Archive for Economics

There Is No Great Stagnation in Debating Stagnation

This morning I attended the debate between Rob Atkinson and Tyler Cowen on Cowen’s much-discussed ebook The Great Stagnation, hosted by the Information Technology and Innovation Foundation.

One of the topics discussed, though not at length, was gains in health care. The Cowenian take on this is that we’ve seen massive increased in health care spending over the previous decades with declining returns; this contrasts with huge gains in life expectancy and quality in the first three-quarters of the twentieth century. We have, as Cowen concisely puts it, picked the low-hanging fruit of medical innovation.

I was reminded of this excellent story from the Washington Post in 2009 on the cost of marginal heart attack interventions over several decades. Were it to run today, it might be linked to as “The Great Stagnation is Real, Cardiac Arrythmia Edition”:

Two decades ago, a famous clinical experiment showed that if a patient in the throes of a heart attack chewed and swallowed an aspirin tablet, the risk of dying fell from 13.2 percent to 10.2 percent.

If progress since then had come so cheap and easy — a 23 percent improvement for an investment of three cents — health care in the United States wouldn’t be in the state it is.

But that’s not how things happened.

Instead, the fight against heart disease has been slow and incremental. It’s also been extremely expensive and wildly successful.

In the 1960s, the chance of dying in the days immediately after a heart attack was 30 to 40 percent. In 1975, it was 27 percent. In 1984, it was 19 percent. In 1994, it was about 10 percent. Today, it’s about 6 percent.

Over the same period, the charges for treating a heart attack marched steadily upward, from about $5,700 in 1977 to $54,400 in 2007 (without adjusting for inflation).

The treatment of coronary heart disease — of which heart attack, or acute myocardial infarction, is the most significant component — this year will cost about $93 billion. It’s a huge contributor to the $2.3 trillion annual bill for medical care in the United States. Cardiovascular disease is responsible for 35 percent of deaths in America and has been the leading cause of death every year since 1900, except 1918, the year of the Spanish flu epidemic.

The evolution of heart attack treatment over the past three decades is a story of doing more things to more people at greater expense with better results. It is a portrait in miniature of medicine in the United States.

Although inappropriate care, high administrative costs, inflated prices and fraud all add to the country’s gigantic medical bill, the biggest driver of the upward curve of health spending has been the discovery of new and better things to do when someone gets sick.

“Money matters in health care as it does in few other industries,” wrote Harvard University health economist David Cutler in 2004. “Where we have spent a lot, we have received a lot in return.”

A great deal of the debate centered around measurement and teasing out the secular trends from statistical aberrations. (Starring in much of this were zero marginal productivity workers, who were not mentioned by name.) In the case of health care, this is really important, and Cowen points out that government and health care expenditures are wrapped into measured GDP at cost, which probably overstates their true effect on wealth creation. (And this goes to a larger point about the weakness of GDP measures in getting to underlying discussions of societal progress, for instance after natural disasters where wealth is destroyed making societies indisputably worse-off, but GDP can be up as a statistical artifact.)

Measurement is an important discussion, but it misses Cowen’s big, underlying points: no matter how measured, the rapid and life-altering innovations that occurred before 1973 simply haven’t been seen since. My grandfather went to medical school before penicillin had been discovered, when kids got polio and pertussis. My generation got smartphones. And to the extent we’re still seeing big, pathbreaking discoveries (which Atkinson argues) in information and communications technologies, the gains from these are not greatly affecting the median American household.

AT&T announces price cuts for most data customers

Free-market types failed to stop TARP in part because “no” seemed an untenable option to many lawmakers. “We have to do something!” many argued.

In an op-ed in today’s Wall Street Journal, University of Pensylvania professor David Skeel offers an affirmative defense when California, New York, Illinois, or other cash strapped states come knocking for a similar bailout–rather than “no,” offer a federal bankruptcy proceeding for the states.

