Wednesday, March 31, 2010

Life span may be as wide as your smile

LA Times article "Life span may be as wide as your smile" (March 29th, 2010) makes the causal connection between smiling and longevity, among other things. Unfortunately the article doesn't note the fact that causality can run both ways, and giving people encouragement that smiling more will improve their lives may be quite misleading.
People who smile a lot are usually happier, have more stable personalities, more stable marriages, better cognitive skills and better interpersonal skills, according to research. Science has just uncovered another benefit of a happy face. People who have big smiles live longer.
Maybe being happy, having a more stable personality, having a more stable marriage, and better cognitive and interpersonal skills causes one to smile more. When we see a positive correlation between smiling and other measures of happiness, we should be careful not to infer that smiling more will cause improvements in other areas of our lives without evidence that this is the case. Science has not necessarily uncovered the benefit of having a happy face--people are likely happy for a reason.

In E-Book Era, You Can’t Even Judge a Cover

New York Times article "In E-Book Era, You Can’t Even Judge a Cover" (March 30th, 2010) describes how e-books are changing free advertising that book publishers received from third parties seeing a book being read. For example, one brings the distinctive Marx Engels Reader, edited by Robert Tucker onto the bus--others see it, remember it, and purchase it. This does not happens, the Times conjectures, with e-books. Corrections suggests that competition between booksellers makes the effect of this loss of advertising a wash, as book companies will pay readers (through lower prices) to read their books for the advertising.

Among other changes heralded by the e-book era, digital editions are bumping book covers off the subway, the coffee table and the beach. That is a loss for publishers and authors, who enjoy some free advertising for their books in printed form: if you notice the jackets on the books people are reading on a plane or in the park, you might decide to check out “The Girl With the Dragon Tattoo” or “The Help,” too.
On the one hand, publishers can no longer advertise on book covers. However, the advertising is by no means free. Let us say I am in competition with another bookseller. An extra person seeing my book cover nets me an expected $0.10, as it does him as well. Then upon this happening, I will be willing to charge $0.10 less for my book, to undercut him on prices, as he will be willing to undercut me. In essence, consumers are being paid to advertise because we compete for advertisers.

Therefore, this switch may have no impact on publisher's bottom lines--competitive book sellers had to pay the consumer the worth of their advertising to begin with. We might note that it may be a loss to consumers, until we recognize that a) the option is still open to be an advertiser and b) marginal cost of e-books is even lower than that of regular books, and they may choose the low-cost bundle to the high-cost-but-advertiser's-fees bundle.

Tuesday, March 30, 2010

Reining in patents

LA Times article "Reining in patents" (March 30th, 2010) complicates a very simple question: without profit based incentives, would firms bother to look for new goods?
Underlying many of these disputes is a fundamental question about what patents should cover. It's easy to articulate the principle that patents should apply only to inventions, not discoveries. It's not so easy to draw that distinction in practice, especially when technology is changing so rapidly. What's more, any decision to rein in patent protection risks reducing the incentives that lead people to invest in research and development. But it also could lead to more knowledge being shared sooner, leading to further innovation.
In order to make public any new drug, whether it be "discovered" or "invented," a firm needs profit-based incentives. Without the potential for profits, we can expect drug companies will stop looking for gene-based solutions to disease. Simply put, without a patent, competition ensues and profits are whittled away. Patents give companies the right to set prices and make profits. When so much in the drug industry is patentable, why should we expect any firm to bother looking for cures that are not?

Congress' failure to extend flood insurance program is inexcusable

New Orleans Times-Picayune editorial "Congress' failure to extend flood insurance program is inexcusable" (March 30th, 2010) suggests that the decision of Congress to let the National Flood Insurance Program lapse is poor decision-making. Corrections questions the program itself, suggesting that it has caused, and is causing, moral hazard.

Members of Congress acted irresponsibly when they let the National Flood Insurance Program lapse for a couple of days early this month. Now they have let the program lapse again and for a much longer period. That's inexcusable.

