Thursday, December 31, 2009

Unhealthy habits are what's killing us

CNN.com article "Unhealthy habits are what's killing us" (December 28th, 2009) appears to misunderstand that total utility of life comes from both quality of life and quantity. Furthermore, Corrections notes that higher rates of early death for minorities appears as a natural outcome of maximization, rather than a product of irrationality or a failure of willpower.

So if the U.S. health system does such a good job saving its middle-aged and elderly sick, why do Americans die comparatively young?

Answer: because Americans are much more likely to get sick in the first place.

And that likelihood owes very little to the health care system and a great deal to the bad choices American individuals make.

If you eat too much, exercise too little, drink too much, smoke, take drugs, fail to wear a seat belt or ignore gun safety, there is only so much a doctor or hospital can do for you.

Corrections does not see bad health and dying early as a bad decision. Total happiness comes from both quality and quantity of life. Individuals enjoy eating, drinking, smoking, and consuming drugs. The author begs the question whether or not Americans are actually making the right choices.

CNN.com has one additional observation that is not contradictory to a rational-individual hypothesis. Specifically, that minorities often engage in self-destructive behavior at higher rates than whites.

Acting on this information won't be easy: It violates too many taboos. Americans understandably treasure their right to make their own choices, including the choice to super-size it. And many are uncomfortably aware that self-destructive behavior is most often found among the poor and among minorities: Black women are more than three times as likely as white women to be severely obese.

This may be a rational discrepancy. If minorities also have lower wages, then their foregone earnings from dying early are less. The shadow cost of unhealthy behavior is lower--we should therefore expect higher rates of early death, coming not from irrationality or dynamic preferences, but from rational maximization.

A Micronesian Paradise - for U.S. Military Recruiters

Time Magazine article "A Micronesian Paradise - for U.S. Military Recruiters" (December 31st, 2009) is noisome in its abuse of statistics to insinuate fleecing by the U.S. military of the Federated States of Micronesia (FSM), associated states of the U.S. It notes higher participation rates per individual on Yap, an FSM member. It continues by noting higher military deaths per individual on Yap.
In 2008, the country had more Army recruits per capita than any U.S. state. It also has more casualties in Iraq and Afghanistan, per capita. The islands have lost nine soldiers in the wars out of a population of 107,000 — a rate five times the U.S. national average. (Only American Samoa has lost more soldiers, per capita, among U.S. territories.)
We would expect these statistics if FSM soldiers were equally likely to be killed in combat as any other state's soldier. Time Magazine is only showing that exactly what one would expect should happen if all soldiers are treated fairly is indeed occurring, as dictated by the below definitions of Yap recruits per capita, and Yap military deaths per capita.  We can see military deaths per capita is dependent on Yap recruits per capita and a constant (if the military treats recruits fairly).


The proper statistic to compare if we are concerned about fairness is military deaths per Yap recruit compared to military deaths per other country recruit, which Time does not comment on.

Judges Consider New Factor at Sentencing: Military Service

Wall Street Journal editorial "Judges Consider New Factor at Sentencing: Military Service" (December 31st, 2009) waves its hands at, but fails to actually observe any externalities in military service that require the parallel justice system it describes. Specifically, it notes that military veterans coming back from foreign deployment have received special judicial treatment in light of their service.

As more soldiers return home from combat overseas and end up in the criminal-justice system, a number of state and federal judges are deciding to show former soldiers leniency in light of their service. Some veterans are receiving probation coupled with psychological treatment, generally for nonviolent crimes that normally would land them in prison.

The article gives an example of one judge's reasoning:

'We dump all kinds of money to get soldiers over there and train them to kill, but we don't do anything to reintegrate them into our society,' says John L. Kane, a federal judge in Denver. Earlier this month, Mr. Kane sentenced an Iraq war veteran convicted of bribery to probation instead of prison.

Yet Judge Kane's argument does not appear to have sound foundations, in the understanding of Corrections. The United States has a volunteer army. Individuals who sign up are doing so because the total discounted lifetime path of wages (cognitive and monetary) are higher than their next best alternative. If they were not, individuals would choose their "next best" (contradictorily, their best) alternative.

If the cost of joining the army, including the probability an individual survives, breaks down psychologically and commits crimes upon their return is too high, individuals will opt out of military service. They will do so until wages are increased or the future costs that cause them to commit crimes are decreased. This is the proper market solution to unfortunate military conditions. If military service is unattractive and unfortunate, fix it through wages, rather than through fringe benefits, like reducing disincentives on producing negative externalities to others (crime), an unsound economic proposition.

Individuals who perform military service are paid in a variety of ways. The public honors them as protectors of freedom. They are paid a wage. They gain fringe benefits through discriminatory governmental hiring practices. The military should make sure it is paying in the most efficient manner, and it is by no means clear that removing disincentives from criminal activity is welfare-enhancing.

The only case in which offering these fringe benefits to soldiers makes sense to Corrections is if ex ante the military has difficulty predicting the single individual of many to pay higher wages in the form of a light sentence, and ex post it can identify them, that the value of this benefit is high, and the moral hazard it poses is low, an unconvincing conjecture.

One might add that there could simply be sample selection in sentencing. Individuals with military service might be less prone to recidivism, incarcerating them less effective, and lighter sentences may be efficient. The article does not address this, though Corrections sees it as a possibility.

Wednesday, December 30, 2009

Heath Cuts With Little Effect on Care

New York Times article "Health Cuts With Little Effect on Care" (December 29th, 2009) offers poor partial equilibrium analysis of Richmond health care. Specifically, it makes inferences from data on local rationing of health care to the impact of a global rationing of health care. This is improper in the presence of control group substitution, the search for alternative treatment by individuals denied it by an experiment (in this case, natural).

Since 1996, the Richmond area has lost more than 600 of its hospital beds, mostly because of state regulations on capacity. Several hospitals have closed, and others have shrunk. In 1996, the region had 4.8 hospital beds for every 1,000 residents. Today, it has about three. Hospital care has been, in a word, rationed.

And

The quality of care in Richmond is better than in most American metropolitan areas, according to various measures, and it continues to improve. Medicare data, for example, shows that Richmond hospitals do a better-than-average job of treating heart attacks, heart failure and pneumonia.

The New York Times is broadly examining the impact of a natural experiment in medical care. It implicitly compares a forced change in hospital bed capacity, using a difference-in-difference model. Specifically, the article examines how the difference between American metropolitan hospitals and an unconstrained Richmond changed when Richmond become constrained.

However, it is important to note that individuals living in Richmond who may have been made worse off (implicitly, the control group in this natural experiment) had the capacity to seek out-of-area hospitals that were not limited by (control group substitution). We could therefore observe an increase in Richmond health statistics due to this local prohibition, while observing a decrease in health due to a global prohibition.

Corrections notes that these observations are predicated on the premise that the New York Times is doing proper analysis to begin with. Observations about hospital care rates alone, neglecting individuals that never went to the hospital, would obviously be severely flawed. The claim that quality of care is better when not considering the quantity, which the New York Times appears to do, is an additional and fatal flaw.

Tuesday, December 29, 2009

The drug war two-step

San Diego Union-Tribune commentary "The drug war two-step" (December 27th, 2009) fails to mention a curiosity in the "War on Drugs" that helps to make interdiction efforts a self-defeating campaign. The article suggests that the elimination of one drug dealer may reduce violence in Mexico but increase the amount of drugs shipped into the United States. Corrections sees a definite possibility for the opposite to occur. Corrections suggests that the elimination of drug dealers could cause more drug-dealer-on-state violence, smaller quantities of drugs shipped, higher drug prices, and higher industry profits.

The question is will “El Barbas’ ”death have any lasting impact on reducing cartel-related violence and reducing the flow of drugs into the United States. On the first point, there may be some hope, but not for the right reasons. Here’s the rub: drug traffickers are peace-lovers at heart, because peace means no competition for customers and profits. With Beltrán Leyva out of the way, “El Chapo” Guzman can expand his business and keep moving up the list of Forbes magazine’s wealthiest people. Meanwhile, the U.S. drug consumers who are padding his bank accounts can rest assured, there will be plenty more drugs available in the days to come.