At a Mercatus Center event last week, Manhattan Institute scholar Steve Malanga argued that the more likely scenario is that cities and municipalities default first, and that states will have to bailout cities. He was less certain about the Constitutionality of a bankruptcy proceeding for states, given sovereign immunity issues.

American Schizo

I would like to take this opportunity to pour some cold water on any prospects for lasting reduction in the size of government or sensible budget reform. Here are some tidbits from a recent national poll by the Washington Post, the Kaiser Family Foundation, and Harvard:

  • “Americans who say they want more limited government also call Social Security and Medicare ‘very important.’ They want Washington to be involved in schools and to help reduce poverty. Nearly half want the government to maintain a role in regulating health care.”

  • “Nearly six in 10 say they want their congressional representatives to fight for additional government spending in their districts to spur job creation; fewer (39 percent) want their member of Congress to cut spending, even if that means not as many local jobs. This is a turnabout from September 1994, when 53 percent said they wanted their representative to battle against spending and 42 percent were on the other side.”

  • “[H]alf the country thinks the federal government can balance its budget by simply cutting wasteful spending.”

To paraphrase Mencken, Americans are going to get what they want, and they’re going to get it good and hard. The 70 percent coalition wants to be left alone as long as they get their Medicare. I almost feel bad for the politicians who have to pander to this kind of schizophrenia. And if Americans had their way, they’d just get rid of the middleman:

  • “Fifty-six percent of those polled say things would be better if there were a national referendum system enabling all citizens to vote on major national issues. At least on this point, there is rare general agreement among Democrats, Republicans and independents.”

California, here we come. As Tocqueville prophesied, there’s no democratic solution to the problem that emerges once the public discovers that it can vote itself largesse from the public coffers. Add to that the largesse to special interests that voters would oppose if only it was worth their while to care, and you end up with a pretty bleak picture.

If there is a solution within the context of democracy, I think we have to hit rock bottom first, like an obese person who is forced to go on a diet only after a heart attack. Even then there will likely be a relapse. More likely though, we don’t have a heart attack. we just get fatter, and our breath becomes shallower, but we hang on, getting lipo every once in a while, enough to let us stuff our faces a few years more.

GOP chances of retaking Senate still a long-shot

Looking at last night’s election returns, the media story has been about a Tea Party “coup,” particularly the upset by Christine O’Donnell over GOP-favorite Mike Castle in Delaware. GOP strategists argued that O’Donnell couldn’t win in the general, and that Republicans would forfeit their chances of retaking the Senate.

Well, now that the Intrade markets have settled down, we can look to see how much Republican’s chances have really changed. In the last 24 hours, the price for the contract that the Republicans control the Senate went from 26 to 21. In odds, the market is saying that the GOPs chances of retaking the senate have gone from roughly 3 to 1, to 4 to 1.

Yes, their chances have decreased. But it  was a long shot, and it still is.

Relationship between spontaneous order and creation?

Stephen Hawking’s new book, The Grand Design, has been making news. He argues that the fundamental physics of the universe don’t require a creator, rather universes can be created spontaneously. You can get a flavor of the book’s argument from Hawking’s op-ed in this past weekends WSJ. Cosmologist Lawrence Krauss at Arizona State University has another WSJ op-ed today explaining more.

I don’t pretend to fully understand all the physics here, and I look forward to reading the book. But for free market types, this idea of spontaenous creation intuitively jives with the principle from economics of spontaneous order–the idea that the order we observe in the marketplace doesn’t require a planner, but instead can emerge spontaneously.

Beyond markets, scholars have used spontaneous order to describe complex phenomena from language to evolution. However, I’m not aware of any research that explores the interconnection between spontaneous order and spontaneous creation of the universe. Can anyone point me in right direction?

Fewer Young Voters Self-Identify as Democrats

The New York Times reports that fewer young people (ages 18-29) self-identify as Democrats. Based on Pew data, the percentage of young people who identify or lean Democrat has dropped from 62 percent at  the peak in July 2008 to 54 percent late last year.