Corrections would suggest that government programs that ensure bailouts for flood-prone regions are the more inexcusable phenomenon. The National Flood Insurance Program was enacted in 1968 to force individuals in flood-prone regions to purchase (often subsidized) insurance because government was bailing them out in the event of a flood anyway. Areas that were given government insurance often had to comply with flood standards; because NFIP was a government program, it was relatively rare for standards to be met--according to the August 1990 GAO Report "Flood Insurance: Information on the Mandatory Purchase Requirement", at the time, about 22 percent of Maine and 79 percent of Texas that was covered under insurance rules did not comply with federal standards. Such government incompetence amounts to subsidized insurance for individuals who live in flood plains.

Corrections, therefore, does not see why NFIP is necessary--it seems inefficient to pay people to live in areas that get flooded, and to build houses that don't have proper protection from flooding due to the moral hazard posed by NFIP.

The Magic Potion

New York Times editorial "The Magic Potion" (March 29th, 2010) appears to have no factual basis for its claim that poverty and homelessness are rising. Corrections conjectures they are falling, (we lack current data).

Poverty and homelessness are increasing.

Corrections has been unable to discover either current data or news articles on poverty or homelessness in 1Q 2010 (today being the second to last day, this is reasonable). We conjecture that Bob Herbert has made this current trend up, and look forward to posting data on this (just as we hope to do for the IHRSA , which has yet to post new data). We will use HUD's definition of homelessness and the census's definition of poverty, absent a change in how government publishes its statistics. We posit that both will be falling over first quarter 2010, at which Bob Herbert is writing at the tail end.

There is reason to believe we are correct. We graphically display GDP below up to and including the fourth quarter of 2009 (click to enlarge). We conjecture it will continue in much this trend. We will update this figure, along with homelessness and poverty statistics, when available.

Monday, March 29, 2010

No Matter What, We Pay for Others' Bad Habits

New York Times article "No Matter What, We Pay for Others' Bad Habits" (March 29th, 2010) appears to misunderstand either the concept of externalitites or moral hazard.

I must admit I often feel like my colleagues who grouse about spending all day treating patients who do not seem to care about their health and then demand a quick fix. I do not relish paying more taxes to treat patients who engage in unhealthy habits. But then I remind myself that we all engage in socially irresponsible behavior that others pay for. I try to eat right and get enough exercise. But then I also sometimes send text messages when I drive.

The author appears to believe that because he engages in activities that have externalities, we should forgo a claim against others engaging in externalities that harm us. The argument appears to be that when we rob Peter to pay for Paul's extra doughnut, but then rob Paul to pay for Peter's cigarettes, things balance out. However, were we to have them each pay for themselves, neither might buy these goods that they don't value enough to spend their own money on.

This is to say that we introduce a moral hazard that causes less efficiency, and that this is not the zero-sum game the author thinks. People choose less efficient outcomes when they don't pay their own costs, and net wealth is destroyed.

For Photographers, the Image of a Shrinking Path

New York Times article "For Photographers, the Image of a Shrinking Path" (March 30th, 2010) offers two quotes without rebuttal that deserve economic and statistical comment, and perhaps correction. The article describes how professional photographers have been hurt by declining demand due to the decline of printed material and an increase in supply from amateur photographers. It suggests first that amateur photographers have prices that are "too low," and second offers a comment that is true of any specific amateur but not of the aggregate.

“People that don’t have to make a living from photography and do it as a hobby don’t feel the need to charge a reasonable rate,” Mr. Eich said.

Corrections would suggest that most people are willing to pay to take pictures--pay in both their time and the money they spend on inputs (from the camera to developing film or other camera accessories. It is not beyond reason that some people would be willing to pay to have their pictures used. Were this the case, Corrections doesn't see why this is not a reasonable rate. For example, when the price of aluminium is very low, then one has to pay people (garbage men) to take one's aluminium cans away. When the price of aluminium is very high, individuals (recyclers) are willing to pay to take one's cans away. Corrections conjectures that there is no "reasonable price" for disposal of one's cans, just as there is no "reasonable price" for a picture.

Second, the Times offers a quote that concerns an individual photographer compared to a professional that is a fallacious argument.

