What we buy from China

Our top categories of imports, by billions of dollars:

$8.6 Shoes
$6.1 Toys
$5.6 Input-output units
$5.1 Data processing machine parts
$3.2 VCRs
$2.6 Wood furniture
$2.0 Transmission equipment
$1.7 Data storage units

Get past the first two categories, and this is not just low-tech junk at your local Wal-Mart.

Now, consider our top imports from China, as a percentage of the overall imports in the stated category:

88% Radios
87% Christmas and festive items
83% Toys
70% Leather goods
67% Shoes
67% Handbags
65% Lamps and lights

From The Fruits of Free Trade, a publication by the Federal Reserve Bank of Dallas, the piece offers many nice illustrations of the benefits of trade.

In the average can of mixed nuts, you might find almonds from Italy, walnuts from china, Brazil nuts from Bolivia [sic], cashews from India, pistachios from Turkey, hazelnuts from Canada – a true international assortment.

Being a nut lover, that was my favorite bit from the brochure.

Milton Friedman tribute

I am pleased to report from a Milton Friedman tribute conference, held by the Federal Reserve Bank of Dallas. Milton, now 91 years old, remains incredibly sharp and quick on his feet. Gary Becker, in his talk this evening, challenged Milton as to why he does not believe in competitive supply of currency. Milton replied by saying he does not have a good answer to that question, but that he does not see how to get government out of the money business, given that dollars are already in place. He did suggest freezing the supply of high-powered money, and otherwise letting markets work and supply whatever forms of outside money might be demanded. Richard Ebeling discusses how Friedman’s thoughts on this issue have evolved.

My take: For a long time I favored Friedman’s position. In the meantime I have been more influenced by behavioral economics. I fear that some downward adjustments of prices and wages might be required, which people often find painful or resist, so I wonder if a very slight rate of price inflation might be superior. Of course a frozen supply of high-powered money does not necessitate deflation, but sometimes it will bring it. I also wonder how much short-run interest volatility would result. The supposed advantage of freezing high-powered money is to limit the potential for a repeat of the bad monetary policy of the 1970s, but has the Fed or government really engaged in effective precommitment? I doubt it. So right now I count myself as a monetary agnostic.

Addendum: Virginia Postrel, who is attending the conference, tells us about a forthcoming television biography of Friedman.

Second addendum: Here is a detailed conference report, written by a very smart and articulate attendee, his blog will be giving you updates as well.

On Whether To Rebuild Iraq and Whether to Pay for It

I am frankly puzzled about what justification there might be for “rebuilding” Iraq and why outsiders, the United States in particular, should pay for it. Is there some powerful theoretical argument or empirical evidence I am not aware of that suggests that Iraq is likely to become a significantly more friendly and civilized place if its electrical grid, highways, and water and sewage systems are substantially upgraded? And if so, is there some special virtue to outsiders paying for it? If there are strong arguments for either proposition I have not heard them. It would seem to me that helping the Iraqis establish the rule of law, a stable currency, secure property rights, will be far more valuable, considerably cheaper, and sad to say difficult enough. My sense is that a large infusion of cash from the outside will have a pernicious effect. It will encourage the (re)development of a rent-extraction industry.

Dalkon Shield, Silicone Breast Implants, Fen-Phen

A bill to move class action lawsuits out of the state courts and into federal courts narrowly failed in the Senate. Senator Tom Daaschle, explained his opposition to the bill this way, “It is the Dalkon shield, it is silicone breast implants, it is fen/phen.”

Good list. Wrong conclusion. The A.H. Robins Co. was driven into bankruptcy and forced to pay 3 billion dollars in damages but the Dalkon shield has been shown to be effective and safe. Silicone breast implants have been reviewed in studies by the AMA, the Institute of Medicine, the Canadians, the French, the British and others. All conclude that there are no unusual problems with the implants (any surgery has risks of course). The FDA will probably soon allow the implants back onto the market but in the meantime Dow-Corning has been driven into bankruptcy and tens of millions of dollars have been spent on lawsuits. Fen/Phen does looks like a serious health risk but tort law had nothing to do with removing the product from the marketplace. (Moreover, the issue is complicated. Only the Fen in Fen/Phen looks dangerous and that was approved in 1973).

We should spend More on Health Care

Tyler appears to be growing more skeptical of the value of health care spending (see his posts here and here). A simple model explains most of what is going on and why he and another of my very smart colleagues Robin Hanson, are wrong. In the graph below spending on health care is on the X axis, health outcomes are on the Y axis. Spending shows diminishing returns. We are currently at point Q on the graph labeled T1 – note that at this point marginal increases in spending have little effect on output (Tyler asks, What margin has low value? Answer: The marginal dollar). Even fairly large increases or decreases in spending will not change outcomes very much given that we are currently at point Q.