When something is demanded inelastically, it means that a one percent increase in price will be met with a less-than-one percent decrease in demand. Addictive, illicit drugs are often examples of goods with inelastic demand. While a monopolist will never supply a good on the inelastic portion of the demand curve, competition will. It is not unlikely that the illicit drug industry is pricing drugs on the inelastic portion of the demand curve.

Therefore, if authorities artificially shift the quantity supplied leftward, it may increase illicit drug industry profits. This is depicted graphically below (click to enlarge).




It is in this manner that drug interdiction efforts may actually benefit the drug industry. It is important to note that under this scenario, fewer drugs will be consumed in the period of interdiction, even though the industry is better off. We could imagine that increased drug-industry profits might actually increase its capacity for violence against the government, concluding the reasons for the above predictions.

Corrections notes as a piquant possibility that one method of reducing the quantity of drugs sold in the United States might be to help form a cartel or monopoly supplier. As outlined above, a monopoly supplier will artificially restrict supply, gaining higher profits. It could be that the formation of a monopoly will cause a smaller quantity of drugs into the market, as depicted below (click to enlarge).

Monday, December 28, 2009

Search, but You May Not Find

The New York Times article "Search, but You May Not Find" (December 27th, 2009) evokes market power problems where they do not belong.
Today, search engines like Google, Yahoo and Microsoft’s new Bing have become the Internet’s gatekeepers, and the crucial role they play in directing users to Web sites means they are now as essential a component of its infrastructure as the physical network itself. The F.C.C. needs to look beyond network neutrality and include “search neutrality”: the principle that search engines should have no editorial policies other than that their results be comprehensive, impartial and based solely on relevance.
The article continues to cite examples in which google promotes its favored (google powered) shopping results above others. There are very few barriers to entry in this industry. For example, if consumers are worried that google is biasing their map-searches, they can create a search that presents google's search results simultaneously with yahoos, or msn's, or any of the hundreds of search engines that are displayed when one googles "search engine" (notably, google is hit number nine). The market for internet search has virtually no barriers to entry and Corrections sees no cause for regulation.

Sunday, December 27, 2009

Smart Answers to Recidivism

The New York Times editorial "Smart Answers to Recidivism" (December 24th, 2009) fails to consider the major repercussions of eliminating major post-sentence criminal punishments. The article suggests that making legitimate-sector job opportunities more available to ex-convicts will lower their recidivism rates. The article describes the changes to ex-convict employment that it supports:
No reasonable person would suggest that a sex offender be given a job in an elementary school or day-care center. An ex-offender could not be disqualified for employment unless the offense was directly related to the job. Job seekers would no longer be required to disclose convictions on applications for state, county or municipal jobs. The offenses could still be uncovered in background checks, but they would no longer automatically rule out an applicant from the start.
Of course, potential criminals likely are aware of these permanent costs of conviction--a difficult job search. Eliminating these costs would increase crime rates under a model of crime under which criminals weigh expected costs against benefits in deciding wether or not to commit crime. Perhaps better legitimate-sector opportunities lowers crime rates among past-criminals, but less punishment for crime increases crime rates overall. Thus, the question of whether or not such a change will lower total crime rates is empirical, and yet unanswered.

To Save the Planet, Save the Seas

The New York Times opinion editorial "To Save the Planet, Save the Seas" (Decmeber 26th, 2009), fails to provide a marginal cost-benefit analysis of the preservation solution to the climate change problem.
Few people may realize it, but in addition to producing most of the oxygen we breathe, the ocean absorbs some 25 percent of current annual carbon dioxide emissions. Half the world’s carbon stocks are held in plankton, mangroves, salt marshes and other marine life. So it is at least as important to preserve this ocean life as it is to preserve forests, to secure its role in helping us adapt to and mitigate climate change.
Even if 99 percent of the world's carbon stocks were held in marine life, it may not be prudent to spend tax revenues on their "preservation." For example, if it were much more expensive to preserve marine life than forest life, we should spend money on preserving forest life until the benefit from the next dollar spent on forest life is lower than the benefit from the next dollar spent on preserving marine life. Without knowing the relative costs of preservation, no prescription can be offered.

Friday, December 25, 2009

Resolution: Get a Deal on a Gym Membership

New York Times article "Resolution: Get a Deal on a Gym Membership" (December 25th, 2009) requires incorrect assumptions on the U.S. fitness industry.  The article seems to assume that gym membership is procyclical (it increases when the economy is strong and decreases when the economy is weak). Corrections suggests that the opposite is quite possible.

But this year the frenzy has been ratcheted up a notch as clubs try to make up for the recession, which caused many corporate sponsorships to evaporate and many individual members to drop out or cut way back on costly extras like personal training and massage.

First, Corrections notes that according to the International Health, Racquet and Sportsclub Association (IHRSA) in 2006, there were 42.7 million health club members. In 2007, there were 41.5 million members. In 2008, there were 45.5 million health club members.

This makes sense. When individuals consume most goods, there are two inputs--commodities that they buy (t.v. sets, or gym memberships) and time they use to consume the good (tv-watching time, or time at the gym). While gym memberships cost money, we expect the larger portion of their cost comes in the form of time.

In a recession, when unemployment is high and wages are low, we expect that people will move away from money-intensive goods, such as expensive meals, and toward time-intensive goods, such as gym time, and its complement, gym memberships.

We may, however, expect revenues to go down, as shopping around for a gym, and going to a gym farther away becomes more feasible and thus gym memberships become more competitive. The general trends for gym membership are displayed in tabular form below.



Corrections will be sure to post the 2010 IHRSA results from next month.

Thursday, December 24, 2009

New rule on airline waits is a big win for consumers

Boston Globe editorial "New rule on airline waits is a big win for consumers" (December 24th, 2009)lauds a Department of Transportion ruling but fails to explain the intuition behind why regulation might increase efficiency, a phenomenon recherché enough to require explanation. Indeed, further examination suggests that the Globe has little reason to cheer.

About 1,500 times a year, airplanes have to wait more than three hours before a takeoff or cancellation of the flight. Such delays affect about 114,000 passengers. In many cases, crews run out of food and drinks for the passengers, and toilets fail. The new rules will also require airlines to provide snacks and drinks after two hours. Airlines that violate the president’s policy will have to pay fines of $27,500 per passenger.

That is more than a wrist slap and will likely push airlines into changing their schedules to reduce chances of extended delays. So be it. Passengers would be happier with schedules that are thinner but more manageable even when weather conditions throw a monkey wrench into operations.

Normally, the Globe's editorial would not be reason to celebrate. However, if there exist customers with heterogeneous preferences for waiting on the tarmac, it is possible that an airline's choice of quality is inefficient for the average customer, while being efficient for the marginal.

Specifically, an airline chooses price and quality to attract the marginal customer.  There is nothing that guarantees that the marginal consumer is a representative consumer.  If the schedule for a marginal consumer's valuation of quality slopes downward, we expect quality to be inefficiently low.  If it is increasing, we expect quality to be inefficiently high.

While this is a possibility, it is unlikely. Multiple airlines can provide a separating equilibrium in which multiple levels of quality are offered. Indeed, the existence of budget airlines make us expect that government regulation will unambiguously reduce utility of everyone involved.  The example of a separating equilibrium for quality is graphically displayed below (click to enlarge).

Wednesday, December 23, 2009

Despite Recession, Crime Figures Are Down

Time magazine's article "Despite Recession, Crime Figures Are Down" (December 21st, 2009) wonders why the recent recession hasn't triggered a rise in crime; notably, there is no statistical evidence for such a correlation.
Murder and manslaughter dropped a surprising 10 percent for the first half of the year, according to the FBI's data.
In addition, the Pittsburgh Tribune Review puts forth the following explanation in their article "Hard times bring drop, not rise, in serious crime" (December 22nd, 2009)
...there are several possible explanations for the drop in crime, including extended unemployment benefits and other government attempts at economic stimulus that "have cushioned and delayed for many people the big blows that come from a recession."
as noted in the Journal of Economic Perspectives, though changes in fiscally motivated crime-rates (such as robbery and property crime rates) can be explained in part by unemployment, there is no statistically significant correlation between violent crime and unemployment (Levitt, 2004). Fundamentally, the benefits to committing violent crime, especially murder and manslaughter, is unlikely to change in the face of a recession. On the cost side, it is possible that the opportunity cost of going to prison for committing murder does decrease. However, the long-term jail sentence a criminal can expect to serve after committing a murder far exceeds the length of a recession, so long run costs (on which people make decisions) change little. Ultimately, it seems unlikely that thousands of people are lurking in the stands, waiting until they lose their job to commit murder  For illustrative purposes only, the relationship between change in national unemployment and change in graphically below.  As in Levitt's paper, the relationship is negligible.



