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Brooks Wilson's Economics Blog: February 2010

Friday, February 26, 2010

Stossel's "Parasite Circuit

By the amount of attention from the media and the Congress that the acceleration problem in some Toyota models has received you might think that thousands have died but you would be wrong.  John Stossel, a uniquely insightful reporter, describes the relative size of the problem in "The Parasite Circuit" from his blog on Fox News.
The scare-of-the-day is always used by politicians to grab power. But to put the Toyota problem in perspective, before all the media hype, 19 fatal accidents were linked to faulty gas pedals and floor mats over the last decade. That's fewer than 2 each year. Compare that to America’s 40,000 annual fatal car crashes.

As David Champion, director of automobile testing for Consumer Reports, said to The Guardian:

"I find it a little odd that we're going to have a Congressional hearing to look at those two deaths out of 40,000...  you have to look at death rates in safety terms rationally."

No one looks at safety “rationally” when the media and Big Government are stirred up.
I agree with his conclusion that elected officials like manufacturing crisis that and that these crises often give rise to parasitic lawyers and that this circuit is bad for the economy but this practice may be rational if their objective is reelection and crisis mongering improves their public image.  Their image does need polishing.  (HT Drudge Report) The Rasmussen Reports published the results of a survey that finds that 71% of the House and Senate are doing a poor job and only 10% believe that it is doing a good or excellent job ("Congressional Performance").

A systematic bias in the public's understanding of economic issues might cause voters to frequently buy political attacks on business and promote those officials who lead the charge despite bad economic outcomes.   Bryan Caplan concludes that non economists suffer from antimarket bias, the tendency to underestimate the effectiveness and benefits of the market mechanism, in his book, "The Myth of the Rational Voter."[1] 

Not only is the "parasite circuit" bad for the economy but populist legislation to solve insignificant problems is as well.

Does anyone really believe that Toyota has grown to be the world's largest automaker by not listening to consumers or by making bad, unsafe vehicles?  Does anyone really believe that the Congress has such high values that they would avoid passing bad legislation that would help them to win reelection?  Who do you trust more, your Congressman or Senator or Toyota?  

[1]  See "The Views of Economists and Non Economists On The Economy (Repost I)" for a brief review of the four systematic biases that Caplan finds in the public's view of the economy based on survey data.

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Wednesday, February 24, 2010

Mankiw on Characteristics Economists Share

Lisa Leslie Henderson of WellesleyWeston Magazine conducted an interview with Greg Mankiw ("Face to Face: An interview with N. Gregory Mankiw").  The entire interview is good, but I want to focus on his view of the making of an economist.
WellesleyWeston Magazine: You have had a remarkable career both in the public and private sector. What is it about economics that piqued your interest?

Greg Mankiw: I first became interested in economics during my freshman year at Princeton. One of my friends was taking a microeconomics class; I started reading her textbook and found that I like economics, a lot. In many ways I am a prototypical economist. Economists share a couple of characteristics: they tend to be naturally better in math and science—economics is fairly quantitative—and they are generally more interested in public policy and social issues than in the substance of science. I have always been interested in politics—dinner conversation in my home often centered on what was happening locally and in Washington. But politics by itself seemed vague, random, and subjective. Economics appealed to me because it brought an analytic perspective to social policy questions.

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The TCCTA on Dual Credit

Texas' budget concerns hit close to home.  The Texas Community College Teachers Association blog reports that dual credit programs are under new scrutiny in "Dual Credit Scrutinized."  I will provide my thought in another post, and copy the TCCTA post in its entirety. 
Dual credit programs have grown prodigiously at Texas community colleges. Since the state first started tracking enrollment in 1999, the number of dual credit students across Texas has "ballooned from fewer than 12,000 to more than 91,000," according to a recent article in the Texas Tribune by Brian Thevenot.

State officials tend to support the growth and, historically, these students perform well in transferring and getting their degrees. It's too early, however, to measure whether the positive numbers will hold up, since today's dual credit students are not necessarily as well prepared as they were before the programs began to multiply. More reports are expected soon, but they may be flawed by an inability at this point to measure the success of the current cohort of students. A time frame of six years is often needed.

Some officials have voiced displeasure about the financing of dual credit, which allows colleges to count students in the instructional formula, and also permits school districts to tally them as part of their average daily attendance totals. "State Rep. Scott Hochberg, D-Houston, and other state policymakers, including Commissioner of Education Robert Scott, have raised concerns that the state may be double-paying for the classes in financing both the high schools and colleges involved," the Tribune article states.

According to the piece, concerns among legislators "emerged when they realized just how large the dual credit program had grown, and some were irked at reports that some colleges also charged tuition, either to students or their high schools."

Then there is the issue of academic standards, which may become more problematic as enrollments grow.

Here's an important passage:
Unlike Advanced Placement courses, which are also common on high school campuses, there’s no test at the end of the class required for students to earn the college credit, [Rep.] Hochberg pointed out. And the dual credit courses can be taught either on college or high school campuses. It’s not known at the state level the prevalence of each, but the high school-based classes in particular have drawn suspicions about their rigor. “There have been a lot of allegations that they aren’t really college-level courses,” Hochberg said.

