Five myths about the U.S. Postal Service

Washington Post article "Five myths about the U.S. Postal Service" (February 28th, 2010) is riddled with errors and questionable statements. The article by the Postmaster General has further convinced Corrections that the United States Postal Service should undoubtedly be privatized. No economic reason was given for the continued subsidizing of the United States Postal Service by laws banning private services from delivering mail. Below, Corrections offers responses to three of the editorial's most ludicrous points.

Otherwise, we have not received taxpayer funds to support postal operations since 1982; in fact, though we're often described as "quasi-governmental," we're required by law to cover our costs.

The Post Office is in debt by $2.8 billion dollars. It does not appear to be paying for its costs in a manner that will not explode.

Ten years ago, it took 70 employees one hour to sort 35,000 letters. Today, in that same hour, two employees process that same volume of mail. Though the number of addresses in the nation has grown by nearly 18 million in the past decade, the number of employees who handle the increased delivery load has decreased by more than 200,000.

The question is not whether or not the Post Office has become more efficient, it is whether or not it is more efficient than potential competitors like FedEx or UPS.

According to the U.N.-affiliated Universal Postal Union, we deliver nearly half of the world's mail.

It's not clear to Corrections that size is equivalent to efficiency given the fact that the Post Office is losing money. It appears that their prices are too low, and that less mail should be being spent--there is no such thing as a free lunch, and taxpayers pay for the "extra" service they're getting "free."

Half Empty: A little shopping trip of huge proportions

Philadelphia Inquirer article "Half Empty: A little shopping trip of huge proportions" (February 28th, 2010) makes an argument that doesn't quite add up for Corrections. The Inquirer argues that Costco has a clever marketing concept because once in the store, customers are unable to resist buying things they do not desire.

The prices are remarkable, or at least they seem remarkable since you have to buy everything in very large multiples. The marketing concept is pure genius, since the Costco folks know that beginners will go down every row looking for deals, inevitably buying something of no use.

If this was the case, Corrections would expect that customers would choose to avoid the store if they had addictive or dynamically inconsistent behavior. Furthermore, that new customers would have heard of the addictive shopping and would avoid the store just as old customers do.

In reality, Corrections expects that Costco could possibly make its money by bundling a good, forcing a consumer to buy a little more than he would have preferred, sacrificing some of his consumer surplus for a higher quality good (equivalent here to a larger pack of goods).

The Health Care Number You Didn't Hear

Real Clear Markets article "The Health Care Number You Didn't Hear" (February 26th, 2010) makes the argument that American workers do not pay for their health care because their employers pay. This is incorrect. While the article's point is quite correct, when people don't have to pay for services they will demand more of them, its point about employers paying for health care is wrong.

American health care fuses these two systems, but with a common economic flaw: people are overinsured, paying pennies directly on every dollar of health service they receive.

The end result: for every dollar spent on health care in the United States, just 12 cents comes out of the individuals' pockets. Imagine what food costs might be if your employer paid 88% of your grocery bill or what a trip to Saks might be like if your company covered the vast majority of the costs of the shopping spree.

Were employers to pay 88% of one's grocery bill, then one would expect one's wage to go down. The incidence of this tax on employers that refunds benefits to is likely to fall almost entirely on the individual. We could similarly imagine a world in which the government takes 50% of every person's paycheck and sends it back to them. Take-home wages would go down by half (and we would get a check from the government for 50%). Equilibrium wages would not change, and employers would not be paying for anything.

Tyler Perry's Crack Mothers

New York Times editorial "Tyler Perry's Crack Mothers" (February 26th, 2010) confuses level of drug rates with per capita crack consumption. Specifically, it claims that depictions of black women as crack-addicted are improper because the total number of blacks admitted to clinics for addiction is now less than the total number of whites.

Furthermore, data from the Substance Abuse and Mental Health Services Administration revealed that of the total admissions to treatment services for crack use, blacks outpaced whites in 1996, but whites outpaced blacks in 2005 for those under 30 years old.

There are six whites in the U.S. for every black. If blacks used crack cocaine less than whites, as the Times appears to attempt to suggest, one should see black admissions to clinics being one sixth that of whites, rather than approximately the same.

This piece of evidence that the Times gives is simply ludicrous. If movies are to be ethnically fair, then they would show (approximately) six times as many black crack addicts as white.

One might add that a priori we expect that whites, who are on average weathier, are over-represented in the data the Times provides.

A registry of animal abusers is a bad idea

LA Times editorial "A registry of animal abusers is a bad idea" (February 25th, 2010) correctly notes the reasons why an animal-abusers registry would be poor policy in California, Corrections would only add one consideration: such a registry disproportionately affects the difficulty of obtaining work in fields other than animal abuse.

California already prohibits their cruel behavior, and a registry, however tempting, won't help them to learn compassion.

As Amanda Agan notes in an upcoming paper (available here), sex offender registries do not impact recidivism. There is little reason that we would expect presumably weaker animal registries to have such an effect. In addition, animal abusers often exploit animals for profit, knowing the illegality of their actions. Presumably, they only work with other animal exploiters and try very hard to keep their abuse a secret from those who support animal rights. A registry would not change the circumstances of this line of work. However, a registry may make legitimate sector employment more difficult to obtain, so that work promoting animal abuse becomes only more attractive to offenders. An animal registry may make recidivism more likely, and for this reason alone, it should not be enacted.