Tuesday, December 22, 2009

Consider the evidence

Philadelphia Inquirer opinion editorial "Consider the evidence" (December 21st, 2009) ignores an interesting possibility concerning the delay in police departmental testing of rape kits. The article is perturbed that there is a shortage in processed rape kits.

The backlog of untested kits includes about 12,500 in Los Angeles, 10,000 in Detroit, 6,000 in San Diego, and 4,000 in Houston. (Philadelphia police, to their credit, say their lab tests every kit).

And

Money shouldn't be a roadblock to solving these crimes. Congress passed a law in 2004 to provide grants to states for rape kit testing. But the law allows police departments to use the money for other DNA testing, not just rape kits. Human Rights Watch reported last March that the Los Angeles Police Department's backlog of untested rape kits occurred despite LAPD's receiving $8 million in grants for testing during the previous four years.

There is no explicit price mechanism to clear the market for processed kits, so instead it is cleared by the implicit price mechanism of time-to-process (perhaps mixed with a nebulous definition of priority). Furthermore, supply is constant. If we increase supply, we expect waiting time to decrease in the short run. However, in the long run, prosecutors and police change their standard methods of operation, and increase their use of more sophisticated methods. This, in turn, raises the waiting time. If long run elasticity is very high, we expect supply shifts to only ever shift waiting time a little. Such a case is depicted graphically below (click to enlarge).  Additionally, our expectations on the evolution of "price" and quantity over time are depicted below (click to enlarge).  

It is foolish to focus only on waiting time or backlog--instead, optimizing behavior would be to first minimize the sentence-adjusted cost of bringing in a suspect (which may include many rape kits or few rape kits), and then choose the amount of money one wants to spend, setting the sentence-adjusted marginal benefit to our (minimized) marginal cost.

Monday, December 21, 2009

A Stimulus That Could Save Money

New York Times article A Stimulus That Could Save Money (November 17th, 2009) cites a McKinsey & Company report that neglects the most fundamental economic thinking to argue that increasing home efficiency will reduce energy use.

The bottom line is that cash for caulkers would be trickier than cash for clunkers — yet would have the potential to do far more good. McKinsey, the consulting firm, estimates that households could reduce their energy use by 28 percent over the next decade. In terms of greenhouse gases, that would be the equivalent of taking half of all vehicles in this country off the road.

Corrections notes that far from decreasing energy use, the sign of an impact of increased efficiency on energy use is indeterminate. People don't want energy as an end consumable product; energy is purchased as an input into producing heat, light, or other consumable amenities. The real product they are purchasing, then, is heat and light. Therefore, we can write the "price" of a unit of heat as the price of electricity multiplied by how much electricity is required per unit of heat.




Therefore, we can see that a doubling of energy efficiency (halving the number of units of electricity per unit of light) is the same as halving the price of electricity. In other words, we may think of this "cash for caulkers" idea as reducing the effective price of light.

This is the point at which McKinsey & Company's analysis stops. They examine energy use as "business-as-usual", assuming "no material change in consumer utility or lifestyle preferences" (page 23 of the above report). Using our above analysis, we can say it is ludicrous to say that light use will remain the same if the price of electricity for light is reduced. As light is a normal good, we will observe light use increasing as price decreases. The remaining question is whether or not, when we halve the "price" of light, energy consumption more than doubles or not. If it increases by a factor greater than two, we should see energy use increasing.

The New York Times took McKinsey's mistaken assumption that consumption of light and heat would remain the same in the face of a decrease in their effective price, and concluded that the price of energy may decrease. In fact, from the Slutsky identity, it can be easy for energy use to increase, given that light and heat are normal goods, and the share of income spent on them is not low.  The possibility for the consumption of light to more than double after efficiency is doubled is depicted graphically below (click to enlarge), along with the possibility for it to increase by less than a factor of two.



Mathematically, the percentage change in heat consumption given a percent change in the effective price of heat will be determined by the Hicksian Elasticity of substitution (negative), the share of income spent on heat consumption and the income elasticity of heat (greater than zero). If our LHS is less than negative one, we will see our predicted increase in energy consumption.



As a final point, we can add that we expect energy companies, as monopolies, to be pricing on the elastic part of the demand curve for energy in general. Monopolies never price on the inelastic portion of a demand curve. To the point that prices are set by the government for energy companies, it is important to note that the more inelastic price is, the more companies have an incentive to lobby and change price, and our suggestion that energy should already be priced on the elastic portion of the demand curve remains intact.

Sunday, December 20, 2009

U.S. food stamp chief wants California to boost use

Reuters article "U.S. food stamp chief wants California to boost use" (December 18th, 2009) falsely supposes that a welfare-based program will improve total utility. Discussing the need for California to recruit more of its eligible federal food-stamp programs, the article includes the following quote from a nutrition analyst:
'There are economic benefits for everyone, for the entire state, if we increase participation [in the federal food stamp program]'
Likely, however, the economic benefits do not outweigh the economic costs for both citizens of the state and for the state.  Notably, a federal program providing subsidized food gets its funding from all US citizens (including Californians), and so increased participation anywhere only costs most Californians.  In addition, the state can easily be made worse off.  By subsidizing people who do not work, food stamp programs magnify the benefit to California citizens of remaining unemployed.  If the labor force is very responsive to changes in wages (or changes in non-labor payment, like welfare), then it is possible that enough people will stay out of California's labor force (at least in the short-run) to depress state tax revenues, as graphically depicted below (click to enlarge).  Californians working and paying taxes have a positive externality to all other Californians, and labor is inefficiently undersupplied as it is.  Placing a negative implicit tax on not working moves Californians further from an optimal equilibrium.


Saturday, December 19, 2009

Not All Drugs Are the Same After All

New York Times article "Not All Drugs Are the Same After All" (December 18th, 2009) offers no economic scrutiny to the complex issue of pharmaceuticals.

Let me start by saying I’m a fan of generic drugs. They save Americans billions of dollars each year and give us access to wonderful drugs at affordable prices. I’ve recommended generics in this column many times and use them myself when possible.

The author goes on to speak on the nature of generics and how they may be inferior to the real thing. What the article does not note is two interesting ways in which generics, chemically-equivalent entities, and brand-name drugs interact.

Monopolies are inefficient, and create deadweight loss. Society grants monopolies to pharmaceutical companies to induce them to research and create new products, which create social benefit, both when the monopoly exists and when the patent runs out; competition from generics runs profit down to zero on a drug and society alone gets the full benefit of the new drug. Traditionally, there is a tradeoff between protracting the life of a patent, which encourages research and development, and shortening the life of a patent, which increases social gain for the drugs that are created. Society balances the positive externalities of research with negative externalities of monopoly.

Therefore, as it is unclear whether or not we are at an efficient patent life of twenty years, it is further unclear whether or not generics are "saving" consumers money off drugs that never exist--harming their welfare. However, elasticity of supply increases as time lengthens--after a matter of years, possibly before the patent ends, a drug can face competition from chemically-equivalent compounds. Compounds that are similar, and free-ride off a drug's preexistent research and development, but are different enough that they do not fall under a patent.

If this is the case, then a pharmaceutical firm might see monopoly profits for a matter of years, let's say seven, at which point chemically-equivalent companies compete and drive down profits for the next thirteen, at which time profits are driven down to zero. It may be the case that shortening a patent life increases profits. Were a patent life ten years, then it is possible chemically-equivalent companies would not find their thirteen years of limited competition to be profitable enough to enter an industry, and a pharmaceutical company would gain ten years of monopoly profit, rather than seven, at which point its profits would go to zero.  This scenario is depicted graphically below (click to enlarge).