While the bad economy and lack of jobs is no doubt weighing heavily on young people’s minds, this raises a question. If many young people lean Democrat, but when the economy is bad lean Republican, what exactly are they?

In the “Libertarian Vote in Age of Obama,” David Boaz and I presented evidence that many of these young people can fairly be called libertarian–that is socially liberal, but fiscally conservative. True, many young libertarians got swept up in the excitement over the Obama campaign, voting 59 percent for Obama to 36 percent McCain. But, we argued, all the talk of a generational realignment towards Obama and the Democrats was premature.

This generation of young people are particularly  prone to disillusionment. And we hypothesized that if the economy stayed bad, many young people, particularly the more libertarian young people, would sour on Obama and jump ship. Perhaps we’re now seeing some evidence that confirms this.

However, I don’t think Republicans are out of the woods yet. Even if young people vote against Democrats in 2010, Republicans will need to provide a credible alternative that addressed the concerns of a more libertarian-leaning generation of potential young voters. This will be a long-term challenge for a Republicans.

A defining idea for academia: jobs

With regulators forcing for-profit-colleges to disclose more data, and the industry facing increased scrutiny, at least you can say that for-profits attempt to train many graduates for jobs. In an article for the Chronicle Review this week,  Camille Paglia, argues that traditional four-year colleges should be doing the same:

“Jobs, and the preparation of students for them, should be front and center in the thinking of educators. The idea that college is a contemplative realm of humanistic inquiry, removed from vulgar material needs, is nonsense. The humanities have been gutted by four decades of pretentious postmodernist theory and insular identity politics…. That may mean a radical stripping down of course offerings… every four-year college or university should forge a reciprocal relationship with regional trade schools.”

KaplanU: Corporate bravado or genuine threat?

Kaplan University recently launched an advertizing campaign that announces in bold terms its aspirations to “use technology to rewrite the rules of higher education.” At an AEI event, KaplanU’s CEO Andrew Rosen argued that if you accept that incentives affect behavior, then you should expect that the quality of for-profit education should outperform non-profits over time. This is the “logical result” of a much clearer set of incentives – for customers, future employers, board members, and shareholders. If students don’t achieve learning outcomes and don’t get jobs, they’ll go somewhere else. For-profits must outperform or go out of business. Where does this logic lead? Rosen predicted that KaplanU will become the “world’s best educator by 2020.” Is this corporate bravado or a genuine threat to traditional education? There is certainly evidence to support Rosen’s case. For instance, it took Harvard 25 years to recommend curricular reform in 2005. And the ideas sat on the shelf until 2007. Since then, progress has been uneven at best. Harvard’s case is by no means unique. For those who appreciate that incentives matter, Rosen certainly seems to have a point. But I suspect that this past month’s hearings in the U.S. Congress on regulating for-profits is only a sneak preview of efforts to restrict this logic from playing out.

Just in: Doctors respond to incentives, are human

A new study by Harvard health policy professor Joseph Newhouse finds that when Medicare payments to doctors for chemotherapy are cut, doctors respond by prescribing chemotherapy to more patients than they previously had, thus making up the difference. Predictable or unintended consequence, it’s still Econ 101. Still, policymakers act as if people (and doctors are people) can be immune to incentives. Since the Obama health reform pays for itself in part with medicare payment cuts, expect to see more of this sort of thing.

What’s especially interesting to me is how this underscores the insanely asymmetric relationship we have with doctors. The only difference between a doctor and a car mechanic telling you that you need to replace your Johnson rod is that you’re probably in a much more vulnerable position talking to a doctor.