Clueless in Kentucky

New York Times Editorial "Clueless in Kentucky" (February 26th, 2010) provides no evidence that unemployment benefits will help Kentucky's jobless recovery, but implies that senators have made a mistake by not extending benefits.

Kentucky has lost about 60,000 jobs since the end of 2008. In December, its unemployment rate stood at 10.7 percent, the highest since 1983. So what exactly is going on in the minds of Kentucky’s two Republican senators, Mitch McConnell and Jim Bunning? This week, Mr. Bunning single-handedly shot down a one-month extension of unemployment benefits, along with a federal subsidy for the unemployed to maintain health coverage.

Unemployment benefits are meant to cover search costs for those looking for relatively high-wage jobs. It is possible that Kentucky has to adjust to a lower demand for labor, and the it has become optimal for workers to accept lower wages than those they previously earned. In this rather likely case, extending unemployment benefits would only result in a net loss to society.

In addition, it may be optimal for Kentucky citizens to move to a new state in order to match with new employers. For example, if industrial work moves from Kentucky to Minnesota, Kentucky industrial workers should move to Minnesota. However, unemployment benefits distort their choice set and keep workers in Kentucky inefficiently.

Why Won't Anyone Clean Me?

Wall Street Journal article "Why Won't Anyone Clean Me?" (February 24th, 2010) misses a fundamental insight into incentives. It speaks on firm incentives to attempt to clean up fridges by educating consumers, and putting reminder cards in fridges on how to store items and clean the fridge. However, it also describes Whirlpool's efforts to make a messy fridge less impactful.

For its new refrigerator, Whirlpool Corp. spent months inventing a shelf with microscopic etching so it can hold a can of spilled soda.

The technology is just one weapon against a dirty kitchen secret: Most Americans clean their fridges only once or twice a year.

[...]

Whirlpool hopes that increasing the amount of storage space might help. The company's new shelves—to be released later this year—are 25% roomier than previous models. And the microscopic etching creates surface tension, causing liquids to bubble up around the perimeter instead of spilling over, it says. Currently, shelves in Whirlpool's refrigerators have a plastic rim to help contain spills. Unfortunately, the rims have "the side effect of crud getting stuck in there," says Carolyn Kelley, brand manager of Whirlpool refrigeration. The new shelves—available on new Whirlpool models that cost from $1,199 to $1,499—would eliminate that problem because they don't require a rim to stop leaks.

It is important to note that when one makes a fridge that lowers the cost of it being in a messy state (such as microscopic etching), individuals will substitute time away from cleaning and to other activities. Messiness is less costly, so we invest fewer resource into avoiding messiness (cleaning).

This same issue is a common mistake made by doctors who become frustrated when individuals smoke more after there are medical advances in cancer treatment, or when quitting cigarettes is made easier. The mistake is understanding the end goal of consumers: it is not to minimize dirtiness or maximize life, but to maximize a weighting of both quality and quantity of life.

The article reads as though technology lowering the cost of messiness and education to have consumers clean the fridge have a common thread: a more clean fridge. Corrections suggests that both are working against one another when it comes to a more clean fridge, but work together to make life easier for the consumer.

The Narcissus Society

The New York Times OpEd "The Narcissus Society" (February 22nd, 2010), though beautifully written, claims that

Pooling the risk among everybody is the most efficient way to forge a healthier society.

This is true, however it is also true that the government is extraordinarily inefficient, and that the taxes necessary to provide a free lunch for some create a deadweight loss. The efficiency of the public healthcare is uncertain.

The article also makes the point that

When it comes to health it makes sense to involve government, which is accountable to the people, rather than corporations, which are accountable to shareholders.

Corrections would argue that private health insurers are in fact motivated by profit (maybe not enough--a case for deregulation). They make money by insuring well! If the health care companies provide a quality good for a low price then they will be able to maintain a high demand. If they create a poor product, consumers will find out and demand will fall, eventually causing their prices to fall below their cost. Competition will cause the most efficient health companies to stay in the market and the least efficient ones to leave the market.

Finally, the article claims that

Government, through Medicare and Medicaid, is already administering almost half of American health care and doing so with less waste than the private sector.

Likely, the article concocted their notion of "waste" outside of the realm of economics--the deadweight loss from the taxation needed to provide Medicaid may well outweigh any administrative gains the article reports.

Failing Grade

New York Times Editorial "Failing Grade" (February 21st, 2010) argues that New York state should take measures to increase the pass rate on the GED, but makes two mistakes:

New York would do well to emulate Iowa’s highly successful preparation program. In 2008, 99 percent of test takers there passed the arduous exam.

The article compares New York State to Iowa, without informing readers that different states have different standards for passing. Students in different states can take the same test, pass in one state, but not in the other. Such differences are exploited to measure the gains to a GED degree in studies Tyler, Murnain, and Willett (2000)

In addition, the article fails to explain how the gains to those who pass a difficult GED and provide a strong signal to employers are outweighed by the gains to others from test with a higher pass rate. Ultimately, if the test is difficult enough to keep many from passing, it is more worthwhile (in terms of labor market signaling) to those who do pass. The article should consider both the winners and losers from a change in the test pass rate before suggests any overhauls.