“Can an amateur take a picture as good as a professional? Sure,” Ms. Eismann said. “Can they do it on demand? Can they do it again? Can they do it over and over? Can they do it when a scene isn’t that interesting?”

This may be true. However, if we have, at any given event, 1000 amateur photographers for one professional, then we might see the professional photographer beating the vast majority of those individuals. It is difficult for an amateur to beat the photographer once out of every hundred. However, because we sample from 1000 amateurs each time, even though any one is beaten by a professional, we expect ten total to have their pictures purchased over the professional's. It is wrong to compare one amateur to one professional--it would be more proper to compare the full alternatives--buy the best professional or the best amateur, and recognize we sample from the "amateur" bin more often.

Sunday, March 28, 2010

Obama announces 15 recess appointments, scolds GOP

Reuter's News article "Obama announces 15 recess appointments, scolds GOP" (March 27th, 2010) offers a quotes that deserves further scrutiny. The article quotes Harry Reid on appointments and nominations:

The Senate's top Democrat, Harry Reid, welcomed Obama's move. "Regrettably, Senate Republicans have dedicated themselves to a failed strategy to cripple President Obama's economic initiatives by stalling key administration nominees at every turn," said Reid, the majority leader from Nevada.

Corrections has a harder time seeing this from the data. On average a confirmed appointee spent 75.78 days waiting until their confirmation vote. On average, the 15 appointed nominees spent 214 days waiting until their confirmation vote. Of the 13 not-appointed nominees who spent 214 or more days waiting until their nomination vote but were confirmed, the average appointee spent 238.5 days waiting. Twenty-two individuals who waited 214 or more days remain unconfirmed.

Examining these twenty-two, none seem to be "key", as Senator Reid claims. As this can be seen as a subjective claim, Corrections offers a list of positions for the purposes of information dissemination and self-evaluation.
  • Four are members of the Commodity Credit Corporation Board of Directors. 
  • One is the Director of Civilian Radioactive Waste Management. 
  • There are three Assistant Attorney Generals (of various counsels). 
  • One is the Deputy Director for State, Local, and Tribal Affairs. 
  • Another is a Commissioner of the Federal Election Commission.
  • Assistant Secretary for Planning and Evaluation
  • Five Judges-two local D.C., two Court of Appeals, and a district court judge
  • Two board members of the Legal Services Center
  • A board member for the national labor relations board
  • Chief Counsel of Advocacy
  • Under Secretary of International Affairs
It is not immediately apparent whether or not Senator Reid's comment is deserving of correction.  For better understanding of the distribution of waiting times, Corrections offers a Kaplan-Meier plot for political appointees and their confirmation (click to enlarge).  We mark individuals not yet confirmed and individuals appointed.

Finally, and perhaps most relevantly, we can see that all appointments come after a large expected increase in their expected waiting days for confirmation, examining the conditional expectations (though a Heckman selection model with dubious exclusion restrictions gives an expected average waiting time of between 40 and 88 days, depending on specification).  This would perhaps be a more economic explanation of these recess appointments.

Saturday, March 27, 2010

Autistic Teen Picks First Two NCAA Rounds Perfectly

NBC News report "Autistic Teen Picks First Two NCAA Rounds Perfectly" (March 25th, 2010) appears to report a non-event. It notes that an autistic individual picked the first two brackets perfectly. Corrections suggests that is expected to happen about 4 times every year.

In fact, he picked every game through the first two rounds correctly. The odds of anybody doing that? One in 13,460,000, according to It's easier to win the lottery. Twice.

According to a survey, about 58 million people will fill out a bracket (more brackets may be filled out, as the average per participant is presumably greater than or equal to one). If the tournament is based purely on chance, we expect a one-in-thirteen-million event to happen four times, on average, each trial of 58 million. Indeed, the NCAA tournament is not composed of random events, and we should likely expect this to happen more than four times, not less.

Finally, while it's easier to win the lottery, according to NBC News, Corrections notes that the winning of the lottery is an everyday event.

Getting even on crack vs. powder

Boston Globe editorial "Getting even on crack vs. powder" (March 27th, 2010) discusses a possible gap between legal penalties for possession of crack cocaine and possession of powdered cocaine. It discusses the penalties between the two, and how there was a "100-to-1" penalty for holding crack. Corrections sees the matter as slightly more nuanced than the Globe allows.