Why are we spending so much as to push us into the flat portion of the production function? One reason is that out-of-pocket expenses for medical care are much lower than true costs – we typically are spending someone else’s money. A second reason is that the marginal utility of wealth is low if you are dead so spending on health care near the end of life has unusually low opportunity cost. A third reason may be that various psychological factors make the desire to avoid regret particulary strong for health care, as Tyler speculated earlier.

Although the marginal dollar has low return the value of improvements in medical technology is enormous. These gains are illustrated by the shift from T1 to T2. It has been estimated, for example, that increases in life expectancy from reductions in mortality due to cardiovascular disease over 1970-1990 has been worth over $30 trillion dollars – yes, 30 trillion dollars (for this research see: book, papers, summary). A conservative estimate is that 1/3rd of these improvements in life expectancy were due to better medical technology. One third of the annual benefits is $500 billion – this is much more than total government spending on medical research (the budget of the entire NIH is around 25 billion).

The low value of medical spending at a particular point in time and the high value of medical research over time suggest that we would be much better off if we cut back on medical care spending and devoted the funds to medical research. We should spend less on Medicaid, Medicare, Prescription drug plans etc. and use the savings to better fund the NIH (or other methods of increasing medical research such as prizes etc.)


Privacy dilemmas

On most privacy issues I am willing to say “tough.” If you don’t like how your persona and image get processed by others, well, stay at home and keep your mouth shut.

But I am disturbed by this recent development, namely cameras hidden in cell phones. Consider this:

About 80 million of the palm-sized camera phones are in use worldwide, mostly in Europe and Asia. They are fairly new in the USA; fewer than 6 million are in use in North America. But falling prices – they now average about $380 – and improving picture quality are likely to spur growth.

Critics warn that as the phones proliferate, they are turning users into would-be paparazzi, with anyone nearby potential prey.

Not surprisingly, some locker rooms are starting to ban the phones, as are some celebrity events. Some firms are worried about industrial espionage. I can’t imagine a good regulatory solution here (how do you track down offenders who post photos on the web?), but these phones are pretty small, so we should not expect that private bans will be effective.

Is there a brighter side? Yes:

In Scotland, rescue workers use the phones to transmit pictures of accident victims to doctors while en route to hospitals, Mawston says. Camera phones were used to photograph a rape in England, and the pictures were turned over to police for evidence, Katz says.

About 2% of the 20,000 photos now posted each day on the Web site Fotolog.net, which allows people to create their own photo journals or share their pictures with others, are taken by camera phones. That number is rapidly increasing, site co-founder Adam Seifer says.

“People don’t leave their house without a phone,” says Seifer, who just purchased his camera phone. “So they’ll never miss those cool little moments that emerge throughout the day.”

My take: Social benefits will exceed social costs.

Government subsidies for witches

You have to go to Norway to get one. Consider this:

A Norwegian witch has won a £5,000 [53,000 kroner] business grant from her government to make and sell magic potions.

Her specialty products include night creams for vivid dreams, a day cream to combat indecisiveness and a foot cream to change a user’s bad habits.

I guess it is better than burning them, but how about laissez-faire?

From Cronaca.com, which right now has an especially good set of blog posts for browsing. The full story is from Ananova.com.

Genetic insurance

I agree with Alex (see immediately below) that adverse selection need not undo genetic insurance of some kind.

He doesn’t mention abortion, but I view genetic insurance as a possible substitute for abortion. Say you are a young Catholic couple, and you know that you would not abort a Down’s child, even if you detected the abnormality before birth. You also would know that caring for such a child would involve a greater than average financial burden. Might you not buy insurance against this contingency? (Of course many couples simply abort.) Furthermore, couples might buy the insurance when they marry, or at least before they conceive, it would not be hard to make “not being pregnant” as a prerequisite for buying the insurance, if secret genetic tests on the embryo were a huge problem.

The Downs example raises the question of why such insurance does not exist today. More generally, Robert Shiller raises the question of why we do not have more insurance markets than we observe. I don’t think there is a single correct answer. Sometimes I think people simply do not want to face the possibility of encountering certain kinds of difficult events, and buying insurance, in their eyes, admits that possibility into their lives. This obstacle, to me, appears contingent rather than necessary, so I can imagine greater scope for insurance markets in the future. Many financial markets are in any case of recent origin, so why should the growth of markets stop at our current selection?

Notes on Genetic Insurance

My idea of genetic insurance created some controversy with Randall Parker at FuturePundit, Brock Sides at Signifying Nothing, and MR’s guest blogger Lloyd Cohen raising some objections. One of the objections that all three had in common (dealt with in my papers but not in the post) is that adverse selection is still a problem if people lie about having taken a test. This minor problem is easily handled, however. Insurance companies could have a clause in the contract forbidding previous tests. We don’t worry so much about people having a theft and then buying home insurance and the issue here is quite similar. (See my papers for a little more on this issue).