Who Can Relax This Way?

New York Times editorial "Who Can Relax This Way?" (February 19th, 2010) flaunts its ignorance and gives no data for its contentious claim. Specifically, the Times claims that the practice of open carry is dangerous. Open carry is the practice of wielding a firearm in an open and unconcealed manner, such as a waist holster.

Open Carry, which last year invited its members to holster up outside President Obama’s speaking sites, said it would not be deterred. Unfortunately, more than two dozen states also have allowed themselves to be bullied by the gun lobby into adopting similarly dangerous law.

Under normal circumstances, the New York Times is sophisticated enough to use data, while providing phenomenally poor analysis to make its point. In this article, it fails to do even amateurish statistical analysis. Corrections notes that there is no evidence of any increase in crime due to open carry, though legal in half of the United States.

Indeed, given that it is not a topic in academia, while being widespread as a potential practice, one might bayesian update that it has little effect (otherwise it would be a topic). This gives further evidence of partisan malpractice at the Times.

Looking for a Date? A Site Suggests You Check the Data

New York Times article Looking for a Date? A Site Suggests You Check the Data (February 12th, 2010) mistakes a correlation between profile pictures on dating websites and interest in the profile for a causation, and then advises readers to adjust their profiles to maximize readership based on these results. Whether the relationship is truly causal or correlational, the article should note that after its publication, the magnitude of the effects it reports should diminish.

If you’re a man, don’t smile in your profile picture, and don’t look into the camera. If you’re a woman, skip photos that focus on your physical assets and pick one that shows you vacationing in Brazil or strumming a guitar.

Those are some of the insights that OkCupid, a free dating site based in New York, has gleaned by using statistical tools to analyze how the mating game plays out on its site.

There are two possible worlds: one in which the relationships the article reports (the effects of pictures on interest in a profile) are causal, likely guided by a signaling model, or they are correlations and the article has falsely suggested causality. In the second case, choosing photos that don't focus on physical assets may be caused by a good education, or a modest upbringing. These factors may be what draws interest to the profile. Then, we should not expect an uneducated person to draw a larger crowd simply by covering up.

In the first case, however, profile picture choice may causally draw interest to the profile. This would be the case if profile picture choice signaled unobservable traits, such as creativity, self-confidence, etc. Those who are not creative would not realize that turning away from the camera may signal artistic flair. Similarly, those who are not self-confident will not realize that they can attract men without showing off their physical assets. Such signaling, however, is only valuable as long as it accurately predicts personality. Once the trade secrets of the artistic and confident are revealed, they become worthless. So, after the article's publication, Corrections expects the value of such signals to diminish.

Consider the example below (click to enlarge):

We see people who are creative are much more likely to look away from the camera for their picture than those who are uncreative. After the signal is made public, and those who want to fake creativity do so, the signal becomes almost meaningless.

Notably, if OkCupid were to succeed in predicting the "perfect" picture, their business would become worthless. The company's product is the ability to learn about the personality of others through their conscious (or subconscious) profile signals. When these signals become worthless, so too does the company.

Do We Really Want the Status Quo on Health Care?

New York Times Opinion Editorial "Do We Really Want the Status Quo on Health Care?" (February 18th, 2010) bemoans the quality of health care in the United States, but does not adequately consider the possibility that America may be better off with less "free" healthcare than more.

Skeptics suggest that America’s poor health statistics are a result of social inequities and a large underclass. There’s something to that. But despite these problems, the population over age 65 manages to enjoy above-average health statistics — because it enjoyed health care reform back in 1965 with Medicare.

In fact, a hugely expensive, tax-payer funded Medicare plan may be sub-optimal. Perhaps, without such a plan, the elderly would save their money throughout life, anticipating medical problems as they age. Certainly, if they pay the full cost of their own healthcare, they will purchase less healthcare than if other Americans pay the full cost of their healthcare, but this doesn't imply that America, as a whole, is worse off. For example, because they pay such high taxes to fund Medicare, a middle-class family may choose not to purchase their own health insurance, causing their daughter not to go to the hospital when she develops a rash, and later to die of meningitis. What makes her health worth more to the author than that of the elderly woman's whose life was saved by Medicare?

Economists do not make such judgment calls because they are difficult to defend. Rather, they choose the surplus maximizing level of care to provide. Though there may be positive externalities to increased healthcare for all, one could easily see such gains outweighed by the huge inefficiencies of an unmotivated, incompetent government. There's no such thing as free healthcare.

Acknowledging the inefficiencies generated by the current system, the author continues:

At the present rate, by my calculations, in the year 2303 every penny of our G.D.P. will go to health care. At that time, we’ll probably get daily M.R.I.’s and CAT scans, even as we starve naked in caves.

Imagine what the author's calculations would deduce if people who could not afford M.R.I.'s were getting them too!

Virginia's immaculate reductions

Washington Post editorial "Virginia's immaculate reductions" (February 17th, 2010) criticizes Virginia Governor Robert McDonnell for his failure to shrink the state's budget. McDonnell halted the selling of the state's liquor stores to private owners. The Post conjectures the reason is because of the money the stores bring in each year in revenue.