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A Canadian's Choice of U.S. Health Care

(HT Drudge Report) Often the Canadian single payer system enters our health care debate as an example of quality provision of health care at a low cost.  Tara Brautigam illustrates some of the problems with the system in "'My heart, my choice,' Williams says, defending decision for U.S. heart surgery," an article on Newfoundland and Labrador Premier Danny Williams' choice to seek heart surgery in the United States.
An unapologetic Danny Williams says he was aware his trip to the United States for heart surgery earlier this month would spark outcry, but he concluded his personal health trumped any public fallout over the controversial decision.

In an interview with The Canadian Press, Williams said he went to Miami to have a "minimally invasive" surgery for an ailment first detected nearly a year ago, based on the advice of his doctors.

"This was my heart, my choice and my health," Williams said late Monday from his condominium in Sarasota, Fla.

"I did not sign away my right to get the best possible health care for myself when I entered politics."
What was better about treatment in Miami?  It was done with more advanced technology by a more experienced surgeon and required less recovery time.  Well, I am assuming that patients recover more quickly from minimally invasive surgery than surgery that requires the breaking of bones. 
His doctors in Canada presented him with two options - a full or partial sternotomy, both of which would've required breaking bones, he said.

He said he spoke with and provided his medical information to a leading cardiac surgeon in New Jersey who is also from Newfoundland and Labrador. He advised him to seek treatment at the Mount Sinai Medical Center in Miami.

That's where he was treated by Dr. Joseph Lamelas, a cardiac surgeon who has performed more than 8,000 open-heart surgeries.

Williams said Lamelas made an incision under his arm that didn't require any bone breakage.
As we reform our health care system, we should protect and perhaps enhance the elements of the current system that allow the introduction of new technologies. One such element is profit.

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Tuesday, February 23, 2010

Rogoff on Debt, Interest Rates, Taxes and Spending

Aki Ito and Jason Clenfield of Bloomberg do a nice job of summarizing Kenneth Rogoff's remarks at a forum in Tokyo in "Harvard’s Rogoff Sees Sovereign Defaults, ‘Painful’ Austerity."  Rogoff does not express much hope for solutions on budgetary problems from the federal government.
Feb. 24 (Bloomberg) -- Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big American banks.

Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years,” Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. “I predict we will again.”

The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said...

“Most countries have reached a point where it would be much wiser to phase out fiscal stimulus,” said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.”...

The U.S. government will delay any efforts to contain the deficit until Treasury yields reach around 6 percent to 7 percent, Rogoff said.

“The U.S. is in a state of paralysis in its fiscal policy,” he said. “Monetary policy will tighten first, and I don’t think it’s the right mix.”

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End of Life Health Care

One issue in the health care debate has focused on end of life expenditures.  Some argue that too much money is spent to extend lives short periods of time.  Philip Moeller of U.S. News and World Report describes research that gives a counter argument in "End-of-Life Medical Spending Not So Wasteful." 
However, new research from four economists challenges conventional thinking. I don't pretend to be able to follow the math in their arguments but if it supports their logic, then perhaps we ought to re-evaluate the way we look at end-of-life healthcare spending. The economists are Tomas J. Philipson, Gary S, Becker, Dana Goldman, and Kevin M. Murphy. Goldman teaches at the University of Southern California and is a senior economist at the RAND Corp. The other three are at the University of Chicago. All of them have impressive backgrounds, including a Nobel Prize won by Becker, and a John Bates Clark Medal, awarded to Murphy in 1997 as the nation's most outstanding young economist. Their paper was published by the National Bureau of Economic Research.

Up to a quarter of all healthcare spending occurs at the end of life, they note by way of introducing the topic. "However, though many observers have claimed that such spending is often irrational and wasteful," their paper says, "little explicit analysis exists on the incentives that determine end of life healthcare spending."

In providing such analysis, they conclude, among other things, that each year of life is not worth the same. Later years are actually more valuable. "A substantial amount of spending on futile care is rational when there is little-to-no value of leaving wealth behind," they say, and this is in fact how people behave near the ends of their lives. Thus, the value of an additional year of life rises substantially as people get older. People's perception that wealth has no use to them after they die makes them willing to spend much if not all of their wealth to extend their lives. "The value of a life year equals total wealth when the alternative is death and decreases as you get further from there," the economists write. "By contrast, traditional valuations typically assume that the value of a life-year is constant."
I don't have a problem with people sending their money on themselves.  I doubt anybody does.  Should we care if people near death spend taxpayer money to extend their lives?

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Friday, February 19, 2010

Clinton, Bush and Obama and Budgets

Our political process often highlights the difference between presidential administrations rather than their similarities. I wandered into Bankrupting America, through Cafe Hayek and found a couple of posts on the federal budget that are of interest.  The first, "The Odd Couple: 5 unfortunate similarities between Bush and Obama," gives a backward countdown of the similarities.
5. They love to spend. Bush passed a $3 trillion budget for 2009.  Obama posted a $3.5 trillion budget in 2010.  Bush doubled the debt to almost $6 trillion and Obama’s plans would leave us with an IOU of an additional $8.5 trillion by 2020.