Additionally, we note that generics may not save certain Americans money. Let us say that, as the article notes, generic drugs are inferior to their brand-name counterparts. Then it may be possible competition for generics makes prices increase, rather than decrease. The reason this is possible is if there exists a heterogeneous population, for which there are inelastic demanders and elastic demanders. Before generic competition elastic demanders are setting the price of a drug, and their quantity is worth a price tradeoff for the firm. When generics are introduced, elastic demanders shift to generics, while inelastic demanders are now the marginal consumers, at which point it is profit maximizing for a pharmaceutical company to raise the price of a good. It is apropos to note that profits will unambiguously decrease for the firm, as quantity will be reduced more than price is increased (otherwise a profit-maximizing monopoly would have reduced price earlier.)  This is depicted graphically below (click to enlarge).




New York Can Do Better By Juvenile Offenders

Wall Street Journal opinion editorial "New York Can Do Better By Juvenile Offenders" (December 18th, 2009) neglects one potentially large channel through which crime rates are lowered. Specifically, it appears focused only of incapacitation, omitting deterrence.

What does $210,000 buy in New York State? These days, as two recent reports demonstrate, that's what it costs to lock up one child in a brutal juvenile justice system so dysfunctional that its reform-minded commissioner, Gladys Carrion, advises judges not to place children in her facilities.

And

We could not do worse. But 10 years of research shows that we know how to do much better—incarcerate less, and use the latest research to treat delinquents in community-based programs.

The Empire State runs one of the country's largest juvenile prison systems. At its height in 2005, it operated 31 facilities housing 2,500 children. Like many other states in the 1970s and '80s, New York responded to rising crime rates with a get-tough approach that included more punitive laws, more arrests, and more incarceration for both juveniles and adults. In an iconic moment in 1995, the state put razor wire fences around its juvenile facilities.

This approach doesn't work: Almost every boy and girl (nine out of 10 boys and four out of five girls) who leaves state custody is rearrested before the age of 28 and, even within just three years, 75% are rearrested. And the costs are jaw-dropping. This year the operating budget for the juvenile facilities will top $220 million.

It is important to note that there are two ways through which the "get-tough" approach reduces crime. The first is longer prison sentences incapacitates past offenders from committing current crimes because they are locked up for their past crime. The second is longer prison sentences deter past and prospective offenders because it is costly, insofar as it is unpleasant and undesirable, to be locked up.

In Economic Inquiry (Levitt, 1998) there is strong evidence that both deterrence and incapacitation play roles, but that deterrence plays a much larger role in preventing crimes, especially for property crimes. Additionally, in American Law and Economics Review (Katz, Levitt, Shustorovich, 2003) shows that poorer prison conditions, represented by a higher death rate among prisoners, deters crime.

The article in the Wall Street Journal completely neglects deterrence as a factor that mitigates crime rates. Even if more prison sentences and worse prison conditions increases crime rates for those who were incarcerated, which the article, without proper counterfactual, does not show, it is unclear whether this is still an effective tactic through the channel of deterrence.

Friday, December 18, 2009

Foreign interpreters hurt in battle find U.S. insurance benefits wanting

Los Angeles Times article "Foreign interpreters hurt in battle find U.S. insurance benefits wanting" (December 18th, 2009) provides an interesting observation without explanation. Specifically, Iraqi interpreters, injured in Iraq while running the same risks as American soldiers there, are not given the same benefits.

Payments intended to provide a decent standard of living in Iraq or Afghanistan leave the recipients below the poverty level in this country.

and

'When we were in Iraq, we were exactly like the soldiers,' Hadi said. 'Why are we treated differently now?'

After establishing that Iraqi interpreters are paid less, the article deepens the question. A normal, reflex response might be to say that Iraqi interpreters were paid less because they were worth less. After all, in competitive markets, people are paid at least what their second-best-offer is. The article gives evidence that interpreters were worth just as much, in terms of productivity, as U.S. soldiers on the ground.

Retired U.S. Army Col. Joel Armstrong, who served in Iraq and was a leading proponent of the 2007 troop buildup, or 'surge,' that helped reduce violence in the country, said Iraqi interpreters were crucial to the strategy's success.

'Without them, you really can't operate effectively as a force. It's just impossible,' Armstrong said.

Taking the Times at its word, the lapidary answer to Corrections is that when it comes to interpreters of Iraqi Arabic living in Iraq, the U.S. Army is all but a monopsony, a single consumer of a good for which there are many producers. In that vein, Iraqi interpreters will not be given their marginal product of labor, while U.S. soldiers, for which the U.S. Army is not the sole option, shall.

We note that even though contractors hire interpreters, we view them simply as intermediaries, and the article's concern about AIG disputing insurance payments will be reflected in higher ex ante wages rather than ex post coverage. This is true especially if private insurance can be purchased, while risk aversion makes the system less efficient.

Atop Towering Cliffs, a Lonely Campaign to Combat Japanese Suicide

New York Times article "At Japanese Cliffs, a Campaign to Combat Suicide" (December 17th, 2009) takes a moral stance for suicide prevention, where economics paints a less clear picture.

While preventing suicides is a universally difficult task, it is particularly challenging in Japan. Depression remains a taboo topic here, making it hard for those most at risk to seek the help of family and friends. Many Japanese view suicide as an issue of private choice rather than public health, and there are few efforts to highlight the problem.

There are a cornucopia of arguments for why we might want to discourage suicide. Cases in which we might are in a dynamic world with shifting preferences, and in which a private means of "tying Odysseus to the mast" is absent. Or where individuals have incomplete knowledge about the present and future. These are conditions under which potential suicides would be better off with prevention.

But suicide can represent an advantageous lower bound on utility. With that in mind, we may not want to prevent all suicides. This situation is graphically depicted below (click to enlarge).

The argument that interventions avert suicides is not one of these. Adding pressure on an individual not to commit suicide can decrease overall utility while increasing the marginal utility of staying alive. If we apply social pressure to raise the shadow cost of suicides, it is by no means clear what channel through which averting suicide works--one in which suicides are made worse off, or better off.  The situation in which we are worse off is depicted below (click to enlarge).



Thursday, December 17, 2009

Starved watchdog

Houston Chronicle editorial "Starved watchdog" (December 16th, 2009) offers the unsupported asseveration that, in wake of several Houston-area industrial accidents, additional resources need to be given to the U.S. Chemical Safety and Hazard Investigation Board.

If only a few workers die in an industrial accident, we won't pry.

That seems to be the philosophy of the U.S. Chemical Safety and Hazard Investigation Board (CSB), the understaffed and underfunded independent federal agency charged with investigating plant and refinery mishaps.

Explosions at two Houston-area facilities within a single week have killed one, injured several more and alarmed thousands of residents near the Valero Energy Corp.'s Texas City oil refinery and the American Acryl facility in Seabrook.

Workers at these industrial facilities are free to move to other jobs. Houston-area industrial facilities are analogously free to put in higher and better safety regulations if the higher wage they have to pay to workers for taking the risk is greater than the cost of additional safety regulations.

But what if the additional safety regulations aren't worth the wage? Then we should see an increased number of deaths, and a higher wage. Corrections states, as a credenda, that individuals are able to decide what they prefer better than an ill-incentivized gallimaufry of their peers. Given a choice across multiple alternatives (one the market has an incentive to give if utility may be gained) a government intervention only hurts the very people they are ostensibly trying to protect.

Incidentally, this argument holds without a right-to-sue for a worker or their estate. A law allowing litigation for injuries or death ex post, rather than wages compensating the chance of injury or death ex ante only furthers the argument that government should not regulate as the Chronicle wishes.

Card Fees only Scrooge could love

San Diego Union-Tribune commentary "Card Fees only Scrooge could love" (December 17th, 2009) offers an ill-reasoned animadversion of credit card company fees.

Because the major credit card brands insist on collecting something on every transaction made on every credit and debit card, so-called “swipe fees” are hidden in the purchase price of all of a retailer’s products. In other words, everyone pays more to cover these fees every time they buy something. This is true even for low-income people who are unranked and must pay with cash. The result is a huge wealth transfer from poor to rich.

In fairness to the Union-Tribune, the economics Ph.D. consulted and cited in the article apparently did not give consideration to the idea that credit card technology could improve the total factor productivity of a firm that sells goods. If this is the case, prices could be lowered because overall efficiency has increased.

This is not an unlikely scenario. We should remember that the adoption of credit cards is optional for a retailer (though once adopted, in Correction's understanding, a merchant cannot charge different prices). If consumers prefer a shop that can offer lower prices but demand cash, then competition will run out the shops offering credit-cards. This is a conjecture robust to a heterogeneous population.

