Markets in everything
How about non-matching socks? LittleMissMatched.com sells you paired socks with different colors and designs. “That way, you would never have to worry about losing a sock,” says one company spokesperson [exam question: does this violate an axiom of choice theory, if so which one?]. The company, by the way, considers schoolyard bullies to be one of its greatest opponents. Here is the full story, New York Times password required.
It is not the case that each sock is strictly unique; the company is encouraging its (intransitive?) young customers to trade socks with each other, to obtain matching pairs.
Should we prefer a monopolistic or competitive Jihad?
Matt Yglesias asks MR to address whether we would prefer, all other things equal, terrorists organized into a single group, or organized into competing groups. The answer to this question will not be a priori, but here are a few relevant considerations:
1. If terrorists perform their acts for fundraising purposes, or for criminal status, you would probably rather face a monopoly opponent. They are more likely to rest on their laurels.
2. If you think that terrorists are deterrable, at least in principle, you would prefer an easily identifiable monopoly opponent.
3. If you think that terrorists are likely to engage in internecine warfare with each other, you would prefer the more competitive set-up. (I’ll predict that if anyone kills, or has killed, bin Laden, it is one of his own people.) This is especially true when the terrorists are far away from you; they can fight without major spillover effects on your citizenry.
4. Perhaps the production of terrorist attacks involves significant economies of scale. In that case you would prefer the smaller competing groups. Nuclear weapons probably involve such economies, but suicide bombings can be organized on quite a small scale.
My guess: In Iraq you would prefer a smaller number of groups, since there is some chance of striking a deal with them. And there we are more worried about the suicide bombers than a loose nuclear device, so economies of scale do not overturn this conclusion. We are less likely to ever “trade” with al Qaeda and its offshoots, so in that case I would prefer splintering. Furthermore al Qaeda has a greater long-run nuclear potential, so it is more important to deny them potential economies of scale. I suspect we do not much mind if western Pakistan becomes a scene for terrorist infighting, whereas such conflicts could scuttle reconstruction in Iraq.
Health Insurance and Health Costs
Tyler asks Why is private health insurance such a disaster? in particular he wants to know, Why does private health insurance perform so badly in holding down costs?
There are actually two issues. Tyler mostly questions the traditional arguments that insurance increases costs. I won’t deal with all of his arguments (today!) but consider the following:
The tax-free nature of employer-supplied insurance benefits encourages wantonness. (TC: Why? You can subsidize the purchase of apples, that doesn’t mean apples will be produced inefficiently or at “excess cost” for that level of apple output.)
True, but the phrase “for that level of output” contains a whole bag of tricks because subsidies will change the output level both in quantity and quality terms. Assume that there are two drugs, a cheap one at $10 and an expensive one at $20. You think the expensive drug is worth $5 more than the cheap one. With no subsidy you buy the cheap drug. With a 75% subsidy the cheap drug is $2.50 and the expensive one is $5 and the difference is now only $2.50 – you now buy the expensive drug. Thus there is no necessary production inefficiency but costs double.
So it is true that 3rd party payment will increase total costs. I think some of the other arguments that Tyler questions are also correct but these arguments do have another problem – one Tyler does not mention. To the extent that third party payment is not increasing, the increase in demand will cause a one-time increase in the level of prices/expenditures. What we see in the United States and worldwide, however, is a sustained increase in relative prices and expenditures and for that you need some factor that is also sustained – that factor is technological advancement. In real terms technological advancement lowers prices but when you combine that with an elastic demand for medical care nominal prices and expenditures increase. (When Christian Barnard performed the first open-heart surgery in 1967 he reduced the real cost of treating heart disease but increased expenditures on open-heart surgery).
In other words, health insurance companies don’t hold down costs because their customers don’t want them to. In this sense, I don’t think private health insurance is a disaster. The problem, if there is one, is in ourselves.
The Ig Nobel Prize in Economics
This year’s Ig Nobel prize in economics goes to the Vatican for outsourcing prayer.
A prize to Tyler, probably more Ig than Nobel, for flagging more than one future winner in Marginal Revolution including the aforementioned prize in economics and the prize in psychology for research on gorilla vision.
If you don’t yet know about the gorilla vision research, I encourage you view this Java video of a basketball game and try to count the total number of times that the people wearing white pass the basketball. Do not count the passes made by the people wearing black. When you’re done read Tyler’s post. As this award indicates some Ig Nobels are given for important research.