The governor said he would raise hundreds of millions of dollars to build roads by selling off state-run liquor stores. But at his urging, a bill in the legislature to do just that was killed last week. The probable reason? Profits from such liquor stores go directly into the state's coffers, to the tune of about $100 million a year.

This reasoning does not make sense to Corrections. If one holds a bond whose coupons yield $100 per year every year for ten years, then one is able to sell that bond for its net present value. There is little difference between cashing it out and holding it (if there were, then individuals would buy or sell it until no arbitrage was possible.

Similarly, the sale of the state's liquor stores should represent the net present value of the business's worth. Let us ignore any potential for increased efficiency when individual businesses take over, as it only helps Corrections's point. A possible objection to our statement might be "but what if the state is charging as a monopolist but in selling its businesses individually it creates a competitive industry that no longer has the monopolistic rents it previously did?" However, it is within the state's capacity to tax liquor stores until the deadweight loss, consumer surplus, and state revenue is exactly the same. This is depicted graphically below (click to enlarge). A government monopoly (left) can be the same as a taxed industry (right).

Growing poverty rate for Ill. children

Chicago Tribune article "Growing poverty rate for Ill. children" (February 11th, 2010) speaks on high child poverty rates in Illinois without asking why that might be the case. Corrections suggests that the reason a place like Illinois might have many individuals below the poverty line is because they do good things for the poor, rather than neglect them.

"Now is not the time to pull back on ensuring that our children have the basic education and health care they need to develop to their full potential," Ryg said.

This may "exacerbate" Illinois's problem. Corrections suggests, as Ed Glazer and Josh Gottlieb did in their NBER Working Paper "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium," (2009), that the reason cities might have many poor people is because they are good places for poor people to be, not bad, as one might intuitively suggest. The reasoning is simple: poor people move to places where they can get the most assistance, the best living standards.

Imagine a world in which there are four cities. One large one and several small. Before time t, the large city and smaller cities have the same poverty programs. At time t, the large city enacts a welfare program to help the poor. The poor from other cities will move to the large city, and the impact of welfare by a city may be to increase the number of poor while perhaps decreasing the total number of poor people. The increase comes from having more poor people move to the city than the program eradicates.

Three 3-D graphics, where the x and y axes are spatial coordinates of cities, and the z axis is level of poverty, are displayed. The center city is the city that enacts the welfare program.The first diagram represents poverty levels in the cities before the welfare program was enacted (click to enlarge).



The second diagram represents poverty levels in the cities after the welfare program was enacted (click to enlarge). Note the z-axis increases slightly, which hides the increase in the central city (but displays more prominently the decrease in outside cities.



The third diagram represents the difference in poverty rates (click to enlarge). The poverty program reduced total poverty, but the gain was seen by the outer cities.



Corrections concludes that local, city, or state poverty levels tell us little about whether or not the poor are better off in a location. Indeed, our modeling suggests that areas with more poor people are perhaps doing more for the poor--that is why they are there. Finally, and as a side note, Corrections could forego the above exercise and note that applying the Law of Demand indicates that good welfare programs encourage high poverty rates. (Though we note they also have a direct effect).

The hidden cost of Senate gridlock: Obama can't fire anyone

Washington Post article "The hidden cost of Senate gridlock: Obama can't fire anyone" (February 14th, 2010) entertains an interesting but possibly incorrect point. It notes that due to political obstructions, nominations are more difficult to pass through the Senate, President Obama's ability to fire his ill-performing Cabinet-level personnel has suffered. The Post gives the example of Treasury Secretary Timothy Geithner, under fire for cheating on his taxes, among other things:

The problem gets worse as it goes deeper. It's not just that Geithner can't be fired. It's that he, in turn, can't fire anybody. Treasury is understaffed, and there's little reason to believe that the Senate will consider its nominees anytime soon. If Geithner is displeased with the performance of an appointed subordinate, he can't ponder whether America would be better off with another individual in that office. Instead, he must decide whether America would be better off if that office were empty.

This has a couple of effects. For one thing, it makes the bureaucracy less accountable, and over the long run, it makes it less effective.

While this may be correct, it isn't immediately apparent. There is no doubt that incentives and accountability matter as the Post suggests, and ease of restructuring a cabinet facilitates the structuring of proper incentives. However, it may be that an increased chance of rejection has differential effects given candidate skill quality--in this case, then the Post could be wrong, and candidate quality could increase.

Let us imagine a world in which the Presidency suffers from an empty seat, and has to pay a price for attempting to fill the seat with a candidate of a certain quality. The candidate may then be accepted or rejected, with differing probabilities based on candidate quality. Furthermore, if the candidate is accepted, then they give a stream of benefits to the Presidency if they stay, with a chance of leaving an empty seat in every period. If a candidate is rejected, then the seat remains empty (to be attempted to be filled or not next period). Therefore we have three states--empty seat (with cost), a seat in the process of being filled (with cost and probability of rejection), and a filled seat (with a stream of benefits so long as the candidate is in the seat, and a probability of a candidate leaving).

