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Brooks Wilson's Economics Blog: September 2011

Friday, September 30, 2011

Some Consequences of Government Rationing

In “Rationing Health Care” and “More on Rationing Health Care” I describe why employer provided health care how employer provided health care was created as a response to the price and wage controls imposed during WWII.  Employers could not raise wages but the government permitted them to offer health care benefits to employees in addition to wages.  New laws made health care expense deductible for the employers and did not count the health care benefits as taxable income for the employees.  Because health care payments paid with the employees wages were taxable, both the employer and the employee had a financial motive to push more medical employee paid health care expenses onto the group plan paid by the employer.

The law created a tragedy of the commons and the common resource was the group plan.  Health care is over consumed because the employees have no incentive to control expenditures but all pay for the increasing costs because the cost of the group plan has increased.  There are basically two ways to control rising costs.  Employees must be again be exposed to market prices or the employer through the group provider must ration health care.

Medicare and Medicaid have created similar tragedies of the commons.  The elderly and the poor get benefits paid for largely by taxpayers, and consequently have little incentive to control consumption.  President Obama’s health care reform would ration health care benefits through expert committees.  A couple of articles describe the impact of government rationing in the Tennessee and the United Kingdom (“Patients to wait longer for care under new health law, think tank says,” “Cataracts, hips, knees and tonsils: NHS begins rationing operations”).

In Tennessee, approximately 700,000 citizens will gain health coverage (demand expands from D0 to D1), most will be younger men with low incomes who will become eligible for Medicaid.  The remainder are people who qualify for subsidies to buy insurance though newly created state health exchanges.  As demand expands without a corresponding increase in health care providers, the price of health care increases as does the quantity of health care provided (the increase in demand has caused a change in quantity demanded along the original supply curve and equilibrium has shifted from A to B).  More health care will be demanded at a higher price.  Somebody has to pay.  Sources cited in the article suggest that taxpayers and healthy young adults that do not qualify for subsidies will subsidize the poor and infirm. 

The second article explains that the National Health Service will ration hip replacements, cataract surgery and tonsil removal as well as other operations to control burgeoning budgets. 

Society cannot afford to provide all the health care that people desire.  As health care becomes more effective and more expensive, people will not be able to afford all beneficial care.  Public payment for health care has or will hit the same ceiling.  We as individuals or collectively cannot afford everything we want.  Resources are scarce.  It seems cruel to force a dying person to examine their financial records to determine if they wish to spend their remaining wealth on a procedure that might be effective.  Many will not have the resources to pay.   It also seems cruel to tell a dying patient that she does not meet the cost benefit criteria for a procedure that might extend her life.

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Saturday, September 24, 2011

The Market Structure of the NCAA

As I prepare to watch the Men of Troy take on the Sun Devils, I reflect on a broad based misunderstanding of the economics of college sports expressed by most fans including my students.  We love the product and perhaps this affection causes us to accept the way that product is brought to market.  My analysis will be descriptive rather than numerical.  Examples are taken from Huma and Staurowsky, "The Price of Poverty in Big Time College Sport.” 

The NCAA is a monopoly producer of college athletics.  It is probably a complement to both the NFL and the NBA meaning that as a fan consumes more NCAA sports he or she is more likely to consume NFL or NBA sports as well.  The NCAA is big business and highly professional organization.  In 2008, more than 100 million people attended a college sporting event.  Broadcasting contracts are in the billions of dollars.  CBS and Turner Sports will pay $10.8 billion over 14 years to broadcast NCAA division I men’s college basketball. 

The NCAA is virtually a monopsony buyer of 18 to 24 year-old football and basketball players.  Although estimates vary, college football and basketball would be paid in excess of $150,000 annually.  Top players would be paid more than $1 million annually.  My guess is that most players will never command such a value in their “professional” careers if they are not drafted into the NFL or NBA and I am somewhat mystified by suggestions that such valuable employees are somehow “amateurs” when their value over a four year period greatly exceeds the median household income.

They are amateurs only because the NCAA has branded them as amateurs to suppress their wages.  Michael Rosenberg reports the following conversation with former NCAA President Myles Brand.  Brand begins

They can’t be paid.


Because they’re amateurs.

What makes them amateurs?

Well, they can’t be paid.

Why not?

Because they’re amateurs.

Who decided they are amateurs?

We did.


Because we don’t pay them.