4. They shop at the same stores. Contrary to popular belief, defense and homeland security spending only made up about 40 percent of Bush’s new spending.  He increased spending across most non-defense categories – like education, Medicare, Medicaid, income security and regional development – by four to six times the rate of inflation.  In Obama’s first half year in office, as he demanded a departure from the “investment deficit” years under Bush, these budgets rose another 70 percent or 40 times the rate of inflation.

3. They dabble with stimulants. In 2001 and 2008, Bush spent billions on rebates to stimulate consumer spending.  In 2009, Obama upped the ante with his $862 billion stimulus package.

2. They give sweetheart deals to failing corporations. Obama carried out Bush’s unpopular $700 billion bailout for failing corporations.  Together, the presidents have bailed out over 600 businesses since Spring 2008.

1. They enjoy regulating in their free time. Once again contrary to popular belief, President Bush was the biggest regulator since Richard Nixon.  Under his leadership in 2007, the number of pages of regulation added to the Federal Register reached an all-time high of 78,090  – a 21 percent increase from Bush’s first year.  And spending on regulatory activities rose to $42 billion in 2009 – a 62 percent increase.  Since taking office, Obama has proposed a large and sweeping increase in regulation that many worry could lead to another financial crisis in the future.
The second post, "A quick ode to the relative fiscal restraint of the Clinton years," correctly notes that President Clinton is the odd man out in spending and wishes the former president a speedy recovery from hearth surgery.  I concur. 

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Thursday, February 18, 2010

Sevastianova on War and Economic Growth

In "WWII and the Economy," I hypothesized that war was not good for the economy and stated three conditions that I believed would not hold to "prove" my hypothesis in a type of proof by contradiction.  The conditions were that consumers do not mind the consumption of armaments, that the war is fought on foreign soil, and that little value is placed on the value of lost lives. 

Daria Sevastianova address the impact of war on a country's economy in "Impact of War on Country per Capita GDP: A Descriptive Analysis" which was published in Peace Economics, Peace Science and Public Policy, Vol. 15, 2009.  Her conclusion reads   
This paper applies empirical growth framework to study the effect of war on economic growth. We model growth over one, two-, and five-year time periods, as well as check robustness of findings with OLS and FE estimation. Along with a standard set of explanatory variables included in growth regressions, COW data on civil and international war are used to code war incidence during 1970-2000 in a panel of 90 countries.

Regression analysis demonstrates that the average effect of civil and international war is to decrease income growth. Civil war harms all economies, while international war might boost growth in some countries. The findings in this paper point to the fact that economies with low growth rates are involved in civil war, whereas faster growth economies are involved in international wars. In addition, the negative effects of war are more pronounced in the short run growth models based on annual and biannual data (where we find negative and statistically significant coefficients), whereas the effect of war on five-year growth rates is statistically insignificant. 

The study also provides a descriptive analysis of how civil and international wars affect income per capita level, where war incidence is plotted against real GDP per capita in a sample of countries. A visual examination of data corroborates the results of regression analysis: while civil war mostly reduces income, there is much more ambiguity in the effect of international war. Some countries, in fact, are able to sustain economic growth throughout the duration of war.

Preliminary results obtained from graphing war data on an individual country basis from 1970 to 2000 point to the fact that there is a considerable amount of variation in the economic effects of political instability. The impact of war appears to vary considerably with conflict severity, time period, and by country. The wide variation in these results warrants a more detailed multivariate analysis in order to ascertain how intra- and interstate conflict affects real income per capita. Focus on different levels of conflict intensity, as well as sample heterogeneity might prove productive for future investigation, where conflict data collected by political scientists are applied in the empirical growth framework.
The model that she employs is tested with data, making it more than a story like the one I told.  It does not directly contradict my conclusions although it demonstrates that some countries are able to sustain growth through a conflict.  For example, income could grow, but the availability of consumer goods could stagnate or decline.

In attempting to contact Sevastianova about her article, I found an interview taken from the Evansville Business Journal (EBJ), October 2008.  I liked her response to one question because it deals with a strange demographic in economics faculties, they are dominated by men.  When asked what she enjoys about her current position she replied
I like sparking people's interest in economics, and I really like it when girls see they can learn economics and are aware of all the various job opportunities there are in the field.

Hear, hear.

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Wednesday, February 17, 2010

More on Rationing Health Care

Economics is the study of how individuals through markets or acting collectively through government ration resources.  Everybody cannot have as much as they want, a point that is often missed in the health care debate and the main point of this post.  Before proceeding, I will review a critical moment in government regulation of health insurance.  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 heart surgery.  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 tax 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 because it is not subject to market discipline.