More Lost Nukes
Concerning yesterday’s post on missing nuclear weapons Gerald Hanner wrote to say:
I once flew with one of the people involved in that lost nuke in South Carolina. It was being carried by a B-47, and they were on their way to a forward-deployed base in England to pull alert. For takeoff the weapon (no one in the business calls them “bombs”) is not pinned into the release mechanism so that it could be released if there was an aircraft emergency after takeoff. Since the “pit” was not installed in the weapon there was no chance of a nuclear detonation. In any case, after a safe takeoff the copilot went back to the bomb bay to place a safety pin in the release mechanism; the pin would not go into the slot it was designed for. After calling back to their departure base to discuss the problem, someone on the ground suggested jiggling the release mechanism a bit to properly align the parts. The copilot did. The next transmission from the aircraft was, “Shit! We dropped it!” The weapon released and went right through the closed bomb bay door; those were heavy dudes back then. You’ve read the rest of the story.
Dave Walker of Lockjaw’s Lair wrote to report on a still-missing nuclear weapon in North Carolina.
It was just after midnight on January 24, 1961. A B52G Stratofortress (one of the greatest airplanes ever to cast a shadow on this fine Earth, IMHO) suffered structural failure in its right wing near Faro, NC. The plane carried two MK39 hydrogen bombs.
The two weapons were jettisoned from the plane. One parachuted safely to the ground, receiving minimal damage. The other plummetted to Earth, partially breaking up on impact. Part of the weapon, however, was never found. The lost portion was the uranium-containing part, as well. Crews dug to a depth of 50 feet in the boggy field, but could never retrieve the warhead. To this day, the lost weapon continues to lie in this field.
Radioactivity tests have come up negative, and the Air Force has purchased an easement on the property to prevent anyone digging. If you’d like to read further on the case of the lost warhead, check out this link.
Truth is Stranger than Fiction Department
In 1958 a nuclear bomb 100 times more powerful than that dropped on Hiroshima was accidentally lost over the coast of Georgia. Amazing! But it doesn’t stop there. At first, there was an intense search but the search petered out when several weeks later another bomb was accidentally dropped near Florence SC – fortunately the latter weapon, although nuclear, was not primed. The bomb’s conventional components, however, detonated on impact creating a huge crater and injuring several farmers. The weapon lost over the Georgia coast may have been found recently by a private radiation expert who measured radiation levels 3,000 times above normal near where the bomb was said to have gone down.
The economics of open-source software
What will the world of software look like once the open-source transition is complete?
Some programmers worry that the transition to open source will abolish or devalue their jobs. The standard nightmare is what I call the “Open Source Doomsday” scenario. This starts with the market value of software going to zero because of all the free source code out there. Use value alone doesn’t attract enough consumers to support software development. The commercial software industry collapses. Programmers starve or leave the field. Doomsday arrives when the open-source culture itself (dependent on the spare time of all these pros) collapses, leaving nobody around who can program competently. All die. Oh, the embarrassment!
We have already observed a number of sufficient reasons this won’t happen, starting with the fact that most developers’ salaries don’t depend on software sale value in the first place. But the very best one, worth emphasizing here, is this: when did you last see a software development group that didn’t have way more than enough work waiting for it? In a swiftly changing world, in a rapidly complexifying and information-centered economy, there will always be plenty of work and a healthy demand for people who can make computers do things–no matter how much time and how many secrets they give away.
Here is the full essay, if nothing else it is provocative. It is also beyond my sphere of expertise, but anyone interested in the private provision of public goods should check out this piece.
Thanks to Steven Pearson for the pointer.
Health Care
Arnold Kling quotes Bob Kuttner:
The hardest job for a liberal is to defend the D.C. public school system. The hardest job for a conservative is to defend free-market health care.
Yes, but the D.C. public school system actually exists.
Who Won the Debate?
The TradeSports contract for “Bush Reelected” at 8:36 p.m. last night was “Bid: 65.0 Ask: 66.0”. That is the price of a share that pays a dollar if Bush wins.
The debate started at 9 p.m., EST.
At 9:55 p.m. the contract was up to 67.0, 67.4.
At 10:30, at the close of the debates, Bush stood at 66.9, 67.4.