Their wages (the scholarship money) fall short of covering college related expenses by approximately $3,222 and more than 85 percent live below the poverty line of $10,890 for a single individual.  The NCAA recognizes the penury the scholarship system produces advising students on the acceptability of food stamps, forcing taxpayers to subsidize a multibillion dollar industry.

Food Stamps.  A grant-in-aid recipient who lives and eats off campus may use the money provided for his or her board to obtain governmental food stamps, provided the stamps are available to the student body in general.  Additionally, the student-athlete must be eligible for such stamps without any special arrangements on the part of athletics department personnel or representatives of the institution’s athletics interest. 

NCAA rules make it difficult to take advantage of the educational opportunity that scholarships are claimed to provide.  In 1973, the NCAA changed scholarships from four year contracts to one year renewable contracts.  If you do not live up to your expected athletic value, it’s one and done.  The NCAA surrendered basketball game scheduling to television broadcasters for larger television contracts.  Broadcasters predictably spread games throughout the week reducing time that athletes could spend in class.  The NCAA rules limit practices to 20 hours per week during the relevant playing season but allow “voluntary” practices.  Athletes who do not attend these practices are not physically ready to play and are frequently dropped from teams.  The average football and basketball player works over 40 hours per week.  Given the rigors of athletic training, it is amazing the graduation rates of a little less than 50% are not lower. 

I believe that colleges should bid for athletes just as the bid for faculty staff and students but Huma and Staurowsky make a more modest proposal that would dramatically improve the welfare of students.  I believe that their most important recommendations are

1. Support legislation that will allow universities to fully fund their athletes’ educational opportunities with scholarships that fully cover the full cost of attendance.

2.  Lift restrictions on all college athlete’s commercial opportunities by allowing the Olympic amateur model.  The Olympics’ international definition of amateurism permits amateur athletes access to the commercial free market.  They are free to secure endorsement deals, get paid for signing autographs, etc.

3.  Promote the adoption of legislation that will allow revenue-producing athletes to receive a portion of new revenues that can be placed in an educational lockbox, a trust fund to be accessed to assist in or upon the completion of their college degree.   

As a reminder, students are free to disagree with my normative values.  Students who wish to disagree the ideas expressed in this post may start with my characterization of NCAA sports as a monopoly and a monopsony.  They may also believe that NCAA sports products are a substitute for rather than a complement of the NFL and NBA.

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Tuesday, September 20, 2011

A Natural Experiment

Since the end of the Jim Crow era, elected officials have attempted to mitigate poverty and racial inequality.  A slew of policies poured money into programs designed to improve educational achievement of poor minority urbanites.  Measuring the success of different programs is challenging.  In Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier, Edward Glaeser describes how Will Dobbie and Roland Fryer (“Are High-Quality Schools Enough to Close the Achievement Gap? Evidence from a Bold Social Experiment in Harlem”) cleverly used data to measure the success of the Promise Academy in Harlem.  I divide two of Glaeser’s paragraphs into three parts: the first explaining the school and available data, the second, how Fryer organized the data, and third, the conclusions he reached.  If, after reading his the section about the problem and data, you figure out how he organized the data, perhaps you too can be a Harvard economist.

In 2004, as New York began to allow more experimentation in its schools, the Harlem Children’s Zone opened its own charter school, the Promise Academy.  The school’s curriculum is intense, requiring long hours from its students, and it offers financial incentives for success.  The school’s leaders worked aggressively to lure the best teachers available, and the academy fired almost 50 percent of its teachers in its first year.  Entrance into the school is determined by lottery…

Dobbie and Fryer organized data.

, which led my colleague Roland Fryer to perform a true natural experiment comparing similar lottery winners and losers. 

Dobbie and Fryer found

…that the school had strong, positive effects on its students: the Promise Academy eliminated the block-white achievement gap in mathematics.  The teachers had particular success with boys, which is unusual and remarkable.

The Harlem Children’s Zone proves that investing in segregated areas can work, as long as that investment targets children, not stadiums or monorails. 

While writing this post, I learned from Greg Mankiw’s Blog that Fryer was named as a recipient of this year’s MacArthur Foundation fellowships.  The award includes a $500,000 grant to conduct research that follows his natural interests (“Three named MacArthur Fellows”). 

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Friday, September 16, 2011

So Close and Yet So Far

In another gaming story, Elida Betancourt’s emotions ran the gamut from ecstasy to depression, and she burst into tears as she matched her lottery ticket numbers one by one to those reported by the Fresno Bee as the winning numbers to a $54 jackpot only then to learn that the newspaper reported the wrong numbers.  She is threatening to sue.