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 that cost was largely independent of their out of pocket cost or insurance cost.  Payment to providers is made by the insurance company.  Economists frequently refer to this arrangement as third party payment.  The price of group insurance was based on the medical cost of the group, and because one employee's efforts to limit health care expenditures had virtually no impact on the overall medical care purchased by the group, no employee had incentive to economize.  Because they would be paid by the group, health care providers had incentive to provide the best quality care regardless of price.  Price became less important as a rationing mechanism and the health care more subject to rising cost.1,2

Abstracting away from problems caused by government tax policy, and with due apologies for goofy numbers, a well functioning market for health care would look something like Figure 1.  The demand curve shows the amount of health care that consumers are willing to purchase at each price, and the supply curve shows the amount of health care that providers are willing to sell at eat price.  The point at which the curves cross (E) is call equilibrium and it occurs at the price which the quantity that buyers wish to purchase is exactly equal to the amount producers are willing to sell.  There is no waste.  In this market, the equilibrium in which the equilibrium price is $48 per unit of health care and the equilibrium quantity of health care is 24 units.  Total medical expenditures are $1,152 ($48*24) and are depicted as the yellow area in the graph.

For the purpose of this analysis, I divided the market evenly into two types of households, low income and high income.  I have assumed that the only difference in demand between the two is income and that given the same level of income, demand would be identical.  This results in demand curves that converge at a zero price per unit.  Neither household is completely priced out of the market, but the market price of $48 per unit results in a much lower demand by low income households (6 units) than my high income households (18 units).  Low income households spent $288 for health care and high income families, $864.  Although the low income families buy health care at the margin, they may be priced out of some procedures or insurance markets or may believe that they can force others to pay for their healthcare (see "Democrats Ask, Can Health Care Bill Be Saved?" and "She Chose"). 

One proposal that is often mentioned is to allow people to buy health care regardless of the cost.  This proposal is untenable.  Again, the numbers are fanciful, but the direction of their movement is not.  At a zero price (point A on the Demand curve), 48 units of health care are demanded, more than 2.67 times more than upper income households would but for themselves if confronted directly by price.  At a zero price, no health care would be provided.  The price needed to induce health care providers to produce 48 units of health care is $96 per unit (point B on the Supply curve).  Taxpayers from both low and high income households would be obligated to pay $4,608, 4 times the bill that households paid under market conditions. 

The market uses prices to ration goods.  Some have suggested that government established committees could better allocate health care resources.  One solution might be to provide low income households with the amount of health care they would have purchased under market conditions if they had the same income as high income households.  This changes the shape of the demand curve causing more health care to be purchased at each price.  At eqhe Health care providers must be paid $2,048 to produce that level of care.  Assuming that low income households pay only $288, their original expenditure for health care, the remainder must come from high income families who are clearly much worse off.  Under market conditions, they paid $864, under government provision, they must pay $1,760.  The increase in their tax obligation is the same as a reduction in income.  Under market conditions, high income families would respond to the reduction of income by lowering health care purchases, but they are forced to buy more health care for themselves than they would freely choose.

Alternatively, the government could choose to provide the market quantity of 24 units of health care and divide it evenly between low and high income households with both receiving 12 units of health care.  The total health care bill would remain at $1,152 and might be divided as it was under market conditions with low income households paying $288 and high income households, $864.  Again, high income households are worse off.  Their health care expenditures are the same but they can only use 12 units of health care as opposed to 18. 

An easier and simpler approach would be to eliminate the tax advantage of employer provided plans.3  The government would be better off receiving more in taxes.  If health care providers do not respond to changing market incentives, low income families would be no worse off but high income families would be worse off due to the higher tax bill.  But people respond to incentives, even health care providers.  Under existing incentives, they provide high quality care regardless of cost, but under the new incentives, they would provide the highest quality care per dollar of consumer expenditure.  The quality of care would continue to improve but, with health care providers and consumers both more concerned about costs, at a much less explosive rate of cost growth.  It is the only scenario in which the government, health care providers, and all consumers could be made better off. 

1.  The high intensity use of labor is a second reason for the rising cost of health care.  See "Baumol, Cost Disease, and Health Care."

2.  See "Rationing Health Care" for a more descriptive analysis of how the third party payment system distorts market incentives.

3.  Alternatively, the government could extend the same tax benefits to private purchasers of health care that are now enjoyed by those who are covered through employer provided plans.  The improved incentives would be the same for buyers and sellers of health care but government deficits would grow.

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Friday, February 12, 2010

NCAA and Wages

I have argued that the NCAA restrictions on payments to athletes lowers their "wages" to levels well below what they would earn in a competitive labor market.  Lawrence Kahn quantifies the differential between what these athletes would earn without NCAA restrictions and what they actually earn in "Market: Cartel Behavior and Amateurism in College Sports" which was published in the Journal of Economic Perspectives (Vol. 212, No. 1, Winter 2007).
Analysis using this framework [an empirical method to estimate wages of NCAA athletes] have been performed for college football, as well as men's and women's basketball.  In constant 2005 dollars, estimates of the marginal revenue product [wage] of a draft-quality player range from about $263,000 for women's basketball (based on the 2000-2001 season) (Brown and Jewell 2006, p. 98)  to $495,000 for college football (based on the 1995 season) and $1.422 million for men's college basketball (based on the 1995-1996 season) (Brown and Jewell, 2004, p. 159).  These estimates of the marginal revenue product of a draft-quality athlete can be compared to the compensation of college athletes.  According to NCAA rules, athletes are limited to receiving a scholarship and stipend, supplemented by up to $2,000 of earnings from a job during the school year (Zimbalist, 1999, p. 26).  Since the cost of tuition, fees, room, board, and incidentals comes to roughly $40,000 at private schools (and less in most cases for public schools), compensation is far below marginal revenue produce for these revenue-producing athletes. 