Finally, let us say that the President pays a cost to attract candidates of high or low skill. What is the impact of a change in rejection probability on the relative values of low-skilled and high-skilled candidates? Setting the problem up as a Bellman equation with generic coefficients and solving recursively, we see that the relative value of high-skilled candidates increases more when the probability of rejection is increased. We graph the relative value of low-skilled and high-skilled candidates crossed with low and high chance of rejection over time. (All approach zero as the time in which one is in office and accrues benefits from their being in office decreases). The relevant comparison is to compare the value gap between high and low skilled candidates in low chance of rejection against the value gap between high and low skilled candidates in a high chance of rejection regime. We see that the relative value of high skilled candidates increases as the chance of rejection increases at any given moment in time. (Click to enlarge). Note that we don't necessarily care about the level of value, we care about the difference between the two blue lines and the two red lines. Even though the red lines (low chance of rejection) are higher than their counterparts in levels, the difference between them is smaller than the difference between the blue lines (high chance of rejection). Therefore, in a high chance of rejection regime, high-skilled candidates are worth more.



Observing the diagram above, we can see that if there is a cost to choosing candidates of a certain skill level, then our comparative statics suggest increasing the probability of rejection will increase the skill level of a candidate. The motivating factor behind this is the idea that skill level and probability of leaving are linked traits. As an empty seat "hurts" more, the President chooses higher-skilled candidates, as they are worth relatively more because they (perhaps due to high job performance) presumably leave less frequently.

This is not a disproof of what the Post is saying, but it does offer the possibility that a higher chance of rejection leads to higher quality candidates, not lower.

Watching China Run

New York Times Op-Ed "Watching China Run" (February 13th, 2010) very misguidedly suggests that the U.S. should be as heavily invested in environmental technologies of the future as China, whose rapid industrialization has also come with rapid increases in pollution.

China also has become the world’s largest manufacturer of solar panels and is pushing hard on other clean energy advances.

The article continues:

We’re in the throes of an awful and seemingly endless employment crisis, and China is the country moving full speed ahead on the development of the world’s most important new industries. I’d like one of the Washington suits to step away from the photo-op and explain the logic of that to me.

Though not Washington suits, Corrections will happily explain. There are two reasons that a country like China, whose air pollution is the stuff of legends, would be expected to invest more in energy than the stable United States.

First, the price of using old energy technologies is higher for China than the US, so by the law of demand, they use fewer of these technologies. While a slight increase in air pollution would go unnoticed in Chicago, the same increase would decrease the quality of life in Chongqing, China--the city with the fifth worst air pollution in the world, according to the World Bank. (Note that China has 12 of the top 20 most polluted cities--the United States has none!) Such a decrease in the quality of life is a price that this city would have to pay, in addition to its direct costs, for using "old energy." Eventually, that price is too high and the city will prefer more directly expensive but cleaner technologies. Chicago can get away with producing the same amount of pollution without having to pay for the inconvenience of foggy air.

In addition, an environmental Kuznets curve would explain why China should be first to invest in cleaner energy. The environmental Kuznets curve gives an inverted U-shape for the relationship between national income per capita and environmental health indicators, as depicted below (click here to enlarge).  This would suggest that a clean environment is a luxury good.  As China's income per capita grows, so too does its environmental investment.

How Not to Write a Jobs Bill

New York Times editorial "How Not to Write a Jobs Bill" (February 11th, 2010) makes a reflexive claim about jobs and tax cuts that may not be valid. Specifically, the Times argues that tax cuts are unconnected to jobs. Further, it appears to support creation and maintenance of governmental jobs.

An $85 billion proposal put forward Thursday morning by Max Baucus, the chairman of the Finance Committee, and by Charles Grassley, the committee’s top Republican, scarcely began to grapple with the $266 billion in provisions for jobs and stimulus that President Obama proposed in his budget. It was not even in the same league as the modest House-passed $154 billion jobs bill.

Worse, about half of the proposal had nothing to do with new jobs. The single largest chunk, about $31 billion, went to renew expiring tax breaks that are generally useful but unrelated to jobs. Another $10 billion would renew an expiring Medicare payment formula so doctors wouldn’t face a pay cut

Harald Uhlig's 2010 Working Paper "Some Fiscal Calculus" suggests that in the long run, a discounted $2.60 is lost for every dollar the government spends, while tax cuts on labor offer up to $1.7 in gain. The relevant idea is that removal of distortionary taxes improve outcomes, while short-run multiplier benefits are temporary and small.

While time Times mentions tax cuts on labor, it focuses on fiscal aid to states and increasing the supply of government jobs. The Times demands more government jobs:

What senators don’t understand or choose to ignore is that state budget cuts mean layoffs. State and local governments are among the nation’s largest employers, responsible for 15 percent of the labor force, about the same share as the health care sector and far larger than manufacturing or the financial sector. Since August 2008, states and localities have eliminated 151,000 jobs.

From the perspective of Corrections, this may be good news for the economy. In "The Current Financial Crisis: What Should We Learn from the Great Depressions of the Twentieth Century?" (March 2009) Federal Reserve Bank of Minneapolis Working Paper, Gonzalo Fernández de Córdoba and Timothy Kehoe, reporting that sharp productivity drops are a main contributer to depressions, write:

With banks and other financial institutions in crisis, the government needs to focus on providing liquidity so that banks can provide credit at market interest rates, and using the market mechanism, to productive firms. Unproductive firms need to die. This is as true for the automobile industry as it is for the banking system. Bailouts and other financial efforts to keep unproductive firms in operation depress productivity. These firms absorb labor and capital that are better used by productive firms. The market makes better decisions than does the government on which firms should survive and which should die.

