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Brooks Wilson's Economics Blog: August 2009

Friday, August 28, 2009

The Views of Economists and Non Economists On The Economy (Repost I)

In a previous post, “Economists as Experts (Repost I),” I stated that economists deserve respect as experts on economics, and that common accusations about their objectivity were wrong. In this post, I describe how the views of economists differ systematically from non economists. As in my previous post, I rely heavily on Bryan Caplan’s book, The Myth of the Rational Voter: Why Democracies Choose Bad Policies. His work is based on a survey on 1,510 randomly selected Americans and 250 Ph.D. economists that was conducted by the Washington Post, Kaiser Family Foundation, and Harvard University in 1996. The survey had thirty seven questions about the state of the economy and how it functioned.

Claiming that economists are nonbiased experts and that their opinions are the best representation of reality, Caplan compares their views to the public’s, and finds that they differ in four areas that he calls public biases. The first, antimarket bias, is the tendency to underestimate the effectiveness and benefits of the market mechanism. Caplan writes,
Economists across the political spectrum criticize anitmarket bias. Liberal Democratic economists echo and amplify Schumpeter’s theme. Charles Schultze, head of Jimmy Carter’s Council of Economic Advisors, proclaims, ‘Harnessing the ‘base’ motive of material self-interest to promote the common good is perhaps the most important social invention mankind has yet achieved.’ But politicians and voters fail to appreciate this invention.
Schultze is not the first economist who supported liberal political agendas to speak to the strengths of markets. In fact, I have difficulty using the political term liberal to define economists and do so with some caution. In this post, I will only call an economist liberal if he or she is a self proclaimed liberal, or supported Obama over McCain in the last election. One such economist is Nobel Laureate (1970) Paul Samuelson who penned these words in a SpiegelOnline article titled, “The Dynamic Moving Center,”
Based on my observations of economic history, both short run and long run, I believe that there is no satisfactory alternative to market systems as a way of organizing both economically poor and economically rich populations.
Also for SpiegelOnline, Edmund Phelps, a Nobel Laureate (2006) writes in a article titled, “What Has Gone Wrong Up Until Now,”
It is preposterous to speak, as some Europeans have, of the "end of capitalism." A good life requires a rewarding workplace -- one of change and challenge -- and that requires some sort of well-functioning capitalism.
Economists recognize greater strengths in markets than does the public in general.[1]

The public also expresses antiforeign bias, a tendency to underestimate the benefits of economic interchange with foreigners. As examples of the differences between economists and the public at large, economists express less concern about outsourcing of jobs and immigration. They also overwhelmingly support policies that lower restrictions on trade.

The general public is also more likely to underestimate the benefits of conserving labor, what Caplan calls the make-work bias. Economists generally favor the introduction of labor saving technology. It allows more of a good to be produced with the same amount of labor, freeing that labor to produce other things. Technological advance in agriculture freed 17 million workers as yields per acre increased. Displaced workers retrained, found new jobs, and produced other things. It might have been difficult to see how the displaced farmers and farm workers would benefit from increasing agricultural productivity, but most did, and certainly the country prospered. Economists measure progress within an industry and in the country by increasing productivity, not by employment numbers. Job creation tends to expand to cover all who wish to work, and flows to areas in which it is most highly valued.

Finally, Caplan argues that non economists suffer from pessimistic bias, the tendency to overestimate the severity of economic problems and underestimate the past, present, and probable future performance of the economy. As a demonstration of the optimism of economists, Brad DeLong writes in the abstract of his paper, “Cornucopia: Increasing Wealth in the Twentieth Century,”
There is one central fact about the economic history of the twentieth century: above all, the century just past has been the century of increasing material wealth and economic productivity. No previous era and no previous economy has seen material wealth and productive potential grow at such a pace. The bulk of America’s population today achieves standards of material comfort and capabilities that were beyond the reach of even the richest of previous centuries. Even lower middle-class households in relatively poor countries have today material standards of living that would make them, in many respects, the envy of the powerful and lordly of past centuries.
As experts in economics, economists have studied economic progress, see its incredible advance over the last century, understand some of its causes, and extrapolate that success into the future.[2]

[1] To be sure, “liberal” economists will speak more about the limits of markets because of imperfections such as asymmetry of information, externalities, public goods, or market power than “libertarian” economists like Milton Friedman, just follow the link on Samuelson’s article as an example, but they both recognize the same flaws as well as the same strengths.

[2] At the risk of repeating a common theme of other posts, one of the disconcerting features of the debate about the current recession is the level of pessimism expressed about the outlook for the U.S. economy in the near term.

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Economists as Experts (Repost I)

Economists have a chip on their shoulder, or at least I do. Nobody argues gravity with a physicist, or covalent bonding with a chemist, but they do argue supply and demand with an economist. Nobody ever asks if a physicist or a chemist is biased, but people make these claims all the time about economists. Like Rodney Dangerfield, economists, "don't get no respect."

In his book, The Myth of the Rational Voter: Why Democracies Choose Bad Policies, Bryan Caplan describes two common biases that many think economists possess. They are self-serving bias and ideological bias.