Lawrence also describes NCAA attempts to limit compensation of assistant coaches.

In 1991, the NCAA set a maximum compensation level for certain assistant at $12,000 during the year and $4,000 for any summer camp earnings.  Several antitrust suits were filed against the NCAA on behalf of the assistant coaches, and they were consolidated into one class action.  In 1995, a federal court decided for the plaintiffs, and damages to the coaches were ruled in 1998 to be $22.3 million, which under the treble damages provision of antitrust law were multiplied to $67 million.  The NCAA appealed, but the parties eventually settled for $55.5 million, to be divided among roughly 1,000 assistant coaches (Hamilton, 2003). 
The article contains a lot of interesting history and good economics.  I love their product but recognize that it is not an "amateur" product. The NCAA is a profit maximizing business.   

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Thursday, February 11, 2010

Wind Farms and Economic Biases

Jonathan Karl's abc NEWS article, "New Wind Farms in the U.S. Do not Bring Jobs" focuses on the number of jobs created by "green" energy wind farms through funds provided by the American Recovery and Reinvestment Act.  This is a fair line of inquiry because the Obama administration sold the Act as a stimulus to create jobs.  It is a reminder that the press corps generally does not think like economists.   
Nearly $2 billion in money from the American Recovery and Reinvestment Act has been spent on wind power, funding the creation of enough new wind farms to power 2.4 million homes over the past year. But the study found that nearly 80 percent of that money has gone to foreign manufacturers of wind turbines.

"Most of the jobs are going overseas," said Russ Choma at the Investigative Reporting Workshop. He analyzed which foreign firms had accepted the most stimulus money. "According to our estimates, about 6,000 jobs have been created overseas, and maybe a couple hundred have been created in the U.S."

Even with the infusion of so much stimulus money, a recent report by American Wind Energy Association showed a drop in U.S. wind manufacturing jobs last year.

Sen. Chuck Schumer, D-N.Y., called the flow of money to foreign companies an outrage, because the stimulus, he said, was intended to create jobs inside the United States...
Several of the large European turbine manufacturers had limited manufacturing facilities in the United States, but there was nothing in the stimulus plan that required that the turbines, or any other equipment needed for the wind farms, be made here, said Rogers. There are strict "Buy America" provisions in the Recovery Act, but this Green Energy Stimulus initiative turned the existing tax credits into cash grants, bypassing the "Buy America" provision.
Karl implies that more jobs would have been created if the government would have forced the government to buy American produced wind turbines and that would have been good for the economy. 

Bryan Caplan calls the tendency of noneconomists to focus on job creation make work bias ("The Myth of the Rational Voter").  Even during a recession, many economists focus on increasing productivity.  Efficient investment leads to increased productivity and economic growth.  Job creation follows economic growth.  Economists deal with tradeoffs.  Economists who opposed the stimulus noted that the funds will not be spent efficiently resulting in lower future economic growth.  Economists who supported the stimulus argued that the loss from an inefficient allocation of resources would be smaller than the losses incurred by leaving resources unemployed.  This is an issue worthy of debate and empirical investigation. 

Economists know that everything has an opportunity cost.  The stimulus was financed by expanding government debt.  Other things equal, as government expands debt, interest rates rise crowding out private investment.  What opportunities did we collectively forego to fund the wind farms?  Would those foregone opportunities have been more or less productive than those made through the stimulus?

Senator Schumer expresses a shocking amount of "antiforeign" bias, the tendency to underestimate the benefits if economic exchange with foreign entities, a second bias identified by Caplan.  We buy wind turbines from Spain.  They earn dollars.  What do they do with the dollars when they are based in a country that uses Euros?  They can import U.S. goods or services thus decreasing the trade deficit, or they can invest in the United States decreasing net capital outflows.  In either case, the dollars are returned to our country and create jobs. 

Schumer, and Karl also fail to ask what would happen if the buy American provisions were stronger.  Other countries would retaliate by passing their own trade restrictions and remember that the Smoot-Hawley tariffs deepened the Great Depression.