International soccer and fiscal policy

The list of countries that qualify for the World Cup is always a motley one. There’s Brazil playing against just-got-in and didn’t-register-properly North Korea, which Radley Balko suggested fielded a side with eight Kim Jong-Ils. Over in Group  E there’s defending world champions Italy, we’d-rather-be-playing-rugby New Zealand, Slovakia (motto: “No, sorry, you’re looking for Slovenia; they’re in Group C; no bother, it’s a common mistake”), and Paraguay (notice that every country ending with “guay” qualified for the World Cup).

Qualifying for the World Cup is a big deal and source of national pride (except in the United States). Could this pride be leveraged for macroeconomic ends? I have a modest proposal.

The Stability and Growth Pact limits the ability of Eurozone countries to run excessive deficits and incur excessive debts. Supposedly. As we’re seeing in Greece, it doesn’t seem to be doing a very good job at this. And Greece is far from the only country to openly flout the Pact.

Would World Cup disqualification work any better? That is, what if FIFA or the regional governing bodies (like UEFA) only certified for World Cup participation countries that adhered to some basic rules of fiscal discipline, keeping their deficits in check and debt below some reasonable percentage of GDP?

It wouldn’t be unprecedented. After all, in club soccer, teams are regularly disciplined for financial irregularities with point deductions and even outright relegation. This seems to be a more-or-less effective way of keeping team management on the up-and-up. The same might well hold for nation-states.

Obviously this isn’t foolproof, and surely there will be countries that game the system. But it would at least allow the exclusion of countries like Greece who threaten the financial stability of an entire continent. To mix my sport metaphors, Greece deserves some time in the penalty box. That need not be executed just by diplomatic means.

Since the endogenous costs of reckless fiscal policy don’t seem to effectively dissuade countries from marching into the abyss, perhaps the damage to national pride accompanying disqualification from international soccer’s biggest quadrennial tournament would prove more effective.

California: America’s bread basket and food regulator

Baylen Linnekin has published a new law review article that you should read if you care about your right to eat whatever you want. He points out that California is leading the charge in regulating and banning politically incorrect foods, including hollandaise sauce and Caesar dressing, taco trucks and other street foods, eggs, raw milk, trans fats, and many others. This should worry the rest of us because as goes California, so goes the nation. For example, California was the first state to ban foie gras, and soon other jurisdictions followed suit, including famously Chicago.

Before reading Baylen’s article, I had no idea that California was responsible for so much of our food production. When you think of America’s bread basket, you tend to think of the midwest, but in fact it is California:

The sheer volume and variety of crops grown in California defy overstatement. The state leads the nation in production of almonds and walnuts and seemingly every crop alphabetically in between. In addition to almonds and walnuts, California is America‘s sole producer—meaning it is home to ninety-nine percent or more of the country‘s overall production—of figs, raisins, olives, clingstone peaches, persimmons, prunes, pomegranates, sweet rice, and clover seed. The state leads the nation in production of asparagus, avocados, bell peppers, broccoli, carrots, cauliflower, celery, cut flowers, dates, eggplant, garlic, grapes, herbs, kiwi, lemon, lettuce, lima beans, melons, nectarines, onions, pears, pistachios, plums, raspberries, strawberries, turnips, and more than a dozen other crops. All told, California farms account for nearly half of America‘s domestic production of fruits, nuts, and vegetables. California growers ship the vast majority of these crops to other U.S. states. California also accounts for all of America‘s nut exports, and three out of five fruit and vegetable exports.

California also has the most vibrant restaurant industry in the country. To me, this begs the question: If California’s agricultural and food industry is so massive why hasn’t it successfully organized to block food regulation? Is it simply the case that green lobby is much bigger?

Final thoughts on Disney

I’m back from Disney and here is my verdict: it’s is incredibly ordinary. I’m afraid I have no grand insights to offer, but I’ll take a stab at a few observations.