Self-serving bias is based on a literature that suggests that people form beliefs that are comfortable and support their financial interests. As an expression of self-serving bias, Lincoln said of slaveholder,
The effect on the minds of the owners is to persuade them that there is no wrong in it. The slaveholder does not like to be considered a mean fellow, for holding that species of property, and hence he has to struggle within himself and sets about arguing himself into the belief that Slavery is right. The property influences his mind. [1]
The argument implies that economists are on average well-to-do, and have job security and therefore support policies that help the rich through markets. Caplan's statistical analysis suggests that self-serving bias does not explain economists' views. If economists had the same level of income and job security as the average person, their opinion on policy would still mirror those of other economists.

Ideological bias suggests that economists beliefs were shaped by their free market mentors. If Republicans are more conservative than Democrats, implying that they are more likely to support free market policies, the accusation does not fit. Economists are more likely to be Democrats than Republicans. Daniel Klein and Charlotta Stern (How Politically Diverse Are the Social Sciences and Humanities? Survey Evidence from Six Fields) surveyed six social science disciplines. The overall response rate of 30.9% and the small number of academic economists responding (96) suggests that results should be interpreted with caution. Academic economists were defined as those working at four year colleges or above. They found that three times as many economists vote regularly for Democrats as compared to Republicans.

The (Examining the candidates) surveyed 683 research economists at the National Bureau of Economic Research, and found similar results to Klein and Stern.
A total of 142 responded, of whom 46% identified themselves as Democrats, 10% as Republicans and 44% as neither. This skewed party breakdown may reflect academia’s Democratic tilt, or possibly Democrats’ greater propensity to respond. Still, even if we exclude respondents with a party identification, Mr Obama retains a strong edge—though the McCain campaign should be buoyed by the fact that 530 economists have signed a statement endorsing his plans.
Their nonscientific results find that Democrats outnumber Republicans 4.6 to 1, an even stronger result.

Caplan compares the political beliefs and policy views of 250 Ph.D. economists and concludes,
Compared to the general public, the typical economist is left of center. Furthermore, contrary to critics of the economics profession, economists do not reliably hold right-wing positions. They accept a mix of 'far right' and 'far left' views.
Economists may have biases, but they are not self-serving bias or ideological bias as often claimed.

[1] Miller, William Lee. Lincoln's Virtues: An Ethical Biography, Alfred A. Knopf, New York , 2002, page 388.

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Confirmation Bias (Repost I)

As classes begin, I urge my students to avoid confirmation bias. Robert T. Carroll of the Skeptic's Dictionary describes confirmation bias as
a type of selective thinking whereby one tends to notice and to look for what confirms one's beliefs, and to ignore, not look for, or undervalue the relevance of what contradicts one's beliefs.
Expose yourself to new ideas. Students tend to think of economics in terms of the Democrat and Republican debate. Although economists are often partisans, their debates frequently turn on a different axis. For example, economists might debate the relative effectiveness of monetary policy and fiscal policy in achieving full employment. Both a Democrat and a Republican might favor stimulative fiscal policy but differ on who gets tax cuts. Many of the economists who believe that fiscal policy is effective may not like the tax cut plans of either party.

Greg Mankiw recently posted a letter from the "perfect" student in A Question about Learning Economics, or at least that's how I think the student. The student reads books by economists with very different perspectives, and respectfully engages professors in discussions. The student mentions having a professor who was a Friedman disciple and another who was New Keynesian. Mankiw's reply is sold. In part, he writes,
You are lucky that you have professors with different viewpoints. Your job, as a budding economist, is to learn from all of them. Ideally, at the end of the day, you should be able to understand and appreciate (although not necessarily agree with) each point of view. You should try to construct in your mind a debate between your Friedmanite professor and your Keynesian professor. What points would each raise, and how would the other respond?
In a valuable EconTalk, Ian Ayers suggests that listeners attempt to name things that they have learned but that they don't like. If you can't think of any, you are a biased consumer of education.

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Experts Vs. Partisans (Repost I)

I love college football; my favorite team is Southern Cal and it has been since I was ten. I love tailgating before the game, and walking into the stadium in a wave of cardinal. Then the game starts. USC defers to the second half. Ray Maualuga smacks a back for a five yard loss and the band plays Conquest. Mark Sanchez hits Patrick Turner on a slant up the middle for a thirty yard gain and the band plays Conquest. The band plays Conquest a lot. After the game, the players, the band, and the fans gather at one end of the stadium to chant traditional cheers, often led by players. I love being a fan and surrounded by other fans.

If I had money on the game, I would not listen to my fellow fans; I wouldn’t even trust my own opinion. As a fan, I have too much skin in the game. With money on the line, I would look at a computer model, or read what an expert or experts say. I would also try to get a consensus opinion of experts by looking at the Las Vegas betting line, or prediction markets. Experts and aggregations of experts somehow stay above the fray and remain objective.

There is a similar relationship between economists, politicians, and citizens; economists are the experts and politicians are the players, the media, the band, and voters, the fans. Politicians and voters are partisans, allegiance to the team comes before objectivity. Politicians enact policy through law, and economists study the impact of policy and advise politicians. Politicians need good positive economics to achieve their normative goals. But if I were a politician, I would like to know my advisors had my back, and would not hire an advisor unwilling to show allegiance to me.