The media can produce stories that ask bad economic questions because most Americans do not have enough foundations in economics to realize that we, through the media, are asking the wrong questions. 
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Tuesday, February 9, 2010

Smith, Acemoglu and Friedman on Greed

Many, perhaps almost all, think that greed is a byproduct of markets (capitalism).  It has existed since the dawn of time and is fully independent of the economic systems used to allocate resources, goods and services.  It is fitting that Adam Smith, the first economist, explained our field's divergence in thought from the rest of society concerning greed ("The Wealth of Nations").
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
Daron Acemoglu provides a more nuanced evaluation of the impact of greed ("The Crisis of 2008: Structure Lessons for and from Economics,").
A deep and important contribution of the discipline of economics is the insight that greed is neither good nor bad in the abstract. When channeled into profit-maximizing, competitive and innovative behavior under the auspices of sound laws and regulations, greed can act as the engine of innovation and economic growth. But when unchecked by the appropriate institutions and regulations, it will degenerate into rent-seeking, corruption and crime. It is our collective choice to manage the greed that many in our society inevitably possess. Economic theory provides guidance in how to create the right incentive systems and reward structures to contain it and turn it into a force towards progress.
This old exchange between Milton Friedman and Phil Donahue further elucidates the differences between economists and non economists on the subject of greed.

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Monday, February 8, 2010

Weisberg on Voters

In "Cruseturner on Democrats and Republicans," I blamed voters for electing officials who promised benefits through government programs that cannot realistically be filled as unsustainable levels of deficits and debt mount.  Jacob Weisberg writing for Slate ("Down With the People") who appears to politically left of center agrees with my hypothesis that voters want the impossible, lots of unfunded government programs, but offers an explanation for the seemingly irrational behavior: voters are ambivalent toward government.  I have no ambivalence, I want a small government sector, but he may be right. 
At the root of this kind of self-contradiction is our historical, nationally characterological ambivalence about government. We want Washington and the states to fix all of our problems now. At the same time, we want government to shrink, spend less, and reduce our taxes. We dislike government in the abstract: According to CNN, 67 percent of people favor balancing the budget even when the country is in a recession or a war, which is madness. But we love government in the particular: Even larger majorities oppose the kind of spending cuts that would reduce projected deficits, let alone eliminate them. Nearly half the public wants to cancel the Obama stimulus, and a strong majority doesn't want another round of it. But 80-plus percent of people want to extend unemployment benefits and to spend more money on roads and bridges. There's another term for that stuff: more stimulus spending...
...Increasingly, the crucial distinction is between the minority of serious politicians in either party who are prepared to speak directly about our choices, on the one hand, and the majority who indulge the public's delusions, on the other. I would put President Obama and his economic team in the first group, along with California Gov. Arnold Schwarzenegger. Republicans are more indulgent of the public's unrealism in general, but Democrats have spent years fostering their own forms of denial. Where Republicans encourage popular myths about taxes, spending, and climate change, Democrats tend to stoke our fantasies about the sustainability of entitlement spending as well as about the cost of new programs.

Our inability to address long-term challenges makes a strong case that the United States now faces an era of historical decline. Our reluctance to recognize economic choices also portends negative effects for the rest of the world. To change this story line, we need to stop blaming the rascals we elect to office and start looking to ourselves.

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Sunday, February 7, 2010

Cruseturner on Democrats and Republicans

My friend and colleague, Ashley Cruseturner, wrote "Are the Two Major Parties Too Lost to Right this Ship?" for  I have cut out a lot of good writing to focus on a main point of the article: that neither party is prepared to make tough choices to resolve long term budget deficits caused by unfunded liabilities of Medicare, Social Security and Medicaid.  I wish to offer a hypothesis to explain the dithering.  Politicians are giving voters what they want: unrealistic promises that can't fiscally be kept.  Cruseturner writes. 
...Like the 1850s, the thrilling and astonishingly decisive victory of a handsome dark horse, paradoxically, may mask the structural instability of the Democratic ascendancy.  Under the sweet but delusional spell of sudden and unexpected congressional majorities and control of the White House, Democrats then and now misread their mandate and misjudged the durability of their dominance.  Ironically, the recent meteoric elevation of party fortunes in 2006 and 2008, the euphoric triumph of Barack Obama, and perhaps even a hard-fought reelection win in 2012 by default, may well offer the Democratic Party of today one final and spectacular opportunity to definitively demonstrate the utter bankruptcy of modern liberalism...

The inconvenient truth: the Republicans of 2010 carry the baggage of a failed party bereft of ideas and visionaries—lacking intellectual honesty and the courage to speak classical conservative truth to its own conventional wisdom...

Right now no one in the Republican Party is seriously addressing the tough issues that pose an existential threat to our survival as a nation: the trillions of dollars in debt we currently owe and the tens of trillions in unfunded liabilities looming in our future.  The best the GOP can do is offer a promise to return to the status quo ante Pelosi: the pledge to stay on the road to disaster —but drive at a more moderate speed.
As Cruseturner penned these words, Paul Ryan, the ranking Republican member on the House Budget Committee released his budget plan, "A Roadmap for America's Future" which is a truly bold plan for the future. The proposal, which would among other things fundamentally change social security, Medicare, and Medicaid, was scored by the Congressional Budget Office.  The report from the CBO to Ryan begins with the usual disclaimers about the limitations of long term forecasts and the unsustainable nature of today's budget path but concludes,
Using CBO’s “textbook growth” model, it is not possible to simulate the effects of the alternative fiscal scenario after 2058 because deficits become so large and unsustainable that the model cannot calculate their effects. The Roadmap would put the federal budget on a sustainable path, generating an annual budget surplus of about 5 percent of GDP by 2080. According to CBO’s textbook growth model, which incorporates the assumption that economic output is determined by the number of hours of labor

