carefully. The danger comes if Bernanke signals a problem and nothing good happens in response. That would make it clear that matters will get worse.
True, you cannot fool markets forever. But if we cannot get out of our current fiscal mess, I don’t want markets to learn that all at once. I don’t want markets to learn — again all at once — that our very bright Fed chair is ineffective and that no one in the administration is listening.
Bernanke needs to signal concern about the deficit in exactly the right way. Ex post, he needs plausible deniability about having complained too loudly. Ex ante, he needs to signal he is complaining. (That’s a tough combination, eh?) Too much squawking, too soon, would be a mistake. Instead he should play the chess strategy — "The threat is stronger than the execution" — and over time subtly shift the rhetorical bargaining power in Washington toward fiscal sanity. A "do or die" stance won’t turn out well when the Administration cannot coordinate with an increasingly rebellious Congress, and that is assuming the Administration wants to do something good in response. Finally people who play "showdown" or "chicken" with the Bush Administration don’t, er, always come out so well…
Markets in everything — funeral guests
Liu and her five-member Filial Daughters’ Band are part of a thriving mourning business in Taiwan. They’re professional entertainers paid by grieving families to wail, scream and create the anguished sorrow befitting a proper funeral.
The performances are as much a status symbol for the living as a show of respect for the dead on this island of 23-million people lying 145 km off the Chinese coast.
Weary, grieving relatives hire groups like the Filial Daughters’ Band to perform their mournful stuff for $600 for a half day’s work.
Here is the link, and thanks to Pablo Halkyard for the pointer.
The Treaty of Tripoli
In the late 1790s the US was having difficulty with Muslim pirates in the waters off Northern Africa. After some difficulty, a treaty was signed in 1796 with the Bey of Tripoli promising friendship, trade and an end to hostilities. The 11th article of the treaty provides a remarkable contrast between how these sorts of issues were handled by the founders and how they are handled today. It reads:
As the government of the United States of America is not in any sense
founded on the Christian Religion; as it has in itself no character of
enmity against the laws, religion or tranquility of Musselmen; and as
the said States never have entered into any war or act of hostility
against any Mehomitan nation, it is declared by the parties that no
pretext arising from religious opinions shall ever produce an
interruption of the harmony existing between the two countries.
The Treaty was read aloud in the Senate and approved unanimously. In his proclamation John Adams said, "I John Adams, President of the United States of America, having seen
and considered the said Treaty do, by and with the advice consent of
the Senate, accept, ratify, and confirm the same, and every clause and
article thereof." The treaty was published in a number of leading newspapers. It never aroused any opposition.
The Mansion Wars
John Tierney had an excellent column on "mansionization" in yesterday’s NYTimes (I am cited). Unfortunately, it’s behind the great wall (which I predict will be down within 6 months) but here are some key grafs:
In the town where I live, a once placid Washington suburb, the mayor has just sent out a letter asking the natives to stop throwing eggs at each other’s homes. Such is life on the front lines of the anti-mansionization war….
My first impulse was to side with the mansionizers [because]…of my knee jerk libertarian reaction to the moralizers…Who were they to control other people’s property?…But when I talked to housing experts, they pointed to another message from the market… A majority of new homes in rapidly growing urban areas are in communities governed by private homeowners assocations that impose much stricter rules than governments do.
Some people chafe at the restrictions [but] Amanda Agan and Alexander Tabarrok…found that a home in the Virginia suburbs of Washington that was part of a private community typically sold for 5 percent more than a similar home nearby not governed by a homeowners association…
[M]ost people apparently want aesthetics to be regulated – not by politicians at the city or county level, but by homeowners in the neighborhood. That’s why the developers of private communities write constitutions that give so much power to the homeowners associations…Those founding fathers learned by trial and error that empowering local busybodies is the best way to maximize home values and minimize strife.
Aesthetic and other rights held by homeowner assocations and condominiums are a relatively new but rapidly growing type of property, the private but collective property right. Figuring out the best form for these rights will be an evolutionary process but one that is greatly aided by the fact that developers and homeowners have the same incentives – to make the home as valuable as possible.
Addendum: Art Woolf points me to the Rutland Herald which has Tierney’s column in full.
Torture, terrorism, and incentives
President Bush, Dick Cheney and others who support the use of torture by the United States and its agents usually rely on the ticking time bomb argument. Sometimes torture is necessary to prevent a greater evil. I accept this argument. If my kid were kidnapped and the suspect was refusing to talk, I’d want Vic Mackey to do the questioning.
But it does not follow from the "ticking time bomb" argument that torture should be legal. The problem with making torture legal is that the government will abuse its powers. I do not trust the government, any government, to use this power responsibly. Leviathan must be heavily restrained, especially when it comes to torture.
Here is where economics can make a contribution. By making torture illegal we are raising the price of torture but we are not raising the price to infinity. If the President or the head of the CIA thinks that torture is required to stop the ticking time bomb then they ought to approve it knowing full well that they face possible prosecution. Only if the price of torture is very high can we expect that it will be used only in the most absolutely urgent of circumstances.
The torture victim faces incredible pain and perhaps death at the hands of his torturer. If these costs are to be born by the victim then we had better make damn sure that the benefits are also high and the only way we can do that is to make the torturer also bear some of the costs. Torture must not be cheap.