Economists advising politicians walk a fine line between holding to their science and remaining objective, or becoming partisans. Occasionally, a good advisor might contradict the politicians they advise as did Greg Mankiw when he said,
Romney has had to distance himself from his top economics adviser after Mankiw _ a Princeton-trained economist now teaching at Harvard _ voiced his support for an immigration bill Romney strongly opposes [1].
At some point, an economist must become a partisan, or at least bite his tongue when his team supports policy that contradicts good science as Greg Mankiw did when he supported tax cuts that important Bush administration officials said would raise tax revenues. Mankiw is on the record as stating that tax cuts don’t increase tax revenue. He took incoming fire from fellow economists for his silence, but defended himself by parsing words, noting that, “Being opposed to a tax cut as a policy and being critical of an argument for tax cuts are two different things. [2]” In response to Mankiw’s relative silence and awkward position on the revenue impact of the tax cut, Brad DeLong noted,
Mankiw was indeed correct in thinking that he personally could do more good for the country and the world working inside than if he were to march up to Dick Cheney, tell him "you have to stop saying that tax cuts raise revenues," and so get fired. But the Bush administration did frequently argue that tax cuts raised revenue. And there is the much harder question: is it worth the sacrifice of the economics profession's outside credibility and the further confusion of the public that is entailed when good economists defend bad policies on the outside that they are working to change on the inside? I don't know the answer to that.
The world has need for both experts and partisans, and it is difficult to do both simultaneously. Anyone who reads my blog for any period of time will note that I do not like economists surrendering their science for partisanship. I believe that most economists share my sentiments. I hope that I can be fair. Best wishes to the Obama economics team that now must walk that fine line.

[1] Glen Johnson, “Romney Finds Advisors Both Help And Hurt,” The Washington Post, June 19, 2007.

[2] Nathan Strauss, “Mankiw Defends Tax Cut Stance, Faces Online Flak,” The Harvard Crimson, July 13, 2007.

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Thursday, August 27, 2009

Initial Unemployment Claims for August 22, 2009

On August 27, 2009 the Department of Labor released the most recent data on initial unemployment claims for the week ended August 22, 2009 in "Unemployment Insurance Weekly Claims Report."  Seasonally adjusted initial claims was 570,000, down 10,000 from a revised estimate of initial claims of 580,000 for the week ended August 22, 2009. The 4 week moving average decreased 4,750 to 566,250. The average is down 92,500 from its peak, signaling a possible peak for this business cycle. [1]Using National Bureau of Economic Research estimates on the beginning and ending dates of recessions, I have  included a graph that compares the recessions that began in March 2001, July 1990, and July 1981 with the current recession which began in December 2007. I have not attempted to adjust the data for changes in the size of labor market. The plots are measured over 103 weeks, beginning eight weeks before the recessions began. The horizontal axes begins in October 2007, the date the current recession began, and the data for the other recessions is superimposed on those dates. The graph gives some insight into why economists, politicians and others have expressed so much concern about the current recession. The current recession seems to have the depth of the 1981 recession but the 4 week moving average seems to be falling more slowly than it has in past episodes.

[1] Robert J. Gordon did research looking at the relationship between the 4 week moving average of initial unemployment claims and found that recessions often bottom out shortly after the 4-week moving average of initial unemployment claims peaks. The average may have peaked at 658,750 for the week ended April 4, 2009. 

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A Blast From the Past: Global Cooling

I just finished rereading, "The Weather Conspiracy: The Coming of the New Ice Age" written by the Impact Team and published in 1977.  The members of the impact team are given, but after an Internet search of three names and not a single useful hit.  The book captures exaggerated concerns of global cooling by a fear mongering media.  They quote a few papers and discuss the extreme outcomes, suggesting that these are the likely.  They conclude that we are headed for a new ice age with catastrophic consequences for civilization: war, famine and pestilence.  A typical passage reads,
America and the rest of the Northern Hemisphere are returning to normal weather. After fifty years of unprecedentedly temperate climate, the world is returning to the more radical shifts and the cooler climate that characterized the previous eight hundred years. Many climatologists believe that since the sixties the world has been slipping toward a new ice age. The only questions in their minds are: What kind of ice age will it be, little or great? How soon will it happen?
Temperatures would only have to drop by 2.8 degrees F to plunge the world into a new ice age.  The authors provide a small list of consequences of a little ice age.
India would have a major drought every four years, and 30-50 million metric tons would be required from the world's grain reserves to prevent the death of 150 million Indians.

China would have starvation conditions every five years and need 50 million metric tons of grain for its people.

Canada would lose 50 percent of its food production, and reduce exports by 75 percent. 
The consequences of a great ice age, apparently equally likely to occur would be much greater and little or great, our descent could happen rapidly. 