My last post inspired Jackson Kuhl to riff on how an ideal of cultural authenticity is generally unhelpful, and concluded: “I think perhaps Jerry didn’t want to go to Disney because, as a 30-something dude without kids, riding the Dumbo carousel doesn’t get his heart pumping.” I think that’s absolutely right. Disney is first and foremost for children, and it was for the benefit of my wife’s nephew that we went. It was only through his enjoyment that I could appreciate the place.

Now, two things that struck me. First, vacationing at Disney is like vacationing at a cross of a mall and sports stadium. The entire experience is engineered to get you to buy stuff. At the stores, at the kiosks, at the food court. The vast majority of the stuff is the kind of completely useless garbage that in a previous life I founded Unclutterer to combat. The twist is that there is no competition inside Disney’s walls, so you pay incredibly inflated prices. The company, however, has mastered the art of making folks thankful for the privilege. I am seriously considering purchasing their stock.

The second thing that struck me is that Disney is one of the most massive experiments in privatization we have today. Walt Disney wanted to build more than an amusement part. The immersive experience he had in mind was not just for visitors, but for residents as well. The Magic Kingdom was to be just a small part of the Experimental Prototype Community of Tomorrow. According to Wikipedia:

Walt Disney’s original vision of EPCOT was for a model community, home to twenty thousand residents, which would be a test bed for city planning and organization. The community was to have been built in the shape of a circle, with businesses and commercial areas at its center, community buildings and schools and recreational complexes around it, and residential neighborhoods along the perimeter. Transportation would have been provided by monorails and PeopleMovers (like the one in the Magic Kingdom’s Tomorrowland). Automobile traffic would be kept underground, leaving pedestrians safe above-ground. Walt Disney said, “It will be a planned, controlled community, a showcase for American industry and research, schools, cultural and educational opportunities. In EPCOT, there will be no slum areas because we won’t let them develop. There will be no landowners and therefore no voting control. People will rent houses instead of buying them, and at modest rentals. There will be no retirees; everyone must be employed.”

Here is a film of Disney presenting the concept city. In one sense it’s a libertarian dream. A completely privatized city. In a law review article on the subject, Prof. Chad Emerson explains how it was made possible by the Florida legislature creating what amounts to a giant business improvement district the size of Manhattan. It ceded to the Disney Company traditionally governmental functions such as zoning, streets, drainage and even police and fire service. For example, in the elevators of the Disney hotel at which I stayed last week, the usual inspection certificates were posted. The issuing authority was the Reedy Creek Improvement District, which is wholly controlled by Disney. In essence, the company is certifying its own elevators. In theory, the district (read Disney) also has the power to set up its own municipal court, and it even has explicit authority to develop a nuclear power plant.

In another sense, though, it’s a libertarian nightmare. Planned by experts from top-to-bottom with a benevolent Uncle Walt at the head. As I’ve mentioned, there also doesn’t seem to be much room for competition inside the city walls. If Walt had had his way, alcohol would have been strictly controlled. And what exactly would have happened to the old people who wanted to retire? I guess it’s all OK though if you what you’re signing up for and are free to leave any time.

In the end, Disney died before even the Magic Kingdom opened, and the plan for greater EPCOT was reduced to the EPCOT Center park we know today. The top down and controlled nature of Disney is still very present there, however, and I think that’s what gives me the willies about the place. There’s nothing nefarious about it, it’s simply like Walt’s vision for the dome that would have encapsulated EPCOT: climate-controlled to a perfect 72º at all times with no chance of weather. Even Las Vegas–Disney World for adults–as “synthetic” as it is, has an element of unpredictability to it.

War + Lithium = Democracy. The Aristocrats!

The United States has discovered a trillion-dollar trove of metals in Afghanistan:

The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe. An internal Pentagon memo, for example, states that Afghanistan could become the “Saudi Arabia of lithium,” a key raw material in the manufacture of batteries for laptops and Blackberries.