The political wheels have begun to turn on correcting the imbalance in sentencing those who possess crack and powder cocaine, but more attention is necessary. Under current law, a person caught with five grams of crack gets the same five-year mandatory prison sentence as someone possessing 500 grams of powder. The 100-to-1 crack-to-powder ratio was enacted at a time that crack was thought to be far more addictive than powder and would spark unprecedented crime waves. Studies long ago disproved both notions, but the law remains on the books, and its burden falls disproportionately on black defendants. More than 80 percent of those incarcerated for possession of crack are black.

We noted in a previous post that addictive substances such as crack cocaine were a technological advancement on cocaine. It allowed for small cheap, unobtrusive, mass distribution in a way cocaine did not, a point lifted from Roland Fryer, Paul Heaton, Steven Levitt, and Kevin Murphy’s 2005 NBER working paper “Measuring the Impact of Crack Cocaine.” It is not immediately clear whether or not this phenomenally destructive drug would have been as prevalent as it was were cocaine itself not illegal. On the one hand, cocaine is an input into crack cocaine production. On the other hand, cocaine is a substitute to crack cocaine itself, one whose competitive availability is likely increased much more than crack cocaine’s, in light of crack’s popularity being in part due to cocaine’s inefficient illegal distribution system.

Crack cocaine is a technological advancement on cocaine--distribution is made easier. Therefore, it may make sense to "tax" it at a higher rate, if one catches individuals who deal in it much less often. That is, if one is caught half as often with crack cocaine, then a doubling of the sentence may "equalize" the penalties between the two crimes, an objective the Globe seems to pursue.

Corrections might further add that the law-race discrepancy may have less to do with politician racism than it might have to do with endogenous selection into drug markets. Let us imagine that individuals have three choices: to work for wages in the "above ground" economy (legal), to work selling powdered cocaine (powder), and to work selling crack cocaine (crack). Every job choice has two wages that are taken as a bundle--the average wage per hour and the expected years in prison one receives. A fortiori, assume wages are the same between the two groups.

Finally, imagine that while the wages of both whites and blacks are the same, blacks lose less from prison (as we shall see, a more reasonable assumption is that their outside wages are different). Let us say that a "conversion factor" between years in prison and wage is $2/year for whites and $1/year for blacks.

Then we display our hypothetical wages graphically below (click to enlarge):

In this case, we should see blacks specializing in crack, even though the sentence is higher, while whites split between legal work and powdered cocaine. The law itself caused blacks to enter into crack, rather than attempting to punish them unfairly. It's not clear whether or not sentencing caused racial segregation of this particular crime or discrimination by politicians caused the disparity in sentencing.

Finally and briefly, we might view this slightly differently and come up with an even more interesting result. Imagine that blacks and whites are two agents producing one of three goods--legal work, powdered cocaine, or crack cocaine. Each individual has an endowment of two inputs--money, and sentencing time. In this assumption, blacks have a larger endowment of the input "sentencing time," so they specialize in the good that is relatively more intensive in sentencing time. If we eliminate the disparity, then the rents they were accruing because they held more of a relatively rarer input go away--blacks could be made worse off if we eliminate the disparity by Stolper-Samuelson Theorem (note that eliminating the disparity essentially floods the market with an infinite amount of "sentencing time" and returns to possessing it become zero). Stolper-Samuelson gives the idea behind why an unskilled worker in a country such as the U.S. may have their standard of living harmed by international trade because they are much less rare an input.

Should Spouses Be Able to Sue Their Mates' Lovers?

Newsweek article "Should Spouses Be Able to Sue Their Mates' Lovers?" (March 26th, 2010) speaks on the demise of laws that allow the spouse of someone who engages in extramarital sex to sue their spouse's partner. It suggests that the ending of these laws could be tied to their ineffectiveness. Corrections suggests that they could be due to their counter-effectiveness.