The causes of global cooling are natural as well as man-made, dust from pollution blocking the warming energy of the sun.  Intriguingly, the authors mention carbon dioxide emissions as a warming mechanism that does not sufficiently offset cooling, setting up the concern of some scientists that man-made global warming may kill millions, not global cooling.
Many hot-earth men believe that global temperatures will rise by at least 3.8 degrees F by 2020, given that the volume of carbon dioxide is doubled in the next fifty years. If this happened, ships could well sail the entire Arctic Circle, and the melting of the polar ice caps could cause the sea level to rise by two hundred to four hundred feet. London and New York would vanish. So would Rome, Paris, Brussels, Antwerp, Marseille, and hundreds of other cities. Trees would grow in Alaska and Siberia; cattle would be raised on what was once tundra.
Their conclusions sound familiar.  Temperatures have warmed, but we are not underwater yet.  We are not even close to losing a major city. 

Given the more probable event, global cooling, the authors conclude,
Under coming conditions, clearly the rich countries of the world (in other words, the tiny minority) will have to make do with less food.  With the exception of the U.S., they will run a food balance-of-payments deficit that will put a big dent in their economies and cause some degree of social disruption. 

For the poor countries of the world, the implications are more ominous.  Many will starve.  This future will place an almost unbearable moral and political burden on the U.S. and its people.  We must face up to the following "unthinkable questions":

1.  How much food will we keep for ourselves?  In other words...

2.  How much are we willing to reduce our standard of living to feed others?  For example, would we all be willing to stop using our air conditioners if the energy so released would feed another 400,000 people?  Or would we rather stay cool and let them starve?

3.  Are we going to give away our food or sell it?

Who gets how much, and why?
The authors disdain for the market system is clear.  Our accumulation of wealth through markets created the problem.  We consume too much.  It does not fairly treat price as a rationing mechanism.  If food becomes scarcer, it's price would rise and we would buy less.  If food costs more and cooling reduces wealth, we will use less air conditioning (a bad example in a cooling world) and less heating as well. 

Yesterdays misreading of climate change has implications for us today.  I fear that some advocates of the theory of global warming hurt the science supporting their position by focusing on low probability extreme events to rally support for political action to curtail carbon emissions.  If ice caps don't melt, wiping out cities, devastating agriculture, and causing energy wars, science is likely to be blamed.  

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Tuesday, August 25, 2009

New Projections Show Larger Deficits

Roger Runningen and Brian Faler writing for Bloomberg in "Obama Raises ’10 Deficit Outlook 19% to $1.5 Trillion (Update1)," (August 25, 2009) report on budget projections by the White House and the Congressional Budget Office.  Their forecasts have grown gloomier. 
U.S. unemployment will surge to 10 percent this year and the budget deficit will be $1.5 trillion next year, both higher than previous Obama administration forecasts because of a recession that was deeper and longer than expected, White House budget chief Peter Orszag said.
The Office of Management and Budget forecasts that the U.S. economy will shrink 2.8 percent this year, worse than the 1.2 percent contraction the OMB projected in May. For next year, the budget office said the gross domestic product will grow 2.0 percent, less than the 3.2 percent expected in May. By 2011, the economy would be well on its way to recovery, growing at a 3.8 percent annual rate, according to the administration’s mid-year economic review, released this morning.

“While the danger of the economy immediately falling into a deep recession has receded, the American economy is still in the midst of a serious economic downturn,” the budget office’s report said. “The long-term deficit outlook remains daunting.”

Separately, the nonpartisan Congressional Budget Office today predicted that the jobless rate would average 10.2 percent next year, gloomier than the White House projection, and forecast the deficit for this year at $1.6 trillion, slightly worse than the White House estimate.

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Posner, "A Failure of Capitalism"

Richard Posner has been a leading scholar of the impact of regulatory law on the economy.  In his most recent book, "A Failure of Capitalism," Posner describes the descent of the U.S. economy into depression and gives its proximate causes.  Although I do not agree with all his conclusions, he makes a valuable contribution.  The book is an easy read for principles students and tells a coherent story about our nation's current economic crisis.  As might be gathered from the title, he believes that individuals acting rationally by responding to the incentives they faced caused the depression.  He also faults policy of both the Clinton and Bush administrations; the former for excessive deregulation of the banking industry and the latter for a hands-off approach to regulation in place. 

In a chapter titled, "The Economics Profession Asleep at the Switch," he describes the interaction between political bias and empirical testing.  Economists do try to let the data form their opinions, but it is neither a painless nor perfect process.
Economics understanding of the causes and cures of depressions has not longer influences analysis. When good arguments, and some evidence, are presented on both sides of an economic debate that engages the political passions that economists share with other people, but the debate cannot be resolved by empirical testing, preconceptions shaped by ideology with exert a mesmerizing influence on the debaters. Still, this depression, like the last, is likely to stimulate fresh thinking by economists, as well as to provide new data for empirical analysis. It has already stimulated a good deal of fresh thinking – on the part of Bernanke, for example. He is a conservative economist, and conservative economists don’t like deficit-spending programs, or at least their public-works and transfer-payment component, which expand the government’s economic footprint. Yet he supports the stimulus program, having come to doubt that a depression can be averted or cured by monetary policy alone. Many economists have been converted – virtually overnight – from being Milton Friedman monetarists to being J.M. Keynes deficit spenders, as they see monetary policy failing to deliver us from the depression. Economists are influenced by ideology, but they are not impervious to evidence. The thirteenth-century change of name of the English town of Middleton de Keynes to Milton Keynes may have been prophetic. But the speed of the profession’s conversion (not that it is complete) from Friedman to Keynes suggests that the intellectual foundations of depression economics are unstable.