Referring to a country as “the Saudia Arabia of” anything hardly augurs well for its future since Saudi Arabia is, well, a theocratic petrostate whose rulers virtually imprison a group of foreign workers whose numbers total about a third of the kingdom’s population and whose native population is subject to the whims of a fascist religious police that, among other feats, murdered fourteen schoolgirls in 2002, prohibiting them from leaving a burning school building because they were not sufficiently veiled.

Afghanistan is not a country that has always been an anti-modern failed state, but one that was at one time, not so long ago, a relative symbol of progress and liberalism in the Muslim world. So moving to being the Saudia Arabia of central Asia isn’t really a great step forward.

Perhaps Afghanistan can join Nigeria or Venezuela in the list of countries whose natural resources have done so much to initiate prosperity, growth, and opportunity. But “central Asia’s Nigeria” doesn’t really have much of a ring to it.

For the umpteenth time: natural resources are not an unalloyed good that move a country from poverty to prosperity. At the risk of sounding like a broken record, the rule of law and favorable institutions have a lot more to do with it than minerals. Given that the Soviets, then the Taliban, and now the US are presiding over an effectively broken institutional climate in Afghanistan, the discovery of mineral deposits is nothing to cheer about. In many ways, it’s a step backwards. At least for the people of Afghanistan.

Wrong method to identify libertarians

George Mason University economist Dan Klein had an op-ed in yesterday’s WSJ arguing that the Left flunks Econ 101. Using data collected by Zogby, Klein argues that liberals perform worse than conservatives or libertarians on a series of eight questions testing basic economic concepts. The longer paper that inspired the op-ed is here.

Nate Silver criticizes the question wording and survey instrument here. I just wanted to add a quibble with the method Zogby continues to use to identify libertarians. Zogby includes the word “libertarian” as an option in the traditional conservative-moderate-liberal ideology question. Using this method, Zobgy finds that about 7% of respondents are libertarian. And while this is certainly an improvement over the traditional method, it still underestimates libertarians by at least half. David Boaz and I have shown that between 14% and 23% of Americans hold libertarian beliefs. But data shows that there is much confusion about the word libertarian and that the word remains unfamiliar to many people who hold libertarian beliefs.

There is a better method to parse out ideology to identify liberals, conservatives, and libertarians. David Boaz and I have suggested using a three question screen to identify ideology, combining the best question wording from Gallup and the University of Michigan’s American National Election Studies. Researchers at TargetPoint and Politico used this method to parse out ideology in survey of Tea Party participants, finding that half were libertarian and half conservative. The questions are:

  1. I am going to ask you to choose which of two statements I read comes closer to your own opinion. You might agree to some extent with both, but we want to know which one is closer to your own views: The less government, the better; or, There are more things that government should be doing. [ANES]
  2. We need a strong government to handle today’s complex economic problems; or, The free market can handle these problems without government being involved. [ANES]
  3. Some people think the government should promote traditional values in our society. Others think the government should not favor any particular set of values. Which comes closer to your own view? [Gallup]

Of course, additional polling questions cost money. And three questions cost more than one. So if I had to choose only two, I’d pick 2 and 3.

Still, ideology matters. And pollsters do their clients a disservice if they overlook important trends in ideology that make a difference in reading the electorate. For instance, I suspect that pollsters would have detected the rise of the Tea Party, or at least better understood it’s causes and roots, if they had been using this method earlier.

Non-tenure faculty jobs are not all alike

I had written before about how tenure-track faculty positions at colleges and universities are declining relative to contingent faculty positions such as lecturers or instructors. And while the American Federation of Teachers thinks this is uniformly bad news, things may not be so clear cut.

Last week, Ronald Ehrenberg, an economist at Cornell University, presented a paper at AEI’s conference “Reinventing The American University” that reveals some surprising trends. Ehrenberg compiles data that show you can actually make more money as a lecturer at a research university than as an assistant professor. And associate faculty at for-profit institutions actually feel less like second class citizens than adjuncts at traditional universities.

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