De-Criminalizing Children

New York Times editorial "De-Criminalizing Children" (December 16th, 2009) does not adequately make the point that there exist two risks when making the decision to imprison juveniles in juvenile detention facilities or adult jails.

When [the U.S Congress] reauthorizes the [Juvenile Justice Delinquency and Prevention Act of 1974] — it is already three years late — Congress should make it illegal for states to place children in adult prisons, perhaps with the exception of truly heinous criminals.

The Times bases its credenda on the belief that adult prisons have a dysgenic effect on youth imprisoned there. However, it is important to note that these marginal individuals, presumably more degenerate than the average individual in the juvenile justice system while more degenerate than the average individual in an adult prison, have their own negative effect on juveniles.

The Times may implicitly recognize this while neglecting it, evidenced by the last portion of their quoted statement.

If the objective is one of minimizing some function of crime and expenditure, we must recognize marginal juveniles may be subject to an adult externality, but the alternative is to expose other juveniles to their own--a balancing act must be made, rather than a universal condemnation.

Wednesday, December 16, 2009

Pittsburgh Sets Vote on Adding Tax on Tuition

New York Times article "Pittsburgh Sets Vote on Adding Tax on Tuition" (December 15th, 2009) provides an inadequate analysis of the consequences of Pittsburgh's proposed tax on tuition:

On Wednesday, the City Council is expected to give preliminary approval to Mayor Luke Ravenstahl’s proposal for a 1 percent tuition tax on students attending college in Pittsburgh, which he says will raise $16.2 million in annual revenue that is needed to pay pensions for retired city employees. Final Council action will be on Monday.

When considering the tax, there are three aspects to consider: the marginal student's decision, the marginal dollar of the University, and the incidence of the tax.

The price elasticity of demand for education from Carnegie Mellon (and other colleges in Pittsburgh) is likely quite elastic, while price elasticity of demand for education is likely to be highly inelastic. Goods become more elastic as fraction of expenditure increases for normal goods like education. Therefore, we expect full time students, poorer students, and students with less lifetime income to be the marginal exiting individuals. We might expect Carnegie Mellon's english students to leave the program more quickly than its engineering students. We expect that "national" students are more elastic than "local" students and would leave more quickly. In the long run (presumably four years as the pre-tax stock of students fully depreciates) the composition of local colleges will change, presumably to include more wealthy and local students.

The price elasticity of supply for education from Carnegie Mellon (and other colleges in Pittsburgh) is likely to be relatively inelastic in the short run and relatively elastic in the long run, especially as the composition of students shifts.

The incidence of the tax, therefore, is likely to fall primarily on Universities at first, and, as it is able to shift capital and become a more local university populated by wealthier students.

Correction's conjecture about the direction of our four relevant variables is graphically displayed below (click to enlarge).


The public option died last summer

Washington Post editorial "The public option died last summer" (December 15th, 2009) is hysterical in its misinterpretation of majority rule in the Senate.

The undemocratic Senate, which vastly over-represents conservative states and rural interests, has become even more undemocratic by the over-use of the filibuster, which gives tiny minorities -- sometimes a minority of one -- the power to kill proposals supported by the vast majority of its members.

Political commentators of all stripes, of course, like to call their opponents maneuvers undemocratic. Republicans might observe that the majority of the country polls against health reform in its current form, while Democrats may observe that a majority of Representatives and Senators are for it.

The post's "focus" on the marginal individual, however, causes them to become preposterous, imagining that because the marginal individual decides an issue, the minority of one is the one killing it. The ability of that singleton is contingent on forty other Senators agreeing with him. A bit like saying that, in a room of 99 people, split 49-49, the 50th vote is a minority vote deciding the outcome.

Just as the Senate balances Congress, and the Legislature balances the Judiciary and Executive, so too can the "vast majority" the author balance the individual "minority of one." All it requires is 60 votes to end a filibuster.

The post's commentary is sound and fury, signifying nothing.

Tuesday, December 15, 2009

Overhaul of U.S. food safety system is overdue

Los Angeles Times article "Overhaul of U.S. food safety system is overdue" (December 14th, 2009) offers a chimerical argument for an expansion of the U.S. FDA's authority for oversight of food products.

Support for overhauling the nation's food safety system is nearly unanimous. Even the agriculture industry agrees, by and large, that current levels of inspection and tracking by the U.S. Food and Drug Administration are inadequate to safeguard the nation's health.

One should not be surprised that support is "unanimous" among major players in the industry. There are four players that are to be considered in food oversight. The FDA, the existing food industry, potential entrants to the food industry, and consumers. Of the four parties with a stake in food oversight, the FDA and food industry both have organized industry groups, while consumers and pre-existent firms do not. What would be better for FDA technocrats than an increase in power of oversight? And what might be better for erecting barriers to entry for an industry than a government agency they have established connections with?

In the meantime, consumers and marginal entrants do not have established connections with the FDA, and further do not have a large enough reason per person to organize as a special interest group, unlike the food industry. The food industry should use the FDA to artificially restrict output (by denying marginal entrants), and increase prices.

Why not privatize the FDA? What administration is more efficient? The FDA, or the many Kosher oversight companies, like Triangle K, KOF-K, and Orthodox Union competing with one another? It is important to note that companies like Nachalt Yitzchak and Keter HaKashrut, kosher companies that are less universally respected, may simply fall by the wayside, concurrently providing a cautionary tale. A monolithic FDA has misaligned incentives--private firms competing provide a vastly less malignant, and a fortiori more competent solution than government intervention.

The United States continues to steal from Indians

Star Tribune commentary "The United States continues to steal from Indians" (December 14th, 2009) supplies ample rancor toward a recent U.S. federal court decision ruling that the government is to pay Indians $3.4 billion as a result of a class-action lawsuit, citing documentation that a larger sum, $137 billion, is actually owed. The commentary is concerned that Federal courts will act under the aegis of the Federal government, rather than some neutral third party.

So basically, now, the U.S. government is saying that it has identified the thief of Indian royalties and resources as itself. It has allowed the thief to determine the value of the settlement and mostly has allowed the thief to keep what has been stolen.

However, the question is not who pays the bills of a Federal judge, but where the incentives for the judge lie. Evidence that there is a principal-agent "problem" for the Federal judge that decided the case is exiguous. Just because the salaries of judges are paid by the federal government does not mean that they are beholden to it. In this case, a judge has little reason to rule "for" or "against" the government, as he gains nothing from either outcome. It is ludicrous to claim shadowy conspiracy without first asking "what are the incentives of relevant actors?"

Monday, December 14, 2009

Tough Times for Big Law

Wall Street Journal opinion editorial by Elizabeth Wurtzel, author of Prozac Nation "Tough Times for Big Law" (December 14th, 2009) concerns itself with a number of recruits for the law firm Cravath, Swaine & Moore.  Last year, every single one of those recruits turned down an offer of $80,000 plus student loan and benefits, not to work and be put on a furlough of sorts until the economy recovered.  Wurtzel is particularly concerned by this development:

...here's something weirder: I've been told that none of the graduates of Yale Law School who were headed for Cravath accepted their offer of $80,000 to surf and sunbathe, or go forth and save the world. Since no one at either institution is willing to discuss this—and I don't blame them, because I would be embarrassed too—I don't know this for certain. But here's what I'm sure of: Not everybody took Cravath up on this peachy keen opportunity to do anything for a year with pay and benefits. And that by itself is disturbing enough.

If even one person said no to $80,000 for bubkes, I'd question the sanity and intelligence of that sole holdout. Cravath recruits the best and the brightest kids from the most highly ranked law schools—and given $80,000 and a dream, all many of them could do was report to work on Monday.

Yet Wurtzel, in her acidulous censure of youth's follies, overlooks the possibility that human capital depreciates. If knowledge concerning Miss Wurtzel's jejune Uniform Commercial Code and the Rule Against Perpetuities is a function of use of that knowledge in the period previous to this, as well as a costly means to re-obtain it (presumably studying) then individuals may want to keep that capital from depreciating in the cheapest way possible. This may include paying to work, if their human capital is valuable enough and reconstructing it from non-use (i.e. from studying) is costly enough.

We may add, more trivially, that the lion's share of payment for entry-level individuals at Cravath, Swaine & Moore is in all likelihood not their benefits, nor their salary, but instead the future expected value of a path that brings them to be a partner in the firm, or signal their value to other firms and clients.