Randall at FuturePundit, however, raises a more serious problem. As the price of genetic tests falls it will soon be economic to sequence a person’s entire genome at birth or even before (see Randall’s posts for some links on costs). In this case, genetic insurance works only if the parents buy the insurance. This is not so implausible (especially not for those who have their child’s DNA sequenced!) but it is a real issue. (We should also remember that genetic insurance will be quite cheap because most people do not have serious genetic defects.) If we have genetic insurance today, however, we can perhaps avoid the adverse selection problem for a couple of decades and that may be good enough for one of two things to happen 1) genetic engineering will reduce the need for insurance (sequencing is much more valuable if there is genetic engineering to correct defects) or 2) genetic insurance could evolve into a more Rawlsian scheme (perhaps involving government at some level) in which payments are made at birth to compensate for Nature’s genetic lottery.

The case for health care spending

In a previous post I wondered whether additional spending on health care in fact brought greater health. Whether we do controlled experiments, or look at cross-national data, a convincing effect is often hard to find.

Brendan Kennelly of Lehigh referred me to this OECD paper, which examines cross-national data to find a positive health effect from health care spending. The result is much stronger for women than for men.

I asked Robin Hanson what he thought of the piece, here is his response:

When a coefficient is truly zero, about 5% of the studies estimating that
coefficient should show a significant difference at the 5% level. And if
people search for specifications that will give this result because they
believe the coefficient is not zero, you might expect 10-20% (or more) of
the reported results will show a significant non-zero coefficient. So
given the current state of econometric practice, the most you could
reasonably hope for when a coefficient is really zero is for about 90% of
the studies to fail to find a significant effect of the desired sign. This
is the current state of the evidence on the aggregate effects of medicine
on health.

My take: The whole debate still makes may head spin. I wonder how much of health care expenditure is geared toward alleviating anxiety (“we did all we could…”) rather than improving health per se. We may be mismeasuring the relevant output. If we could measure the total costs of illness, what percentage of the total would come in the form of anxiety? Furthermore, health care is not a single thing. The marginal return from some forms of health care (bypass operations?) is certainly high, in other cases the return much lower or perhaps negative. So perhaps the debate should shift away from aggregates, and toward trying to identify which health care expenditures we can do without, or do not need to subsidize at current margins.

The wonders of money

…lifting children out of poverty can diminish some psychiatric symptoms…A study published in last week’s issue of The Journal of the American Medical Association looked at children before and after their families rose above the poverty level. Rates of deviant and aggressive behaviors, the study noted, declined as incomes rose.

“This comes closer to pointing to a causal relationship than we can usually get,” said Dr. E. Jane Costello, a psychiatric epidemiologist at Duke who was the lead author.

The study tracked 1420 children, many of whom lived on an Indian reservation. A local casino opening lifted many out of poverty, and also improved their mental health:

…the rate of psychiatric symptoms among the children who had risen from poverty was dropping. As time went on, the children were less inclined to stubbornness, temper tantrums, stealing, bullying and vandalism – all symptoms of conduct and oppositional defiant disorders.

After four years, the rate of such behaviors had dropped to the same levels found among children whose families had never been poor. Children whose families broke the poverty threshold had a 40 percent decrease in behavioral symptoms. But the payments had no effect on children whose families had been unable to rise from poverty or on the children whose families had not been poor to begin with.

Even I, author of a book called In Praise of Commercial Culture (see to the right), am surprised by this result. Supposedly the wealthier parents were now able to spend more time with their children, thus improving their mental health. I wonder whether the key factor instead might have been improved behavior on the part of the parents.

Here is the abstract, plus you can buy a copy of the original research for $12.

Addendum: David Levy, citing Adam Smith, wonders if it isn’t the growth rate of income that makes people better off, rather than the level.

Why not?

Here is a new way of earning seigniorage revenue, after all we offer vanity license plates:

..vanity stamps already exist in Canada and Australia…In the land down under, your picture goes next to the stamp, while our neighbors to the north put your picture in the middle of a border…The price in OZ is about a 100 percent premium (for example, one hundred 40-cent stamps for $87), while in Canada the price is $24.95 for one sheet of twenty-five domestic stamps.

From Why Not?, by Barry Nalebuff and Ian Ayres. My previous blog post on this book also brings you to their web site, full of other ideas of this ilk.

Disagreement With Alex Over A Market in Bad Gene Insurance

The Human Genome Project and its offspring, testing for genetic anomalies, have the prospect in the short-term at least of reducing human welfare. Alex is right that we are largely behind a veil of ignorance with respect to our genetic predispositions to diseases that have not yet presented themselves. Genetic testing removes that veil. No insurance market against genetic disease could survive the asymmetry of information between the insured and the insurer. I have written about this in The Human Genome Project and the Economics of Insurance: How Increased Knowledge May Decrease Human Welfare, and What Not To Do About It, 7 Annual Review of Law and Ethics 219 (1999).