I would be angry too, but does she have a case?

Error ilusiona a mujer con ganar lotería

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When a Win Is Not a Win

Last Saturday, USC welcomed Utah into the Pac-12 with a victory that frustrated SC fans.  The Utes kept the game close by recovering 3 turnovers while losing 1.  One the last play of the game, Utah attempted a 41-yard field goal that was blocked by USC lineman Matt Kalil and returned by Torin Harris for a touchdown.  USC players rushed onto the field drawing an excessive celebration penalty, and apparently disallowing the touchdown.  For the next two hours, the score was given as USC 17, Utah 14.  The betting line in Las Vegas favored USC by 8.5 points.  SC failed to cover but that is wee the story begins because in Vegas a win is not a win.

Two hours after the game ended, the Pac-12 announced that a miscommunication between the press box and the officials caused an error in reporting the score.  Excessive celebration is a dead ball foul that is automatically declined by rule at the end of a game.  The final score was 23 to 14 and SC did cover. 

The casinos, who took in about $500,000 in bets mostly on Utah, were prepared.  They have house rules on bets for just such circumstances and the rules between casinos are different.  Some casinos pay based on the score reported at the end of the game.  They paid betters that took Utah.  Those who took SC and gave the points were not happy.  Other casinos pay according to the official score.  These casinos initially paid betters who took Utah but switched to paying out SC betters after the score was correctly reported.  At these casinos, betters were happy and the casinos took a bath.  Betters who, thinking that they had losing tickets, destroyed their tickets are hopping mad.   

Some unhappy betters who took SC and gave the points complained to the Nevada Gaming Commission.  Should the Commission establish rules of the (betting) game?  Should the Pac-12 or the NCAA establish reporting rules that better mesh with the gaming industry?

See also “Too late to bet on USC-Utah?” and “USC-Utah scoring change creates stir.”

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Thursday, September 15, 2011

Mankiw, Krugman, Barro and Causation

Economists develop models that imply causation and test them with statistics that measure correlation.  As everybody with statistical training knows, including economists, correlation does not imply causation.  It is an easy mistake to make and in a blog post Greg Mankiw argues that Paul Krugman falls victim to this error in his critique of an article by Robert Barro.  

The problem that Paul glosses over is that correlation does not imply causation.  Paul appears to jump to the conclusion that this correlation establishes that the business cycle is the driving force behind investment spending.  But it could just as easily be the opposite (or a third factor driving both).  I am completely confused as to why Paul thinks this graph establishes much of anything at all.

The points of this post are that causation is difficult to establish and that economists expend a great deal of energy at it.

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Tuesday, September 13, 2011

A graphic from a reader Recession Proof - 10 Hot Careers
Created by: Online Graduate Programs
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Glaeser on Earnings Gap

I read the following paragraph in Triumph of the City by Edward Glaeser and found two ideas that might interest my students. First, why did less-skilled workers in Cleveland and Detroit earn more than more-skilled workers in Boston and Minneapolis. Glaeser suggests that unionization of low-skilled workers is at least a partial explanation. Second, the earnings gap between skilled and unskilled workers has grown causing increased earnings inequality.  As you read the paragraph, ask yourself if, from a normative perspective, it is more fair that less skilled worker who organized through unions earned more than workers who increased their skills set.

The connection between urban skills and urban productivity has grown steadily stronger throughout the developed world since the 1970s. In those days, less-skilled places that were filled with highly paid, unionized factory workers often earned more than more-skilled areas. In 1970, per capita incomes were higher in industrial areas like Cleveland and Detroit than in better-educated metropolitan areas like Boston and Minneapolis. Over the past thirty years, however, the less-skilled manufacturing cities have faltered while the more-skilled idea-producing cities have thrived. In 1980, men with four years of college earned about 33 percent more than high school graduates, but by the mid-1990s, that earnings gap had increased to nearly 70 percent. Over the past thirty years, American society has become more unequal, partly because the marketplace increasingly rewards people with more skills.

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McArdle on Bias

In my lecture notes, I write,

A goal of economic or any scientific training is to think logically and free of bias.  Bias ties our conclusions to our prior beliefs, eliminating the need for study.

In a comment about a book, Megan McArdle eloquently expands beyond my conclusion, reaching a profound conclusion that bias affects the questions asked.