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Monday, August 24, 2009

Yoram Bauman on Mankiw's, "Ten Principles of Economics"

For those who wish to see a comedic take on Mankiw's "Ten Principles of Economics," I have linked to Yoram Bauman, the stand-up economist. Yes, he does have a Ph.D. The video is a little over five minutes.

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EconTalk: Brady on Health Care Reform

Russ Roberts interviews David Brady on "Health Care Reform, Public Opinion, and Party Politics."  The discussion involves more political science than economics but was interesting and would be enjoyed by many economics students.  Using contingent valuation, Brady finds that voters desire health care reform but are unwilling to pay for it.  In this sense, they vote their pocketbooks.  He also finds that people who do not pay income taxes favor reform, and those who do pay income taxes oppose reform.  I seems this a dismal but believable finding.
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Friday, August 21, 2009

Protection Anyone?

With all the moral problems of pornography, who would have thought that the biggest complaint would be that the actors don't use condoms?  Shaya Tayefe Mohajer, of the AP writes in "Porn makers challenged for not mandating condoms," that
An AIDS advocacy group filed complaints with state officials against 16 production companies that show unprotected sex in porn movies.

The AIDS Healthcare Foundation filed the action Thursday with the California Division of Occupational Safety and Health, alleging the practice amounts to unsafe behavior in a California workplace.

"We will not stop until there is a policy of requiring condoms to be used in porn," foundation president Michael Weinstein said.

By law, U.S. adult film actors must prove they have tested negative for HIV and other sexually transmitted diseases within 30 days of going to work on a film...

Weinstein said AIDS could be spread through the on-camera behavior and noted that many people get their sex education from porn movies.

Watching unprotected sex could prompt them to be careless during sex acts, he said.
Why don't actors use condoms?
Hustler publisher Larry Flynt told The Associated Press, "people who enjoy viewing adult films do not want to see people using condoms."

"While it might provide some additional protection, the sales are not going to be there to make the effort worthwhile for the actors and actresses," he said...

Former porn actress Jan Meza said she asked about the use of condoms when she first started appearing in adult films in 2006.

"I was told that I would never get work again," said Meza, who later contracted herpes...
Why has the state of California done nothing?
Weinstein said no state legislators have agreed to sponsor the group's proposal to mandate condoms in porn movies.

Hirsch [of Vivid Entertainment] said the adult film industry would likely leave California if the use of condoms became mandatory.

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Rose Friedman

Rose Friedman, an economist and author, the wife Milton Friedman, and sister of Aaron Director died of heart failure in her home in Davis, California on August 28, 2009.  The Wall Street Journal provides an eulogy ("Rose of Freedom," Wall Street Journal, August 20, 2009, part of which is provided below.
The Journal of Economic Literature recently described the last quarter century of rapid economic growth and rising living standards as "The Age of Friedman," after Milton Friedman, the Nobel Prize winning economist. The editors could as fairly have called it the Age of Friedmans to include Milton's wife of 68 years and collaborator, Rose Friedman, who died Tuesday at age 98.
Rose was small in stature like Milton—both were less than five-feet tall—but their ideas were of towering impact. That was especially true in the postwar era through the 1970s, when statist economists dominated most universities and national capitals. The Friedmans re-popularized the principles of economic freedom, which led to the Reagan-Thatcher ascendancy and the spread of capitalist ideas to China, Eastern Europe and even dirigiste India.

"Our central theme in public advocacy," wrote Rose in "Two Lucky People," their joint autobiography, "has been the promotion of human freedom. . . . it underlies our opposition to rent control and general wage and price controls, our support for educational choice . . . an all-volunteer army, limitation of government spending, legalization of drugs, privatizing Social Security, free trade, and the deregulation of industry."

It is said that Rose was the only one who ever won a debate with Milton. Once in a discussion on tax policy between Milton and economist Arthur Laffer, she intervened and admonished them: "I think we should cut tax rates way below the revenue maximizing rate." We asked her not long ago if she thought the recent economic troubles and revival of statist policies was a repudiation of Milton's legacy. "Oh heavens no," she said. "Milton's ideas are timeless." So are hers.

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Wednesday, August 19, 2009

Rationing Health Care

Economics is the study of how individuals through markets or acting collectively through government ration scarce resources to meet unlimited wants.  A point that is seemingly missed in the current health care debate is that it is a product like any other and must be rationed.  The demand for health care can be divided into two components: the demand for routine, relatively low cost health maintenance and for extreme, low probability, high cost events such as care for cancer or strokes.  The two demand components are similar to other goods we insure like our homes or cars.  Consumers generally opt to pay for routine costs out of pocket and insure the high cost, low probability events.  Over time and largely because of government policy, the purchase of health care maintenance has been conflated with the purchase of insurance for extreme health care events.  The result has been a quirky, expensive health care system inherently subject to rising cost.