So at the time people thought Bush won handily. But Friday morning, at 7:26 a.m., Bush was down to 62.1, 63.6, apparently Bush lost the post-debate “spin”…
Addendum: There are at least two ways of reading these numbers. First, bettors realized that Bush was connecting with the American public. But then the “left-wing press” gave the debates a pro-Kerry spin, and voters now buy into this interpretation. Second, the press is better at reading the debates than are the bettors. The bettors got it wrong at first, but fell into line once the press spoke.
Second addendum: By 10:22 a.m., Friday morning, Bush was back to where he started before the debates. And by 11:19 a.m., Bush is at 65.5, 65.9, slightly up from before the debates.
Should we privatize Social Security?
Brad DeLong argues that we should privatize social security. His ingenious analysis suggests that privatization could help overcome market failures of insufficient savings and insufficient investment in equities (the “equity premium paradox”). Turning the usual debates on their head, he argues that market fans should have no reason to support privatization, but interventionists might. Note that Brad was replying to earlier posts by Matt Yglesias and Atrios, both worth reading in their own right on the issue.
I agree with most of Brad’s analysis (though the equity premium matter is complex and poorly understood), but I am less sanguine about the privatization idea. I wish to privatize many things, but forced savings is not one of them.
Most of all, I am worried about the fiscal implications of this privatization. Current plans need not, in the long run, cost us any money, as Arnold Kling reminds us. But they do require a big tax increase in the short to medium run. In essence the proposed reforms stop collecting “pay as you go” contributions and move everyone possible toward private accounts. But during the transition an influx of money is still needed to pay off the current elderly, therefore the tax increase. And we are talking trillions here, not just small change.
Of course these taxes must come sooner or later, given that privatization is simply shifting future claimants out of the public sector expenditure nexus. So if we raised taxes today, to finance a transition, and cut them twenty years from now, social security privatization would be revenue-neutral in this regard (of course it could influence revenues along other dimensions).
Now you can see my fear. If we move to privatize social security, I predict that higher taxes today will mean still higher taxes tomorrow, not an eventual tax cut. People would grow to tolerate the higher taxes, and our ever-diligent Congress would find new ways to spend the money (don’t trust any promises to the contrary — remember when they told us that social security numbers would never be used for purposes of personal identification?).
I think of social security as having two parts: a welfare system for old people, plus a regime of forced savings for the young. The Bush plan cuts back on the welfare angle, but also would put the forced savings in the private sector.
If we were starting from scratch, I could imagine that a fully vested system of private accounts could make sense. But given where we are, I would like to see social security evolve into a system of welfare for the elderly, and junk the forced savings aspect. Keep in mind those “private” accounts will be regulated rather than truly private in the libertarian sense. They will channel benefits to government-approved providers, thus leading to bureaucracy, regulation, and costly commissions. And if anyone’s account goes bust, do you really think there will be no secondary safety net to bail them out? What if the whole market went bust for about ten years’ time?
One of the original virtues of social security was its minimum administrative costs and its relatively “clean” fiscal nature. Let’s not lose their properties of the system just to privatize something — forced savings — that should be a matter of voluntary choice in the first place.
So let’s push for means-tested benefits, and hope that social security slowly but surely shrinks and evolves to a welfare system for the needy elderly. It should not be a stranglehold over every mainstream employment relationship.
It may sound like a strange world where Brad DeLong endorses social security privatization and I oppose it. But given the other views we hold, this is where we each ought to end up.
Charter Schools
Caroline Hoxby is mad, and rightly so. In August, the American Federation of Teachers released a study attacking charter schools because charter school students performed worse than their public school “peers.” The study got huge media attention, including a front page article and editiorial in the NYTimes, despite the fact that it is not a very good study – lagging far behind its peers in the academic literature.
The main problem is that the study doesn’t do a very good job at comparing peers. The most credible studies look at the achievement differences between randomly assigned students (as did the study on private schools in Colombia I discussed earlier). When charter schools are over-subscribed (which often occurs – a sure sign that parents think they are superior to more traditional public schools) students are sometimes selected by lottery. Using data on randomly assigned students in Chicago, Hoxby and co-author Jonah Rockoff find significant achievement gains for the charter school students (paper, executive summary). (Surprise! When given the opportunity, parents can pick good schools.).