What bias does--in science, in media, in any situation where information is gathered--is affect what questions you ask…

Bias matters not because researchers* deliberately slant their stories, but because they are much more likely to interrogate the facts that contradict their ideological beliefs, than the ones that support them.  When they come across an uncomfortable fact, they'll go out of their way to figure out why it isn't really true.  When they come across a fact that confirms what they believe, they'll be more likely to accept it at face value.

*I substituted the word liberals with researchers to conform with the impact of bias that I am teaching students.  I feel comfortable making this substitution because McArdle also writes, “I'm not claiming that liberals do this more than conservatives (I think that being human, they're equally prone to this phenomenon)…”

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Friday, September 9, 2011

It Is Not from the Benevolence of the Butcher…

In Ogden, a man was butchering a cow in his driveway located in a high density neighborhood.  Household production is not counted when calculating GDP so transforming the cow into burgers does not add to GDP despite the value added, but I wonder where he got the cow and if he paid for it (“Police called after man butchers cow in his driveway”).

OGDEN -- Charges may ensue for an Ogden man who startled the neighbors by butchering a cow in his driveway over the weekend.

Police were called to the scene at 1:44 p.m. Sunday after the cow's owner began harvesting the animal. A patrolman was responding to a caller who saw a cow being trailered to the home in the 2700 block of Gramercy Avenue.

The caller then reported hearing the cow's audible mooing, followed by what sounded like a gunshot, said Police Lt. Troy Burnett. Then the mooing stopped.

The patrolman's report said when he arrived at the scene a half-block above Monroe Boulevard, "the cow was in the process of losing its head," Burnett said.

The man sawing at the animal's neck, the owner of the beef, denied shooting the cow on the premises, telling the officer the animal had been dispatched outside the city limits.

The officer took the information and filed a report that will be screened by the city attorney's office for possible charges, Burnett said.

What crimes might have been committed?  Here’s a partial list:

  • discharging a firearm within the city limits
  • disorderly conduct
  • health code violations
  • animal cruelty

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Thursday, September 8, 2011

Glaeser on Green Energy

Yesterday, I linked to Daron Acemoglu’s article “The Real Solution Is Growth” in which he suggested that policy should focus

ON green technology, the next area that has the best promise of creating a platform for more innovation…The United States is lagging behind other countries in these activities. To regain leadership, we need both more and smarter subsidies to research in green technologies and a carbon tax that naturally encourages the use of cleaner technologies and triggers more research to seek such technologies.

Another exceptional economist from a nearby institution, Edward Glaeser, explains why green technology is not an engine for job creation, why it increases productivity, and what types of activities should be subsidized in “Why Green Energy Can’t Power a Job Engine.”

He uses Evergreen Solar which had a factory that received $40 million in subsidies and recently announced that it was moving production from Massachusetts to China as a case study.  Evergreen’s comparative advantage was its proximity to one of America’s foremost centers of engineering, Boston, and its principles worked with MIT profession Emanuel Sachs who invented the “string ribbon” process for producing solar cells. 

The new company’s innovative product brought international partners willing to finance the company’s expansion.  When the time came to begin commercial production, the lure of cheap labor enticed Evergreen to move production to China.

Glaeser conclusion expounds on Acemoglu’s recommended policy that government funds research in green technologies.

Failed public investments, like the money spent in Devens, reflect the fact that public officials are rarely skilled venture capitalists and that governments pursue many objectives that lead them away from solid investments. It’s easy to see why any governor would be excited about a green-energy manufacturing plant in a less prosperous area of his or her state. But the same forces that made Devens political catnip meant that it was unlikely to be a long-term success…

Massachusetts’s edge lies in ideas, not products. Those ideas are best produced in creative clusters, built around cities, where knowledge moves easily from inventor to entrepreneur. The only production that really needs to occur in greater Boston is the early-stage manufacturing that can be an important part of the research process. Mature companies, like Evergreen Solar, naturally move their factories to lower-cost areas…

As long as solar panels are getting cheaper, we shouldn’t worry about where they are being produced. We should continue financing research on solar technology as long as that research continues to produce cost-cutting breakthroughs, like “string ribbon” technology, but we shouldn’t pretend that cheaper solar energy will end up employing millions of our less-skilled citizens.

For decades, local economic success has come from entrepreneurship and education, not large-scale manufacturing. The Devens closing doesn’t imply that there is anything wrong with clean energy, but it does suggest the difficulties inherent in trying to beat China at cheap manufacturing. In the long run, America will be richer than China only by having smarter citizens, and that requires the skills that come from schools and cities, not dispersed factories.