Corrections suggests the same goes for one of the few employers whose labor productivity appears fundamentally disconnected from wages, and whose labor allocation is distorted by a labor force that is 36.8% unionized, a figure that is approximately the highest private sector union density ever reached, in the mid 1950's. Government job shrinkage appears to serve a double purpose: increase productivity in the long run as well as serve as a (Ricardian) tax cut in the short.

Insight is a good thing

San Diego Times article "Insight is a good thing" (February 9th, 2010) appears to cast a weak comment against the practice of "ability-grouping." Corrections does not understand why.

As long as teachers approach students with different expectations and rely on dangerous practices such as ability-grouping – blue birds, red birds etc. – in order to make those classrooms more manageable, then we shouldn’t be surprised that students continue to perform at different levels.

The sentence appears quite correct, save for the phrase "dangerous." Ability-grouping is the tactic of putting groups of students at similar skill levels together. If other-student knowledge is complementary to student learning, then putting groups of students together is a good idea. Students help one another learn. Everyone would be better off with a higher-achieving individual in their reading group. However, in terms of efficiency, it may be better to match high individuals with high individuals if higher knowledge individuals help other individuals with higher knowledge more than they help lower knowledge individuals.

That is to say, if a sixth-grade reading level individual boosts another sixth-grade reading level individual's reading level up two grades, and would only boost a fourth-grade reading level up one, then we might say that it creates more total learning to match the two highest--a concept called positive assortative matching in economics. This is more easily seen in the table below (click to enlarge). The table displays the joint returns to schooling. We see that higher reading level individuals create more surplus when matched with higher reading level individuals than they would with lower reading level individuals.



In matching theory, our graph displays supermodularity. Corrections displays this graph in colored 2-d and from two perspectives in 3-d to give an idea of why we might want to positively assort individuals. Click to enlarge 2-d. Click to enlarge 3-D #1. Click to enlarge 3-D #2. Note that colors match between the two 3-D graphs, but not between these graphs and our 2-D contour graph. In all cases, the "surplus" might be imagined to be total extra points on reading tests created from a combination. It ranges from zero to twenty-five (without loss of generality).







While the article is correct that this practice will cause more inequity, it may also cause a higher total amount of learning.

Lay Off the Layoffs

Time Magazine article "Lay Off the Layoffs" (February 5th, 2010) concludes that Southwest's decision not enact mass layoffs post September 11th was a cause of their success, comparing them against their rivals that did lay off employees. Not only is Time weakly using a single example, but it's missing a more obvious answer: firms that lay off employees are less healthy.

On Sept. 12, 2001, there were no commercial flights in the United States. It was uncertain when airlines would be permitted to start flying again—or how many customers would be on them. Airlines faced not only the tragedy of 9/11 but the fact that economy was entering a recession. So almost immediately, all the U.S. airlines, save one, did what so many U.S. corporations are particularly skilled at doing: they began announcing tens of thousands of layoffs. Today the one airline that didn't cut staff, Southwest, still has never had an involuntary layoff in its almost 40-year history. It's now the largest domestic U.S. airline and has a market capitalization bigger than all its domestic competitors combined. As its former head of human resources once told me: "If people are your most important assets, why would you get rid of them?"

It's an attitude that's all too rare in executive suites these days.

Corrections suggests that organizational/firm-specific capital or search costs can certainly be a reason for labor-hoarding. However, concluding that firms should not lay workers off because firms that don't lay off workers are successful is like concluding that firms that don't declare bankruptcy are the most successful firms--therefore they shouldn't declare bankruptcy. The rest of the article provides nothing but economic sound and fury, signifying nothing.

Viral irrationalism

Jerusalem Post opinion "Viral irrationalism" (February 8th, 2010) reports on the failure of Jews to inoculate their children against basic diseases. It recommends required immunization, while Corrections remains uncertain as to whether or not such a requirement would be welfare-enhancing.

The Jewish community, here and in the Diaspora, is not immune to such irrationalism. Some people have been instructed by their clerics not to immunize; some have been swept up in the quagmire of medical quackery, while still others are convinced profiteering pharmaceutical companies are conspiring to promote unnecessary vaccines.

After establishing that Hasidic Jews have experienced outbreaks of mumps, the article urges required inoculation.

We urge the Health Ministry to consider requiring parents to provide a child’s pinkas hisunim – immunization record – when they register their youngsters for school. The enforcement tool would be simple: Any municipality or stream, including most of the haredi sector, which is found to admit unimmunized children, would face loss of funding from the national government.

The only reason Corrections can see that a government might get involved in required inoculation is that it represents a positive externality through herd immunity. Herd immunity is a concept in epidemiology that allows for the protection of non-inoculated individuals because enough of the herd is immune. In brief, the concept is as follows: if one person has the disease, and they give it to (on average) less than one other individual, then there will be no outbreaks. The herd is largely "immune." If they give it to (on average) more than one other individual, then there will be exponential growth in a disease and outbreaks will ensue.

So long as a society is past herd immunity thresholds, they have decreasing returns to further inoculation, in terms of herd immunity. In such a case, required inoculation can easily be seen as welfare-decreasing, especially as all other individuals have the option of becoming inoculated.