that workers supply, the size and composition of the capital stock, and the state of technological expertise, real potential gross national product per person would continue to grow over the entire 75-year period (see Figure 4).10 The economy would be considerably stronger under the proposal (as analyzed by CBO) than it would be under the alternative fiscal scenario. Real gross national product per person would be about 70 percent higher in 2058 under the proposal than under the alternative fiscal scenario.
Ryan's provides a graph of projected economic growth per capita under the "Roadmap for American" plan and the status qua.  It appears to be based on the same data as the CBO report and it indeed shows and extreme difference in economic growth.  Other projections show dramatic improvements in the deficit and national debt, and levels of taxation and spending. 

The Ryan plan seems to be the exception that proves Cruseturner's point that nothing useful is being proposed by in Washington.  Democrats are attempting to pin the plan on all Republicans and Republicans have turned their backs on it.  Jake Sherman of Politico writes in "Dems rip into Ryan's roadmap,"
Last Friday, Rep. Paul Ryan looked like President Barack Obama’s new Republican best friend. The president showered praise on everything from his substantive budget proposal to his family during the now-legendary question-and-answer session with House Republicans.

But rather than opening a hopeful new avenue for bipartisanship, the White House and Hill Democrats quickly went to work ripping apart Ryan’s “Roadmap for America’s Future” — which Obama himself said he had read...

Republicans believe the criticism was a setup.

Rep. Devin Nunes (R-Calif.), an ally of Ryan’s and a collaborator on the plan, said the Democrats’ playbook was obvious: Obama elevated Ryan’s plan in order to methodically break him down. Democrats dismantled the road map point by point over the past week, framing it as a radical shift back to George W. Bush economics...

House Republicans sought to put some distance between themselves and Ryan’s plan. It is just one proposal from one member, the House’s top Republican said Thursday.

“We have a lot of members who have spent really a lot of time creatively looking at how [we] solve the nation’s problems,” House Minority Leader John Boehner (R-Ohio) said. “Paul Ryan is [the] ranking member on our Budget Committee, who has done an awful lot of work in putting together his road map. But it’s his.”
Democrats and Republicans are providing unsustainable policies while decrying true reform as costly.  Why?  You must either believe that politicians continually trick voters or that they are providing the policies voters want.  I'll take the latter option, politicians are giving us what we want.   

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Thursday, February 4, 2010

A Comment from a Reader on Forceps

I thank CrisisMaven for the comment and the questions to "Forceps," a post that describes how as many as one million babies and mothers died because a doctor named Chamberlen kept secret his innovation of the use of forceps in delivery.  I encourage you to visit "CrisisMaven's Blog."   CrisisMaven wrote,
But what do you suggest? That every inventor be tortured to own up? And how does one find out that he/she invented anything to be elicited in the first place? And what if Chamberlen had shared the fate of semmelweis? Maybe he had other good reasons to keep his secret and it only came out into the open when the world was prepared to accept it? Don't we remember Galilei?

For those not familiar with Semmelweis, he was a doctor who in 1847 conducted research into the cause of high death rate of mothers and their newborns in Vienna General's maternity ward compared to those who gave birth in their homes.  Doctors at the hospital were required to perform autopsies on all who died at the hospital.  Semmelweis discovered that doctors picked up bacteria in performance of the task which they carried with them as they assisted mothers with birth.  The solution was simple.  Semmelweis required doctors to wash their hands and the death rate plummeted.  Sadly, he was not hailed as a hero and his findings and solution were not only ignored but ridiculed by many in the scientific community.  Semmelweis did not handle the criticism well, growing bitter and developing strange lewd behavior that may have been due to insanity or perhaps the onset of Alzheimer's; he died at forty-seven in a sanitarium. 

Galileo Galilei history is better known.  A great scientist, he was persecuted by the church because he stated that some had misinterpreted the Bible. 

CrisisMaven asks what would I suggest?  Often history is simply lamentable and I believe this is such a case.  Lives were saved because of Chamberlen's innovation.  More would have been saved if he or his descendants had shared this knowledge earlier.  As a lover and defender of liberty, I would not suggest that the government try to elicit secret knowledge from its citizens through torture or force.  However, well defined markets that protected new ideas and innovations through copyrights, trademarks and patents might make sharing ideas more profitable than keeping them secret.  The innovator would have to compare the potential profit of the innovation through secrecy with the risk of discovery to the potential profit through time limited copyright, trademarks and patents.  If the innovator chooses secrecy, society is no worse off.  If she chooses protection through law, she benefits as well as society.  It is a difficult, yet proper function of government to design law that best protects the innovator to encourage innovation and limit monopoly granted privileges to maximize benefits to society.   

CrisisMaven is invited to make a response as a guest post if he desires.

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Wednesday, February 3, 2010

Products for Your Protection!