Video poker? Not here.

Chicago Tribune article "Video poker? Not here." (December 14th, 2009) submits legalized gambling to an auto-de-fé. The Illinois legislature has passed a law enabling legalized video poker machines. A portion of the revenue generated by these machines is transferred to the state. The Chicago Tribune vociferously objects:

If your county or community is on the first of these two lists, congratulations. Your local officials have "opted out" of legalized video gambling. They have declared their disgust with the Illinois legislature's decision to bankroll a $31 billion capital improvements bill in part by luring more people into neighborhood gambling. These communities have said: Go somewhere else.

If your county or community isn't on the first list, get cracking.

It is a herculean task to describe the foolishness this represents. Six powerful economic arguments for legalizing video gambling abound. First, and foremost, individuals should be free to choose. Second, even if gambling is addictive, individuals still make rational decisions. Third, when utility is concave, even taking unfair bets can be a rational decision. Fourth, if even unfair bets are in the interest of multiple individuals, they will likely provide gambles privately. Fifth, the creation of another good to tax decreases deadweight loss for all other objects, on average. Sixth, if all other districts ban gambling, and a significant number of individuals from other counties are willing to travel to gamble in mine, it is in my interest to provide gambling to other districts.

The first argument, that individuals should be free to choose, should not need explanation. As a matter of conditional probability, the chances that a government has decided to limit an individual's liberties for his own good, and is correct in its conjecture, is miniscule compared to the chance that it is doing so for the narrow, personal incentives of legislators, or that it is incompetent in execution, even if well-meaning.

The second point, that gambling may be addictive but should still be legal, is more interesting. Following the earlier argument in Corrections, there is ample evidence that individuals are rational in their decisions, even about addictive goods.

The third point, that individuals are able to accept even unfair gambles is best depicted graphically below (click to enlarge). If they find themselves at a spot where there is local convexity, expected utility from a gamble is greater than expected utility without that gamble. Our fourth point, related to this, is that if we take away efficient private means of redistributing wealth efficiently, individuals will provide them, under the conditions that they are able to match with one another properly and able to provide bets with sufficiently cheap overhead, which it seems apparent they would be able to do.




We turn to the fifth point: the "creation" of a new, taxed good decreases existing deadweight loss (the amount of possible economic gain that disappears in the face of taxation) on average. This point is a subtle one, an idea that will likely be entertained in more depth in a later article. The idea behind this is the same lessons as one gains from the Ramsey Tax problem: if one can, one wants to tax every good at an equal percentage--given that one cannot, one wishes to tax the most inelastic goods. This new good decreases deadweight loss from all other goods, which all have increasing marginal deadweight loss, while creating its own (which starts at a smaller base for its increasing marginal deadweight loss). Additionally, presuming video poker is as addictive as many detractors would claim, the deadweight loss from taxing it is minimal, and such a tax decreases the deadweight loss for other goods.

Sixth and finally, if all or most other localities have successfully banned gambling in their districts, then it is in one's own localities interest to legalize video poker, provided that a large enough number of individuals from foreign localities put a sufficient amount of their money in local businesses for a locality to recoup whatever moral deracination that occurs from allowing the travesty that is video poker to exist.

Sunday, December 13, 2009

10 years after its implementation, One Florida defies its critics

Miami Herald article "10 years after its implementation, One Florida defies its critics" (November 13th, 2009) may be correct in its noting that the critics of ending affirmative action were wrong, it fails to provide adequate evidence.

A decade after Gov. Jeb Bush announced his controversial plan to end race-based university admissions, the number of minority students statewide has risen, according to a Miami Herald/St. Petersburg Times review of enrollment figures.

`That certainly flies in the face of those who were predicting Armageddon all those years ago,' said universities chancellor Frank Brogan.

However, as the article notes, the number of minorities in Florida has also risen. It is unclear from the article if the ratio of the proportion of minorities in college to minorities in state and the proportion of whites in college to whites in state has similarly risen.

Additionally, the article notes that there has been an increase at some colleges but not in others. An increase at minorities at poorer schools with a decrease in minorities at better schools would be relevant.

Finally, we should note that the report fails to have any attempt at a proper counterfactual. If college minority representation around the country went up 25%, while at Florida it only rose by 15%, then it is possible that ending affirmative action was indeed a catastrophe.

The Herald's failure to report the ratio of minority proportion in college against minority proportion in state, the total quality units of minority education (rather total units), and a proper counterfactual gives it little latitude to conclude the ending of affirmative action did not drastically harm minorities. They do, perhaps, have latitude to condemn critics of ending affirmative action if their predictions were off-base.

Saturday, December 12, 2009

Germany shows government role is key to thriving solar industry

Los Angeles Times article "Germany shows government role is key to thriving solar industry" (December 12th, 2009) is offensively inept in its treatment of profitability. Showing that some solar panel companies are profitable with government subsidies, the article suggests that the solar industry would thrive in the US with a little bit of government help:

What you do need, energy experts say, is a national government willing to foster the development of renewable energy. Leaving it purely to market forces -- or piecemeal local incentives, as in the U.S. -- doesn't work as well.

Nowhere does the article note that solar panels could ever be profitable without government subsidies. Indeed, the article notes that the mere suggestion that preferential rates for solar power could be dropped (rates that cost $5 per household in higher electricity bills), sent solar-power provider stock shares plummeting.

It is worth noting that companies that dig dirt holes and then fill them the next day could be profitable with high enough government subsidies. It doesn't mean supporting them is a good idea.

Friday, December 11, 2009

Shrouded in secrecy, decision makers gambled and Harvard lost

Boston Globe article "Shrouded in secrecy, decision makers gambled and Harvard lost" (December 12th, 2009) makes two economic errors in his excoriation of Harvard's dealing with its endowment.

Harvard’s treasurer acknowledged that in hindsight, the university might have managed its investments differently. Yet, he noted, even with the downturn, the endowment grew over the past decade at a healthy annualized rate of 8.9 percent. True enough, but the Corporation manages not only Harvard’s balance sheet, but the expenses of the university as well. The 8.9 percent growth of the endowment wasn’t nearly healthy enough to cover the staggering growth in costs.


First, the touted 8.9% growth rate over a decade with the endowment's 30% fall still means vast growth over the decade. Indeed, the endowment is only around where it was in 2005. Second, it is not clear ex ante that the idea was poor ex post. We cannot say if Harvard failed to understand the probabilities in the bets it was making, or if the bets simply failed to materialize. We would be wrong to censure a man who loses millions on a bet that has 1:1 payoff and 90% chance of winning. He made the right decision, ex ante. The same may be true of Harvard--the world it expected to materialize as time went on may have been wrong, but that does not imply that it was wrong ex ante. Third, while the "staggering growth in costs" may be true, the University also gained from those costs. An increase in costs in and of themselves imply nothing. The difference between benefits and costs do.

Thursday, December 10, 2009

Swine flu has hit about 1 in 6 Americans, CDC says

Los Angeles Times article "Swine flu has hit about 1 in 6 Americans, CDC says" (December 10th, 2009) neglects to mention a curiosity in mathematical epidemiology that appears to have been under-looked in our Swine Flu vaccination push.

At least 50 million Americans had contracted pandemic H1N1 influenza through Nov. 14, according to the newest estimates from the Centers for Disease Control and Prevention released today -- meaning that about 15% of the entire country has been infected, about one in every six people.

And

Swine flu vaccine supplies continue to grow, he said. There are now 85 million doses available, up by 12 million from last week. As supplies have continued to increase, many communities have begun to expand eligibility requirements for the vaccine to include the population at large.

Given the ever-present reminder of H1N1's potential for mutation, it is not apparent that vaccination is beneficial. While vaccination, elimination, and eradication contains massively monetarily valuable pursuits, when a vaccination supply does not outstrip the number of vaccinations required for herd immunity, then all vaccination does is to slow infection. More generations of a virus are visited upon a population, and the costs of delaying may be greater than what is essentially a rapid (but costly) "vaccination" system.

Britain Imposes 50% Tax on Bank Bonuses

New York Times article "Britain Imposes 50% Tax on Bank Bonuses" (December 9th, 2009) reports on an impossibly foolish decision by the British government, but fails to note the monstrously poor idea this is.