As part of its effort to manage the economy during World War II the government passed the Stabilization Act of 1942 that imposed price and wage controls but authorized employers to offer health insurance as a fringe benefit exempt from wage controls.  Employee provided health insurance was granted tax preferences in 1943 by an administrative tax court ruling, and in 1954 by changes to the Internal Revenue Code; health insurance payments were made tax deductible for the employer and tax exempt for the employee.  Copayments remained fully taxable creating an economic incentive to have as many dollars of health care services paid through the employer provided plan.  To avoid taxes, routine health payments and insurance against catastrophic health events were covered by the same policy.  Health care users no longer observed nor cared to observe the full cost of medical treatment because it had little to do with their out of pocket cost.  Price became less important as a rationing mechanism and the health care subject to rising cost.

I would like to begin with a thought experiment involving cars rather than health care to lose some of the emotional responses that the health care debate engenders.  What type of car do you currently drive?  Because we must pay for all costs of the vehicle, we shop carefully for price, not just of purchase but of use, including insurance.  Automakers are attuned to our demand and supply a number of models to meet our demand and make cars ranging from the Ford Focus to the BMW M5.

Let's change reality a little to create an insurance plan for cars that is similar to employee provided health insurance.  You are joining an employee group auto plan that has a fixed fee of $250 per month and $20 every time that you have maintenance performed.  The fixed fee also covers insurance.  There are 300 people in your group and each drives a Honda Civic prior to joining.  The cost of the plan is based on the average cost the group has experienced driving a Civic.  After joining the group you decide to replace your car.  What type of car would you buy?  I'll bet that with a little consideration that it is a lot nicer than the Civic.  Say that you bought the BMW M5 costing $85,000.  You would only pay 1/300th of the purchase price; other group members would pick up the other 299/300th.  The same goes with the gas.  You are only paying $20 plus 1/300th of the cost of the fill up.  And when the wash car option on the gas pump is offered, you select it.  The cost of the plan would increase by $65,000, the increase in purchase price over the price of the Civic plus the increase in routine costs.  Of course, all members in the group are likely to respond the same way and cost of the group plan will grow.  A rational person would soon drop out of the group, but suppose they couldn't.

Automakers and service providers would respond to the change in market conditions.  Honda will drop the Civic, Toyota the Corolla, Ford the Focus, etc.  All makers will specialize in high end models loaded with standard equipment like GPS systems, radar that finds blind spots, self filling tires, etc.  Rather than have a clean car option, gas stations will have a detail clean option.  Jiffy Lube will not only provide coffee, but full meals as well.  We will have the best car sector in the world for those who could afford it.

This is the mess the government unintentionally created when they gave tax benefits for employee provided health care and we can't easily drop out.  We would pay more because our income used for health care payments would be taxable and we would be buying into a health care system specializing in the production of high end medical care.  In fact, most states regulate individual purchases of insurance to make it more like employee provided insurance.  It just cost more. 

Some people have dropped out or been forced out.  Advocates of universal coverage claim that there are 47 million uninsured and believe that all should be provided access to the system and that taxpayers should cover the bill.  Of course, the 47 million are likely to choose BMW M5 health care, and the cost would explode as it has with employee provided plans, Medicare and Medicaid.  The Obama administration has proposed eliminating unnecessary procedures that don't benefit anyone to help contain the cost.  Even if perfectly done, that is rationing and still won't solve the basic problem.  It does the equivalent of eliminating meals at Jiffy Lube.  People are still accessing BMW M5 health care because the buyers do not face the true cost of either ordinary health care maintenance or health insurance for high cost, low probability events.

The government could ration care by trying to emulate a market outcome with taxpayers picking up the tab for those priced out of the market, but governments are bad at emulating markets.  They produce inferior goods at a higher price.

Effective reform begins by separating the market for routine health care from the insurance market for extreme medical events.  This means that the tax break given to employee provided plans must be eliminated or extended to private purchasers of health insurance.  Given that a recession is a bad time to raise taxes, I would start by extending tax benefits to all and eliminating them over time as the economy recovered. 

Over time, insurance companies would offer more varied insurance options including low cost-high deductible health plans in which consumers would pay for routine health care out of pocket.  The lower cost would make health insurance more affordable and the number of uninsured would decrease.

Problems would remain.  Many would still be uninsured and insurance companies would still try to drop people with preexisting conditions to name two.  Perhaps taxpayers would be more willing to pay for universal access into a cheaper health care system, and health care markets might spontaneously deal with other problems.  But it would be a good start and inexpensive. 

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Tuesday, August 18, 2009

Mexico: Violence, Limited Access Order and the War on Drugs

(HT Drudge)  Douglas North, John Wallis, and Barry Weingast would describe Mexico as a limited access order in which government solves the problem of violence by trading economic favors to specialists in violence for foregoing violence. The size of the payoff is directly related to the ability of commit violence.  When payoffs are disrupted, violence ensues.  Our demand for drugs and subsequent War on Drugs has made Mexico a more violent country.  Perhaps because of comparative advantage in the production of drugs, or relatively effective enforcement of laws prohibiting the production of drugs in the United States, Mexico has become an important producer of illegal drugs. 