The threshold for herd immunity in mumps is approximately 80%. Israel passed that threshold in 1990. Corrections notes that among humanity's most valuable accomplishments has been the eradication of smallpox through vaccination. Vaccination has great value. However, given that the critical herd immunity threshold has been passed, allowing Jewish parents to make their own decisions about the risks of their children dying is much cheaper.

When athletes praise God at the Super Bowl and other sports

Christian Science Monitor opinion "When athletes praise God at the Super Bowl and other sports" (February 9th, 2010) ignores possible utilitarian concerns in its invective against Drew Brees praise of god on national television.

'God is great.'

So said Drew Brees, the most valuable player in last Sunday’s Super Bowl, after leading the New Orleans Saints to an upset victory over the Indianapolis Colts.

Such comments have become commonplace on American television, where athletes routinely thank God in postgame prayers and interviews.

Is this a problem? I think it is. And to see why, try to imagine if Brees had made a slightly different statement: 'Allah is great.'

It is worth noting that approximately 76% of the United States are Christians. Corrections imagines that among Super Bowl watchers, and American sports fans, it's likely higher (and more intense).

In a purely felicific calculus, average gain that individuals who watch may get from hearing a praise of their chosen deity multiplied by their number is likely greater than the average loss from individuals who watch and don't like hearing praise of god. The author's comparison would make the transition from somewhere between a 3-to-1 and 9-to-1 christian-to-other watcher, to a very small minority-to-a large majority, if an Islamic prayer were said.

The author's comparison is false, if we examined it on Benthamian felicific calculus, or any reasonable weighting to achieve a comparison between aggregate benefit and aggregate cost.

Supreme Court sets bad public policy

In the Chicago Tribune Opinion "Supreme Court sets bad public policy" (February 8th, 2010) describes the consequences of striking down an Illinois law prohibiting exorbitantly high awards for malpractice lawsuits:

The law ended ridiculously high noneconomic (e.g. pain, suffering and loss of consortium or society) awards handed out in Illinois malpractice suits, especially in downstate Madison County, the malpractice lawyer's mecca. The law was effective, helping reduce medical costs and stemming the departure of Illinois health care providers because of excessively high malpractice insurance costs.

The article forgets one additional effect of such a law: it made bad doctors stay in the state. When the punishment for malpractice increases, so too does the cost of practicing medicine, especially for the worst (most likely to get sued) doctors. Of course, higher malpractice payouts should all get passed to consumers in the form of higher doctor's fees, because in the long run doctor location is elastic.

L.A.'s blueprint for job creation

LA Time's Opinion Editorial "L.A.'s blueprint for job creation" (February 7th, 2010) puts forth a "cost" figure for trade, without considering the incredible benefits of trade:

Buy local: In 2009, L.A. city government spent roughly $1.7 billion for various goods and services. Unfortunately, companies in L.A. received only 15% of it. More than half of the total went to firms outside the region, and some of it left the state entirely. The city's procurement guidelines should give preference to local manufacturers and service companies.

Economists have long known that trade benefits both trading partners. To analyze California's situation properly, we would need to know the benefits that Californian buyers receive from non-locally produced food and clothing purchases. "Buy local" may be the prescription of many, until they are faced with a price-tag of $50 per cup of coffee.

It is also worth noting that even if companies in L.A. received only 15% of total food purchases from L.A. city government, these companies could still be receiving a great deal of revenue from around the world. The discrepancy would be natural if the companies were specializing--making only what they make most efficiently. For example, if L.A. companies are only good at making carrots, then we would expect that they service very little of L.A.'s total food demand. However, these companies are still better off than they would be if forced to give up their natural advantage for carrot-growing to grow the coffee beans that the government now refuses to buy from Columbia.

Both the carrot farmers and L.A. consumers are better off if L.A. doesn't adopt a "Buy local" policy--all inefficiencies created by L.A. city government are passed on to consumers. Subsidizing production that food companies wouldn't make without such a subsidy only hurts the city.

A Recovery That’s Factory-Built and Gaining Speed

New York Times article "A Recovery That’s Factory-Built and Gaining Speed" (February 5th, 2010) points out that increased manufacturing output may be a sign of quick economic recovery:

The sharpness of the rebound, reflected in the indexes created by the Institute for Supply Management in the United States, and recreated in many other countries by Markit, could indicate that the American economy is not in line for another slow recovery

Likely, this is a sign of recovery. An interesting economic possibility, however, is that increased manufacturing output is actually a sign that the economy is headed only further into recession. We imagine a world in which individuals can either consume with their income or invest it. If the economy is only headed further down, they want to invest less, meaning they must consume more, until captial has depreciated to its new steady state, as depicted below (click to enlarge). Investment trends would need to be analyzed in order to dismiss this possibility.

The Necessity of Obamanomics

Wall Street Journal opinion editorial "The Necessity of Obamanomics" (February 4th, 2010)

You don't have to be an orthodox Keynesian to understand that as long as the private sector is deleveraging the public sector has to borrow and spend in order to keep the economy moving forward. Spending on the original stimulus will peak soon; spending for additional unemployment insurance and the jobs bill will add about $90 billion.