To the howls of London bankers, the British government said Wednesday that it would return money from banks to taxpayers by placing a 50 percent tax on banker bonuses of more than £25,000, or about $40,700.

The one-time windfall tax would affect not only British banks but also the London subsidiaries of Wall Street giants, whose rapid recovery from the financial crisis and plans to award bonuses that could rival those of the bubble years have stunned many Americans.

In addition, other reports offer Chancellor of the Exchequer Alistair Darling's perspective that this decision would cause the bank to reinvest its profits back on itself, or to inefficiently pay executives.

All this law should do is intertemporally displace bonus decisions, assuming such a decision has yet to be made, or if made, may be taken back.  It will be almost trivial for the banks to avoid paying this tax. The move has no economic consequences; it is only a knee-jerk political reaction from someone who should know better.

Tuesday, December 8, 2009

Recession's silver lining: falling divorce rate

Christian Science Monitor article "Recession's silver lining: falling divorce rate" (December 7th, 2009) seems celebratory about what appears to be, by its own reckoning, a loss of aggregate utility.

These tough economic times may have at least one positive side effect: they might be encouraging greater family solidarity.

The evidence for this? The US divorce rate fell during the first full year of what might be called the Great Recession. That's the first such decline since 2005.

'Many couples may be rediscovering the long-standing sociological truth that marriage is one of society's best social insurance plans,' said W. Bradford Wilcox, a sociology professor and director of the National Marriage Project at the University of Virginia, in a new report on the state of US marital unions.

In other words, individuals who would have divorced haven't, because they are now too poor to be able to afford the loss of income. The argument for why this impoverished marriage is not welfare improving goes as follows: in a Coaseian sense, no divorce should happen unless the combined desires of both parties are for it to happen--if one partner desired divorce a little (we could say it give them an extra $30,000 a year in happiness) , and the other was vociferously against it (the loss of their partner would cost them $70,000 in unhappiness), then they would simply transfer between $30,000 and $70,000 to stop the divorce. Now, if divorce only happens when both parties gain from a divorce, and we believe that divorce is a normal good (so that people purchase more "divorce" when their income increases), it is true that reducing their income simultaneously reduces the divorce rate and reduces their utility.

The revelation that the Christian Science Monitor offers is that fewer people get divorced in poorer times. This is akin to celebrating individuals switching to public transportation rather than buying cars when they lose their job--those individuals are unambiguously worse off.

Monday, December 7, 2009

Is money tainting the plasma supply?

Andrew Pollack's New York Times article "Is money tainting the plasma supply" (December 5th, 2009) fails to properly describe the notion of equilibrium price in the market for plasma donations.
If there is a cartel, it is likely to be tested over the next few years because after several years of rapid expansion, plasma supply seems to have caught up to demand and could soon exceed it.

One sign is that in Eagle Pass, payment for two weekly donations has dropped to $60 from $80 earlier this year.
In fact, the resource of plasma is being supplied by donors to demanders.  In this case, the demanders are plasma companies.  The price of plasma donations is found at the point where supply meets demand.  Without market distortions caused by, for example, government intervention, demand can't "exceed" supply (so long as price is free to adjust).  The curves are totally unrelated to one another (click to enlarge):

In addition, it is possible that a decreased price of the (alleged) plasma cartel's inputs likely signals that the cartel has gained in strength.  Generally, cartels and monopolies produce at lower quantities than the equilibrium described above: they restrict quantity in order to reap profits from a higher price.  However, a restriction of quantity would also imply lower demand by plasma companies for plasma resources from plasma donors.  Thus, a price decrease at the input level would be perfectly consistent with cartel behavior.  In order to claim that a cartel is losing power, it will be at least necessary to show that plasma quantity supplied by plasma companies has increased rather than decreased.

Sunday, December 6, 2009

Shaving real estate commissions can save sellers thousands

Los Angeles Times article, "Shaving real estate commissions can save sellers thousands" (December 6th, 2009), offers an unnecessarily complicated, misguided, and misleading analysis of a simple problem--what commission to pay your real estate agent.  First, the author suggests that in such a poor housing market, real estate agents desperate for work will accept lower commissions, saving sellers money.  Of course, real-estate agents' effort (the amount of work they puts into getting a sale) is an increasing function of how much money they can make from a deal, so they will exert less effort for lower commission.  For example, if it costs them $10,000 to put in the effort necessary to sell a house for $200,000, they will put in the effort to sell the house at that price for a 5% commission, but not for a lower commission.  Thus, even if a buyer can negotiate for a 1% lower commission, he may end up losing more than 1% of his potential gain from a house sale.

Like in any economic problem, the seller should simply maximize his earnings as a function of the sellers' commission, and the market likely has set this rate for the seller already.  If there were more money to be made for both parties through either a higher or lower commission rate, why would such a commission rate not emerge in the market?  Without clarifying why one would expect this to be true, the author offers an extreme example where one woman saved money by paying the market price, rather than a steeply discounted commission offer.

In addition, the author falsely implies that simply cleaning up a home will increase a real-estate agents' efforts.  Certainly, no one in the business of real estate would survive if they were mislead about the quality of a home due to a few dirty dishes!
A seller who invites a professional into his unkempt house -- dirty dishes everywhere, general clutter or filth -- may convey a message that the house will be difficult to sell. The longer a place takes to sell, the more an agent's cost per hour goes up -- and the likelihood of the agent offering a discount diminishes. Sellers in today's difficult market demand sophisticated marketing strategies, all of which are financed by the agent's commission.
Jones said she sometimes can tell immediately whether a home is likely to sell quickly or languish. Sellers who fix their places up to make a good first impression on agents are more likely to get a double payoff: top dollar on their property, plus a discount on the commission they pay.

More likely, dirty dishes signal that the seller is uninterested in presenting himself well to the real estate agent and similarly is uninterested in negotiations.  If sellers' market experience suggests that clean homes signal nit-picky, tough negotiating sellers, then they will offer the discount they know is coming.

Saturday, December 5, 2009

Reason to be cautiously bullish on America

Boston Herald article "Reason to be cautiously bullish on America" (December 5th, 2009) may be correct in its main point, that the beginning of the end of this recession may be at hand, but appears to use contradictory economic indicators to show it.

You may have to squint to see them, but there are signs of recovery - jobless claims are down for a fifth straight week, productivity is up, market indices are up, the economy began growing again in the third quarter.

New jobless claims are lower, but hiring has not risen past jobless claims, with a loss of 11,000 total jobs in the same period according to current government figures.

When productivity rises, and the absolute value of labor has gone down, it is unclear whether or not productivity gains are due to innovation or simply the fact that production with decreasing marginal returns to scale is at a lower overall level. Indeed, the all the figures cited but the last could be an indicator that production has been being scaled back. It is difficult to tell if the last is a "real" phenomenon or a product of government spending.

Friday, December 4, 2009

EU moves toward common patent system

BBC's article, titled "EU moves toward common patent system," (December 4th, 2009) cites some benefits of making patents cheaper for companies to obtain, but fails to discuss one important way in which patents can stifle, rather than encourage innovation.  Though patents give companies opportunities to profit from innovation, the current web of patents through which new inventors have to pass (a costly venture) discourages innovation.
Sweden's Trade Minister Ewa Bjoerling said the EU patent would "make it much easier and cheaper to protect innovations in the EU".

"This will give European industry better opportunities to compete on the global market," she added.
As Michael Heller stresses in his book, The Gridlock Economy, it is important to realize that when product creation necessitates the bundling of numerous existing patents (as is the case with virtually any technological innovation), an entrepreneur with a new idea may decide not to bring a product to market for fear of thousands of potential patent infringement suits, or due to the cost of hiring the legal help necessary to clear patent hurdles [for more information, click here].  It may be true that the patents cost all producers (including the ones who would have entered markets if not for the web of patents) more than they are worth and in net, patents may suppress innovation.

Wednesday, December 2, 2009

We need a new woman's health movement

Los Angeles Times opinion editorial "We need a new women's health movement" (December 2nd, 2009), makes an ex-post fallacy when claiming that radiation from mammograms meant to detect cancer may in fact cause cancer, and so women should not advocate mammograms as much as they do.
This is what's at stake here -- not only the possibility that some women may die because their cancers go undetected, but that many others will lose months or years of their lives to debilitating treatments for radiation-caused cancers or, possibly, cancers that didn't require treatment at all. 