Another problem with the AFT study is that it uses a relatively small sample, about 3% of charter students in the fourth and eight grades. In another paper, Hoxby examined tests from 99% of 4th grade charter students. It’s not possible to use a randomized study when you look at nearly all charter school students so instead Hoxby compares charter students to students in the nearest regular public school and the nearest regular public school with a similar racial composition. For the latter comparison she found that charter students were 5% more likely to to be proficient in reading and 2.8% more likely to be proficient in math – small but meaningful improvements. And in places where the regular public schools are especially bad, like Washington DC, charter students were about 36% more likely than their peers to be proficient in reading and math!
Despite the fact that Hoxby’s studies are of far higher quality than those of the ATF and other groups you don’t see her work trumpeted across the front page of the NYTimes. And it’s not as if Hoxby isn’t well known, she is a Harvard professor whom several years ago The Economist listed as one of the best young economists in the world. As Brad DeLong might ask in another context, Why can’t we have a better media?
I have drawn from an op-ed by Hoxby in the Wall Street Journal from Wed. Sept. 29, 04 (sorry I don’t have the link).
Oh Berkeley!
At Colonial Williambsurg you can immerse yourself in a different time and place and see how people lived in the past; how they dressed, ate, worked and lived. It’s a wonderful and unique experience. That’s why I truly miss Berkeley, the Colonial Williamsburg of the 1960s. My friend Carl Close, who remains in the area, sends me this wonderful reminder of what makes Berkeley great (not entirely work safe). Thanks Carl!
Why is private health insurance such a disaster?
Why does private health insurance perform so badly in holding down costs? (Here is one story.) I can think of a few hypotheses:
1. Medical ideology portrays doctors as a priestly caste, accountable to no one.
2. The observed cost increases are driven primarily by government reimbursements and purchases.
3. The tax-free nature of employer-supplied insurance benefits encourages wantonness. (TC: Why? You can subsidize the purchase of apples, that doesn’t mean apples will be produced inefficiently or at “excess cost” for that level of apple output.)
4. The tax system discourages insurance policies with higher copayments. (TC: But if copayments are so great, companies today could offer higher-valued benefits along other dimensions, while increasing the copayment rate.)
5. Malpractice suits. This one is true for sure, but put it aside since the problem goes much further.
The most plausible answer is:
6. It is hard to contract in advance for which services should be covered. If you let everything be covered, costs skyrocket. If you allow for “outs,” insurance companies will use these loopholes to cut off high cost patients, thereby eliminating the benefits of insurance.
But why should this be such an insurmountable problem? Why can’t impartial third-party arbitrators arrive at a coverage solution that is reasonably efficient? After all arbitrators settle millions of legal disputes, issues where conflicts of interest could not be more pronounced. Or imagine third-parties that evaluates whether an insurance company covers reasonable expenses or instead screws over its customers?
Yes this does mean a cost-monitoring bureaucracy. But surely under all health care systems someone must decide which treatments are worthwhile or not. Why cannot markets allocate this function to the least cost decider? Why does the usual solution — intermediation — appear to be working so badly?
Inquiring minds wish to know. And simply citing the very large role for government in the American system does not do the trick. Here is one Cato account, you can agree with many of the points but it doesn’t answer my question. Here are some broader market-oriented links.
And this is why I find it so hard to come up with a good plan for health care reform. If we don’t understand why private health insurance functions so badly in our mixed system, we won’t understand how to fix things.
We’ve been waiting thirty-seven years for this…
Yes, Brian Wilson of the Beach Boys has finally released his this one the most accurate and interesting. Here is a broader round-up of opinion. Now if we could only get Roger McGuinn to finish his projected two-disc space opera Gene Tryp…
Subsidy Spam
Here is a piece of spam email that I received recently.
The new revised edition of the Canadian Subsidy Directory 2004 is now available. The new edition is the most complete and affordable reference for anyone looking for financial support. It is deemed to be the perfect tool for new or existing businesses, individual ventures, foundations and associations….
The Canadian Subsidy Directory is the most comprehensive tool to start up a business, improve existent activities, set up a business plan, or obtain assistance from experts in fields such as: Industry, transport, agriculture, communications, municipal infrastructure, education, import-export, labor, construction and renovation, the service sector, hi-tech industries, research and development, joint ventures, arts, cinema, theatre, music and recording industry, the self employed, contests, and new talents.
Sadly, I have no doubt that this all true. (I am also sure a similar product exists for the U.S.)