At times, the ability of a good to protect us is a significant determinant of demand.  This posts describes two potective products.  The linked story and video, "Bogota's bulletproof tailor," was produced by VBS.TV's Ryan Duffy and is found at CNN World.  I wish we lived in a world in which such products were not need, but now I am sounding like a Miss. America contestant.  Duffy introduces his story.
Brooklyn, New York (VBS.TV) -- Colombian tailor Miguel Caballero specializes in making garments that enable the wearer to get shot at point-blank range with nary an injury besides, maybe, a bruised ego. At-high-risk-of-catching-a-bullet demographics, such as rappers and politicians all over the world, rely on Miguel's handiwork. And, lucky me, when I was recently in Bogota for VBS.TV covering a few stories, I had the chance to visit Miguel's shop, learn about his protective clothing, and get shot in the gut by him. Seriously.
A second product is described in an ABC News video about "protecting the boys" with the Nutty Buddy.  The product's theme song is "Hit me with Your Best Shoot."  Follow the link to an ABC News story.  Will the Nutty Buddy replace the traditional cup? 
Replace this text with...
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A public good has two characteristics.  It is non-rivalrous and, once provided, exclusion by others is difficult.  Non-rivalrous means that the use of the good by one does not stop use by others.  An idea, knowledge, is a public good.  It is non-rivalrous; my use of algebra or a song does not affect yours.  Exclusion is difficult; once algebra or a song is know, it is difficult to stop people from using it. 

We want people to introduce new ideas into the market; they cause the economy to grow.  They will not be provided unless those who introduce them can profit.  Inventors protect their ideas through secrecy and governments protect them with copyrights, trademarks, and patents.  We also want the ideas to spread to others so they can be built upon and expanded by others.  Achieving a balance between encouraging new ideas and granting the innovators monopoly use rights is an important yet tricky function of government.

Steven Levitt and Stephen Dubner provide a gruesome example of knowledge that was protected too long by secrecy in "Super Freakonomics."  The relevance of the example and its application to lawmakers in determining how long to protect new ideas should be clear.
There is another powerful, if bittersweet, example from the realm of childbirth: the forceps.  It used to be that when a baby presented itself feet- or derriere-first, there was a good chance it would get stuck in the uterus, endangering both mother and child.  The forceps, a simple set of metal tongs, allowed a doctor or midwife to turn a baby inside the uterus and adroitly pluck it out, headfirst, like a roast suckling pig  from the oven.

As effective as it was, the forceps did not save as many lives as it should have.  It is thought to have been invented in the early seventeenth century by a London obstetrician named Peter Chamberlen.  The forceps worked so well that Chamberlen kept it a secret, sharing it only with sons and grandsons who continued in the family business.  It wasn't until the mid-eighteenth century that the forceps passed into general use.

What was the cost of this technological hoarding?  According to the surgeon and author Atul Gawande, "it has to have been millions of lives lost."

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Monday, February 1, 2010

The BCS Is Under Bipartisan Busybody Attack

Every year a slew of unhappy fans claim that their favorite college football team was unfairly excluded from BCS college football national champion game.  Politicians feeding into that discontent, either from a ghoulish desire to ride populist discontent or an earnest desire to serve disgruntled constituents, propose government action to reform the BCS.  The latest effort is described by an AP writer for ("Justice Dept.: Obama administration may take action on BCS," Jan 29, 2010).
WASHINGTON (AP) -- The Obama administration is considering several steps that would review the legality of the controversial Bowl Championship Series, the Justice Department said in a letter Friday to a senator who had asked for an antitrust review.

In the letter to Sen. Orrin Hatch, obtained by The Associated Press, Assistant Attorney General Ronald Weich wrote that the Justice Department is reviewing Hatch's request and other materials to determine whether to open an investigation into whether the BCS violates antitrust laws.

"Importantly, and in addition, the administration also is exploring other options that might be available to address concerns with the college football postseason," Weich wrote, including asking the Federal Trade Commission to review the legality of the BCS under consumer protection laws.

Several lawmakers and many critics want the BCS to switch to a playoff system, rather than the ratings system it uses to determine the teams that play in the championship game.

"The administration shares your belief that the current lack of a college football national championship playoff with respect to the highest division of college football ... raises important questions affecting millions of fans, colleges and universities, players and other interested parties," Weich wrote.
I oppose the busybody, partisan attack for at least four reasons.  First, a playoff system may not do a better job at selecting a national champion as James Hamilton explains here.  The BCS is adaptive and has repeatedly demonstrated that they are a profit maximizing organization.  If there is additional profit to be had in a playoff structure, it will make its way to college football.  Third, President Obama, Senator Hatch, and the staff at Justice have better things to do than fix a nonproblem.  Isn't a War on Terror fought on two fronts, trials of terrorists, 10% unemployment enough?  And most important, it is not the government's role to attempt to fix every problem, some should be beneath their notice.  Let individuals and private organizations solve their own problems; their track record is better than yours.  If the BCS has violated antitrust or consumer protection law, it is the law that should change, not the BCS system.  

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