If this post is of interest, read Glaeser’s entire article linked above.  If the article leaves you wanting more, read his book, Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier.

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Tuesday, September 6, 2011

Acemoglu on Innovation

When evaluating policy, the American public focuses on its potential job creation, economists focus on potential improvements in productivity.  In The Myth of the Rational Voter: Why Democracies Choose Bad Policies, Bryan Caplan assumes economists know better than non-economists on economic issues and refers to this difference as make-work bias.
Daron Acemoglu, an MIT economics professor, describes his solution to the debt ceiling, the recent credit rating downgrade, unemployment in “The Real Solution Is Growth” which is quoted in part below.  I recommend the entire article.
We should not take our eye off the really important ball: economic growth and the innovation process that underpins it.
Though the U.S. economy has tremendous innovative capacity, even in the depths of the current recession, this means neither that policies to encourage high-value innovation are not possible nor that we should ignore the danger of significantly damaging this capacity.
Here are the dangers.
  • Patent protection is becoming a more bureaucratic, red-tape-ridden, and uncertain process
  • The explosion of salaries on Wall Street has attracted many of the talented individuals who otherwise would have gone into research, design, and engineering occupations
  • Markets will not generate enough innovation.
  • Innovation also relies on the political infrastructure of society

And here are some positive measures for fostering innovation.
  • Encourage skilled foreign workers to work and settle in the United States
  • Foster the commercialization of innovation. Much more can be done to facilitate this process. The Bayh-Dole Act of 1980 was only a small step toward encouraging commercialization of academic research…
  • Focus on green technology, the next area that has the best promise of creating a platform for more innovation
Different economists might emphasize different policy measures to secure productivity through innovation but Acemoglu’s list is a good place to start.  This week, Mit Romney will present his economic platform, the Republican presidential candidates will debate and President Obama will deliver his jobs program.  I listen for policies that will improve productivity as candidates propose solutions to the economic malaise.

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Monday, September 5, 2011

Additional Child Tax Credits

Economists refer to economic problems that result from government action as government failure.  These failures are analogous to market failures that justify government interventions that Mankiw summarizes as principle 7; government can sometimes improve market outcomes.  These failures generally span several administrations both Republican and Democratic.  According to the Treasury Inspector General for Tax Administration, (“Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits”) through a series of unfortunate events spanning fifteen years and three administration, the federal government has created conditions that allow undocumented workers to fraudulently claim $4.2 billion in 2010 on refundable tax credits most coming from the additional child tax credits (ACTC). 

All people who earn income in the United States are required to pay taxes even if they earn that income through illegal activities or are in the country illegally.  Refundable tax credits are earned when refunds to individuals exceed taxes paid.        

In 1996 Congress passed and President Clinton signed into law the Personal Responsibility and Work Opportunity Reconciliation Act, fulfilling a Clinton campaign promise to “end welfare as we know it” and a plank on the Republican’s Contract with America.  A minor section of the new law attempted to discourage illegal immigration with provisions authorizing denial of public welfare benefits to illegal aliens.  Guidance on implementing these provisions was not provided and the importance of that lack grew with subsequent legislation.     

A year later, the Taxpayer Relief Act of 1997 was enacted with main provisions that lowered capital gains taxes, exempted from taxation homes sold for less than $500,000 that had been lived in for at least two of the last five years, and increased the child deduction.  The Economic Growth and Tax Relief Reconciliation Act of 2001 made it possible for filers to receive a return that exceeded taxes paid by removing the requirements that the Child Tax Credit be refundable only if the taxpayer had three or more qualifying children and Social Security taxes exceeded earned income credits.  The new law also increased the Child Tax Credit from $500 to $1,000 per child, making more families eligible for the refundable portion known as the Additional Child Tax Credit (ACTC).  The American Recovery and Reinvestment Act of 2009, the Obama stimulus legislation, similarly increased potential refunds by raising the income threshold for calculating the ACTC. 

The graph shows that the number of ITIN has increased from 796 thousand in 2005 to 1,526 thousand in 2010 as laws increased the benefits of filing.  During the same period, the ACTC increased from $924 million to $4,000 million.  The greater slope of the ACTC one compared to the ITIN line implies that the benefits per filing increased.  By 2010 the average filing claimed $1,325 of ACTC. 

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