Early on drug cartels develop methods of using violence to enforcing contracts for the production, distribution and sale of drugs that are outside the law.  Being both profitable and violent in a limited access order earns them a role in government.  They must be bought off to preserve peace or violence will ensue. 

Non-drug producing elites in Mexico have chosen civil war over peace to remove drug suppliers from the ruling coalition and it is proving to be a difficult task. reports on August 16, 2009 in "Mexican Army takes over customs on US border," that
Mexico's Army took control of customs Sunday on the busy US border, as federal authorities pulled agents off the job in a massive anti-corruption shakeup, officials told AFP.

An Interior Ministry official said the dismissals were being carried out at all Mexican border facilities, and that the customs agents were being replaced.

Customs agents were sacked after some were found to be linked to contraband operations, according to sources at the ministry.

Agents in Nuevo Laredo, on the border with the southern US state of Texas, were called in Saturday to be told they were fired, and to hand in their badges and weapons. A total of 1,100 agents were sacked, Mexican media said...

During a visit to Mexico last week, US President Barack Obama praised President Felipe Calderon for his controversial military crackdown on the country's drug gangs, which involves more than 36,000 troops.

The United States has pledged around 1.6 billion dollars to tackle drug trafficking in Mexico and Central America under the Merida Initiative, which also includes funds for training and equipment to boost security on the Mexican side of the border.

The Obama administration has acknowledged the US role in the violence, pledging to stem the flow of weapons into Mexico and curb demand for drugs in the United States, one of the world's top cocaine consumers.

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Monday, August 17, 2009

Glaeser on Clunkers

The cash for clunkers program has three goals: to stimulate economic activity, decrease fuel consumption, and decrease carbon emissions.  Edward Glaeser, a Harvard economist, argues that the program fails on the last two accounts following.  Part of his reasoning is similar to that of economists who have studied the impact of CAFE standards.  People who drive newer, nicer, more efficient vehicles drive more, partly because it cost less.  Glaeser writes in a Boston Globe article titled, "Program has clunky reasoning," that
...We should expect more driving from someone who is induced to buy a newer, more pleasant car that is cheaper to drive. No one should be surprised when the stimulus package’s jolt to highway spending increases driving. Some leaders seem to think that subsidizing high-speed rail will offset this cash for cars, but subsidizing travel means more travel and more carbon emissions. The best way to get people to ride trains is to impose appropriate taxes on carbon and congestion charges.

If the government is desperate to subsidize something, it should focus on the greening of urban buses. With public bus lines, the number of vehicle miles can be kept constant. Better bus service in the urban core encourages high-density living. Unlike new cars or inter-urban rail lines, which transport the prosperous, buses are disproportionately used by the poor. The cash-for-clunkers policy actively reduces the supply of old cars available for lower-income buyers, but environmental policy need not be regressive.

Good policies ensure that subsequent behavioral responses work toward the policy’s aims, not against it. If America wants to fight global warming, a carbon emission tax makes more sense than car subsidies. Doling out cash for ailing car companies may be popular, but that doesn’t make it right.

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Friday, August 14, 2009

Dark Deeds

HT Drudge) Let me be clear, defacing other people's property to make your political point is a violation of the owners' property rights and is a crime in most places and should be in all. The crime is particularly annoying because the Internet allows anyone to plaster political posters all over the world. Anthony Colarossi describes efforts of authorities to find and punish those responsible for defacing others' property in "Clermont police interview suspect in Obama 'Joker' posters," written for the Orlando Sentinel on August 13, 2009.
Clermont police have interviewed one suspect who is admitting to putting up the dozens of posters pasted around the city depicting President Obama as the Joker character from the Batman film The Dark Knight, city officials confirmed...

At this point officials are not sure how much damage was caused by the signs or the dollar amount associated with the clean-up.

Dozens of the posters were pasted around the city earlier this week. A pair of the posters were pasted to a Clermont Post Office collection box. They prompted the postmaster to contact the Postal Inspector's office, which is looking at potential federal crimes for defacing federal property.

City officials, meanwhile, are trying to determine what local crimes might be associated with the posting of the images on public and private properties. They've also been busy ripping down the sticky signs because they're a violation of city ordinance regarding illegal signs.

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Noah on Health Care Reform

Timothy Noah wrote about misstatements about Medicare and Medicaid from the right in "The Medicare-Isn't-Government Meme, Part 2," for Slate (August 12, 2009).  I believe that the source of the misstatements is that these government programs use tax revenues to fund the purchase of private medical care.  In countries that have government run health care sectors regulatory reform that allowed private provision of medical services with government funding would be considered a step toward market provision of medical care.  In the United States, expansion of public funding would be a small step toward government provision.  If you believe that all citizens should have access to medical care regardless of ability to pay then government funding is necessary and private provision is an option in providing that access.   