You may not have to be an "orthodox Keynesian," to believe that the government can stimulate aggregate demand as a pareto-improving (or some "aggregate" utility improving) government intervention, but if you aren't an orthodox Keyesian (whatever that means), you might find yourself as a hydraulic Keynesian or neo-Keynesian. Perhaps familiarity with economics breeds an inability to understand when a non-economist such as Robert Reich makes contentious claims seem ordinary.

Corrections disputes Reich's point, and suggests that even if you don't have to be an "orthodox Keynesian," to understand government intervention is currently necessary for some reason, you have apparently heard of some secret consensus that has evaded Correction's ears.

Backing down on climate change

The LA Times recently ran an editorial called "Backing down on climate change" (February 5th, 2010) that claimed

No one really knows what would happen if average temperatures hit 5 C higher than 1850 -- a level we could easily reach within a century under a business-as-usual scenario -- but changes to the physical geography of the planet become probable: land masses would vanish; ecosystems would collapse. Human civilization would change, and not for the better.

Corrections would urge the author to credit the human race with some modicum of intelligence. It is unclear that a global climate change would harm civilization, as a whole. Afterall, the flood urged Noah to build the world's largest boat. Rational human beings will begin to invest increasingly in technology that will prevent serious climate change as soon a such change becomes worrisome. In fact, many have done so already. Assuming people discount the future, they may be willing, for some time, to put off trying to solve the global warming problem in favor of leisure activities or other types of invention. When demand for a solution becomes large enough, individuals will certainly shift their production toward climate innovation. Just because we currently see no social investment in the problem of global warming (beyond shopping in a special "organic" aisle at the grocery store), does not imply that such investment will not take place. Warning readers that "human civilization will change, and not for the better" is contingent on the same, ageless refrain "if current trends continue..."

Jim Crow Policing

By its title at least, a recent New York Times editorial--"Jim Crow Policing" (February 1st 2010)--suggests that the New York City police department is racist:

An overwhelming 84 percent of the stops in the first three-quarters of 2009 were of black or Hispanic New Yorkers. It is incredible how few of the stops yielded any law enforcement benefit. Contraband, which usually means drugs, was found in only 1.6 percent of the stops of black New Yorkers. For Hispanics, it was just 1.5 percent. For whites, who are stopped far less frequently, contraband was found 2.2 percent of the time.

In this analysis lies a fundamental mistake. We have not been provided with the correct statistic to determine whether the department is actually racist. Suppose, as in the figure below (click to enlarge), that minority members of the population and majority members of the population factually have a different distribution of "suspiciousness."

For example, the x-axis could represent the level of "suspicious dress" (let's suppose that this is not endogenous). The top chart represents the distribution of the majority population, while the bottom chart represents the distribution of the minority population.  In this example, there is little signaling differentiation among the minority population.  However, there is a great deal among the majority population.  In this sense, although the population averages are the same, and although the "level of suspiciousness" trigger is the same, a much larger proportion of the minority population appears suspicious.

If suspiciousness is correlated with commission of crimes, the New York Police would not be discriminating by stopping more black men.  Moreover, if suspiciousness in the majority population is so rare that it strongly signals criminal behavior, we would expect a larger proportion of police stops of majorities to lead to arrest.

Ultimately, what determines discrimination is not the average number of police stops that lead to arrest of minorities vs. majorities.  The proportion of marginal stops that lead to arrest , which we do not observe, determine the level of discrimination on the police force.  If the marginal (last) stop of a minority is less likely to lead to arrest than the marginal (last) stop of a majority, then the police department would be discriminating by stopping the minority. The only way the statistics we are given could actually lead us to the conclusion that the New York Police Department is racist is if they were the results of marginal, not average stops. This is not the case; the Times is mistaken.

Some 600,000 jobs tied to Obama stimulus plan in 4Q

Reuter's article titled "Some 600,000 jobs tied to Obama stimulus plan in 4Q" (January 31st, 2010) reports improvements in the job-generation counting mechanism of the stimulus plan, but neglects to mention those jobs that this government has taken away from future generations:

That would mean a total of a little more than 1.2 million jobs were created or saved in 2009, versus the Council's forecast of 1.5 million to 2 million jobs, though comparisons are difficult.

Comparisons are made even more difficult by the deadweight loss associated with any subsidy. In the picture below, the deadweight loss in the job market is given by the red shaded area (click here to enlarge).

It is important to specify that the government has taken money from people to "create" jobs, redistributed it, and claimed victory, likely at the cost of future jobs. If the government had not decided to push forward with a stimulus, the money they no longer needed could be re-invested by consumers in more productive activities--hopefully, in spending that does not generate deadweight loss. Natural investments, which spur industrial growth, may create many more jobs in the future than the government has burdened tax-payers with now.

It is also important to note, as Kevin Murphy has, that the effect of government spending depends largely on how efficient the government is at employing the resources it has. If we believe that the government is largely inefficient (so for every tax dollar it raises, it entirely wastes fifty cents), this makes it more likely that the net value of the stimulus is negative. If we notice that the stimulus plan is not devoted to making use of "idle" resources, but rather to transferring funds from productive taxpayers to less productive citizens, this also makes it more likely that the net value of the stimulus is negative. Finally, if we believe that even "idle" resources, such as the unemployed, are able to become productive with relative ease, such as by taking a college course or moving, the case that the stimulus has net negative value becomes quite compelling.