Of course, any woman who tragically learns from a mammogram that she has breast cancer may regret getting mammograms if she also learns that they were the cause of her cancer.  Nonetheless, it remains true that no woman would be wise to avoid mammograms if they are nearly guaranteed to detect cancer ex-ante.  In other words, if all women have some reasonably high probability of getting breast cancer, and mammograms cheaply detect cancer while causing a miniscule proportion of the cancers that they detect, mammograms and guaranteed early detection remain a better choice than death from cancer not caused by mammograms, and not detected by mammograms.

Optimally, women should keep getting mammograms until the cost of getting another mammogram equals the benefit of getting another mammogram.  The miniscule cost imposed by radiation from mammograms shouldn't be expected to significantly impact the optimal number of mammograms that women get.  In other words, if the cost of each mammograms is m, and the benefit of mammogram number f(n), while the expected cost due to radiation exposure from a mammogram is given by p, then we have:

Before women know that radiation from mammograms can be harmful: f(n) = m at optimal
After women know that radiation can be harmful: f(n) = m + p at optimal n. When p is very small, however, the optimal n changes little from that derived in f(n) = m. This will be the case for reasonable assumptions on the benefits of each additional mammogram to women.

Tuesday, December 1, 2009

Aurora neighbors buy golf course to preserve their view

Denver Post article "Aurora neighbors buy golf course to preserve their view" (December 1st, 2009) offers a curious possibility concerning discrimination that was not reported upon. It is merely a hypothetical possibility to be noted, (given a severely flawed media), rather than a reporting mistake per se.

As of today, residents of homes surrounding Heather Ridge Country Club can stop worrying that their scenic golf course will be turned into condominiums and high-rise apartments.

Three years after forming a special district to preserve the view, residents will take ownership of the golf course on East Iliff Avenue near Interstate 225. The group purchased the 90-acre golf course for $3.1 million and plans to spend another $1.5 million on improvements.

The article further notes the cost:
The 1,127 homeowners who now line the course will pay about $35 a month in taxes for bonds that are structured to be paid off in 30 years, although district members expect them to be paid off much sooner.

What better way to discriminate, if you live in an area that was, according to the 2000 Census, around 88% white, surrounded by an area that was 57% white? When the median household income for your census tract in 1999 was $40,907, this purchase of a golf course represents a 1% tax on income per year for those who don't value a golf course at anything.

If nonwhites don't particularly care for golf, then this is, hypothetically, a thoughtful way to discriminate and segregate.

Sunday, November 29, 2009

A paradox of plenty - hunger in America

Brend Debusmann, writing for Reuters in his article "A paradox of plenty--hunger in America" (Nov. 24th, 2009), gives both a false analysis of equality in America, and offers a poor comparison of opportunity in America to opportunity in Europe.
After all, a bedrock belief in America held that this is the land of unlimited opportunities where every citizen has an equal chance to succeed and become rich.  That requires an assumption that the system is fair.  How many Americans still believe that?  Last summer, a pair of political scientists, Benjamin Page and Lawrence Jacobs, published a study whose findings included that just 28 percent thought the present distribution of wealth is fair.
The author's evidence has nothing to do with his claim.  Although more than two thirds of Americans may think that Bill Gates does not deserve his billions, that it is "unfair" that he is so wealthy, this in no way informs wether or not each of these displeased Americans had the opportunity to obtain, for example, the schooling necessary to become their own Bill Gates.  Drive, of course, is a pre-requisite to obtaining wealth.  Ex post inequality of outcome does not presuppose ex ante inequality of opportunities.

Also, the article falsely implies that the chance of joining the middle class for poor children in America is lower than in other European nations.
More evidence that the gap between myth and reality is shrinking comes from the American Human Development project, a research group which found that "social mobility is now less fluid in the United States than in other affluent nations...a poor child born in Germany, France, Canada or one of the Nordic countries has a better chance to join the middle class in adulthood than an American child born into similar curcumstances."
 To see why this is a misleading statistic, imagine that half of American children are poor, and half middle class.  Suppose also that assignment into adulthood social class is random, so that a poor child has the same chance as a middle class child of ending up either middle class or poor.  Then, the chance of ending up middle class is 50% for a poor child, just as it is for a child born in the middle class.  Suppose now that 80% of European children are middle class and only 20% are poor.  Then, suppose that class re-assignment is random, so that a poor child has a 80% chance of entering the middle class in adulthood.    We see that under such a random assignment, the chance that a poor child becomes middle class depends completely on the size of the middle class relative to the lower class.

In fact, middle classes may not be comparable.  For example, in Soviet Russia, the probability that a homeless child entered the "middle class" was likely quite large, but the child's living standard, quite low.  All of this implies that expected future income of poor children should be as relevant a measure of lower-class mobility as the probability that those children rise to the ranks of the middle class.  Given this information, we may find that a poor child would quite prefer to take a chance on more in America over less in Germany.

Saturday, November 28, 2009

Can America afford the 'vanity tax'?

The LA Times opinion editorial "Can America afford the 'vanity tax'?" (November 27th, 2009) neglects to acknowledge basic notions of pleasure in its lambast of American leisure.

Although bemoaning taxes is the true national pastime, the one tax nobody really considers is this "vanity tax": the difference between what a thing needs to cost (to fulfill a given function) and what it ends up costing (after being artificially inflated by imperatives besides function).
Of course, our economic system is not structured around functional necessity, but rather around functional happiness.  That is to say, the most fundamental objective of the American consumer is to maximize his own well-being, not to maximize his usefulness to society.  If, as the author seems to suggest, we should build an economic system structured around necessity, it would be important to understand why we would do so.  Replacing every housewife's earrings with a new pair of gardening gloves, every child's toy with a multiplication book, may in the long run make America stronger against its enemies, but what gain have Americans really made?  If we are switching to function-value for another reason, we should ask ourselves, "what is that reason?"  Corrections cannot think of one.

Responding to a critic who called Twitter useless, the founder replied, "So what?  So is ice cream."  We eat ice cream for a reason beyond its "functional value" of eating calories--we enjoy it.

Even if we accept, for some reason, the author's barren, function-only world, we should not forget that luxurious goods have a purpose.  Economists define "Veblen goods" as those goods that grant their purchaser increased status, so the value of a Veblen good to a consumer is always tied-up in its price.  For example, a ferrari would not be valuable to most of the men who purchase expensive cars if it cost only $1.  This is because a ferrari has a function beyond its own use.  Veblen goods publicly display the wealth of those who purchase them and are often the same goods that signal high matching status.   One result of the ability to distinguish oneself from one's peers is to be able to signal (wealth, taste, sophistication) and gain information that allows optimal marriage market matchings.  In this sense, the red Ferarri might be worth as much as its sticker price to "society" since it allows an increase in matching efficiency.

Friday, November 27, 2009

The Jobless Gender Gap

Wall Street Journal opinion editorial "The Jobless Gender Gap" (November 27th, 2009) presents an informative piece, with what may be too-simplistic an analysis of the recession's unemployment gender gap.  It argues that the unemployment rate for men has risen because traditionally male sectors have been hit harder, and that government stimulus spending has been unevenly distributed to women, who have lost fewer jobs.

What has happened to men is fundamentally a product of the times.  This recession made America's already declining manufacturing sector decline more rapidly.  About half of all job losses have been in manufacturing and construction, overwhelmingly male sectors.
And
Government policy has also exacerbated this trend.  The stimulus dollars were disproportionately directed away from those who lost the most jobs.  The Obama administration estimated early this year that more than four in 10 stimulus jobs were going to women, about twice women's estimated job losses.
There are a number of concerns raised by this line of argument.  First and foremost, it is worth noting that numbers delivered from political entities  naturally suffer from a principal-agent problem.

Secondly, and more interestingly, it is unclear that we would expect what happens to men to be "a product of the times."  If employers can easily substitute men's labor for that of women, then we expect that if men are fired, the wages of women go down.  Men are now competing for their jobs.  However, it is not difficult to believe that women, even working women, could have a higher shadow wage than men.  This can mean a higher unemployment rate for women, in spite of the fact that their specific industry was not hit by the recession.

It is worth noting that the industries people are employed in are dynamic--just because men lost jobs in one industry does not mean they will not gain jobs in another.