Noah correctly points out quotes by Arthur Laffer and former Sen. John Breaux, La., that insinuate that Medicare and Medicaid are private programs (Noah's links are retained).  He also attacks Claude Pepper, Glenn Beck and Rush Limbaugh, the latter with less efficacy.  It is a good article and deserves to be read. 
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Thursday, August 13, 2009

Murray on Taxation

Charles Murray describes two ways that the current income tax corrupts American democracy and offeres two suggestions for improving it in "Tax Withholding Is Bad for Democracy," for the Wall Street Journal on August 13, 2009.
America is supposed to be a democracy in which we're all in it together. Part of that ethos, which has been so essential to the country in times of crisis, is a common understanding that we all pay a share of the costs. Taxes are an essential ingredient in the civic glue that binds us together.

Our democracy is corrupted when some voters think that they won't have to pay for the benefits their representatives offer them. It is corrupted when some voters see themselves as victims of exploitation by their fellow citizens.

By both standards, American democracy is in trouble. We have the worst of both worlds...

This deforms the behavior of everyone—the voters who think they aren't paying for Congress's latest bright idea, the politicians who know that promising new programs will always be a winning political strategy with the majority of taxpayers who don't think they have to pay for them, and the wealthy who know that the only way to get politicians to refrain from that strategy is to buy them off.
As evidence of the tax distortion that corrupts, Murray writes that the top 1% of income earners pay 40% of income taxes and that the bottom third pay 0% of income taxes.  He then offers a cost free solution.
...Most families who pay little or no personal income taxes are paying Social Security and Medicare taxes. All we need to do is make an accounting change, no longer pretending that payroll taxes are sequestered in trust funds.

Fold payroll taxes into the personal tax code, adjusting the rules so that everyone still pays the same total, but the tax bill shows up on the 1040. Doing so will tell everyone the truth: Their payroll taxes are being used to pay whatever bills the federal government brings upon itself, among which are the costs of Social Security and Medicare.

The finishing touch is to make sure that people understand how much they are paying, which is presently obscured by withholding at the workplace. End withholding, and require everybody to do what millions of Americans already do: write checks for estimated taxes four times a year.

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Australian Senate Rejects Cap and Trade Legislation

Other countries must follow the lead of the United States in passing cap and trade legislation if its efforts are to be effective in reducing carbon emissions.  Otherwise, citizens of the United States will pay a step price for a program with few if any benefits.  Gemma Daley of Bloomberg writes in "Australian Senate Rejects Rudd’s Cap and Trade Emissions Plan," that the Australian Senate has voted against cap and trade legislation proposed by Prime Minister Kevin Rudd.
Aug. 13 (Bloomberg) -- Australia’s Senate rejected the government’s climate-change legislation, forcing Prime Minister Kevin Rudd to amend the bill or call an early election.

Senators voted 42 to 30 against the law, which included plans for a carbon trading system similar to one used in Europe. Australia, the world’s biggest coal exporter, was proposing to reduce greenhouse gases by between 5 percent and 15 percent of 2000 levels in the next decade.

Rudd, who needs support from seven senators outside the government to pass laws through the upper house, can resubmit the bill after making amendments. A second rejection after a three-month span would give him a trigger to call an election.

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Monday, August 10, 2009

I'm Back!

I'm back from a five night cruise with my family on the Carnival Ship, Fantasy.  We left from New Orleans and traveled to two cities in Mexico, Progreso and Cozumel, and then back to New Orleans to complete the loop.  Never having been to New Orleans, I enjoyed the short visit immensely.  Katrina's destruction was visible everywhere, but so was the reconstruction.  The French Quarter was beautiful and historically interesting.  Street performers were everywhere, playing jazz and dancing.  Dozens of restaurants specialized in Cajun food but still managed to cater to different types of customers, families, young adults, etc.  One word of warning, if you are taking a taxi, ask the price before you get in.  The trip from the Marriott to the point of debarkation cost $20, and the trip back, $35. 

The Fantasy was a good ship, and the international staff treated us very well.  The evening meals were excellent, but better still were the goofy song and dance routines performed by the staff as they finished serving dessert.  The evening shows were also entertaining and often involved audience participation.  The staff went out of their way to treat my children well, and many knew them by name.  

Our first port of call was Progreso, Mexico, a city of about 50,000 with two main industries: tourism and fishing.  While acting the part of a tourist, I met a family that owned a small family business that hauled people on a "banana boat" a big banana shaped raft that was pulled by a speed boat.  The family members were friendly, and the ride was fun.  At different parts of the visit, I learned that many of the Mexican businessmen did not like competition from street vendors, many of them Guatemalan, and I presume, illegal.  The dislike did not stop a businessman from guiding my wife to a Guatemalan woman who sold purses that he did not stock.  Bravo! 

Our second port of call was Cozumel.  Our excursion to a zipline park was canceled because of thunder storms.  It seems the proprietors did not think their customers should ride a down metal cords when lightening was clearly visible.  The shops at the port facility were heavily visited and it seemed everyone spoke English, a small disappointment to me since I speak Spanish.  I talked with several workers in the shops, and was informed that many if not all shops are owned by or partner with the cruise line, an interesting type of horizontal integration.  It provides an additional profit opportunity for the cruise line and a more controlled environment for patrons concerned with drug cartel violence, crime, bad water, etc.  For those wishing to see a more traditional view of Mexico, all that was required was a short walk of one hundred yards to exit the facility and enter the Cozumel proper. 

The worst part of the trip was the 541.2 mile drive home.
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