Back when women were considered property, there was a set of laws on the books called "heart balm" torts. Meant to protect the family unit from interlopers, these Victorian-era statutes gave men the right to sue anyone who seduced their wives. The terms at the time were "criminal conversation," which meant adulterous sex, and "alienation of affection," which could be anything that destroyed the love between husband and wife.

But perhaps recognizing that the threat of public humiliation and financial penalty hasn't ever been all that effective in deterring adultery—just ask John Edwards and Tiger Woods—most of the country got rid of these laws in the 1930s.

Corrections suggests that penalizing extramarital intercourse will have two effects. The first is to make people less likely to engage in extramarital intercourse. The second will be to make people less likely to marry. Affairs will become more expensive for married individuals (Corrections conjectures that their elasticity of demand is much lower than the elasticity of supply by their extramarital partners follows from common sense). This, in turn, will make marriage itself a more expensive proposition. This should cause both fewer marriages and more divorces. It would not be ridiculous to postulate that these laws could end due to their unintended consequences of harming marriages.

Thursday, March 25, 2010

Preexisting conditions for the GOP

Washington Post opinion "Preexisting conditions for the GOP" (March 24th, 2010) utterly misunderstands economics in a dimwitted thought experiment. Matt Miller of the Post does not even consider the possibility that

It's time to demand that GOP leaders, candidates and other would-be Obamacare repealers take a pledge. It should be simple. Something like: "Because I believe so strongly that Democratic health-care reform is a calamity for the country, I hereby vow that neither I nor anyone in my family will take advantage of the protections offered by this law." Those pledging would of course voluntarily surrender their current group health coverage and be thrown into the unregulated market for individual health insurance, so as to swim in the same sea of insecurity as their constituents. A quickie law would be passed allowing insurers to treat pledge-taking Republicans and their families under prior rules, exempting them from the reforms just signed into law by the president.

Miller does not consider the reality that the current malformed health reform changes the very nature of the macroeconomic system of health care. It is as ludicrous as saying "because one does not support the building of the following dam, they shall be free to drink as much as they can downstream, but not benefit from the reservoir". Any thinking half-wit should recognize that the system itself has changed, and such nugatory thought experiments move from failed charlatanry to fraud.

Wednesday, March 24, 2010

Antisemitism and This Recession: The Dog That Didn't Bark

Jewish Daily Forward article "Antisemitism and This Recession: The Dog That Didn't Bark" (March 24th, 2010) speaks of how this recession is an exception, in that a connection between individuals who practice Judaism and economic downturns is normally made. Corrections suggests that if anything, the opposite is the case, and that Jewish bankers are mentioned when GDP goes up, but bankers in general are mentioned when GDP goes down.

With unemployment stuck at about 10%, and few expecting this to change anytime soon, we are still suffering the effects of a cataclysmic recession, one that seems to have its origins, in good part, in the nation’s financial institutions. Not surprisingly, Jews have pricked up their ears, waiting for the howls of the antisemitic hounds.

Corrections used Lexis-Nexis to find any mentions of "Jewish Banker" since 1976 in major global news sources. We used Google's news search to find news articles on "bankers" over the same period. Google's news search was used because Lexis-Nexis had too many results to count for "banker." We expect our results to be robust to this methodology. We then compared the difference in mentions of Jewish bankers to difference in log GDP. If an decrease in U.S. GDP was met with a increase in the mentions of "Jewish Banker" in news sources, we expect there to be a negative correlation between them. To make sure there was a connection between bankers and GDP at all, we also used our Google search. We display the results graphically below.

First, we have U.S. GDP and the number of "Jewish Banker" mentions in Lexis-Nexis over time (click to enlarge).

Second, we have the difference in log GDP against the difference in number of mentions of "Bankers" (click to enlarge).

Finally, we have the difference in log GDP against the difference in number of mentions of "Jewish Bankers" (click to enlarge).

As it turns out, the correlation between difference in log GDP and difference in number of mentions of "Jewish Banker" is .0053. The correlation between difference in log GDP and difference in the number of mentions of "Banker" is -.0328. This would suggest that while "bankers" are mentioned more in times of low GDP, "Jewish Bankers" are mentioned more in times of high GDP.

The Forward claims that this is a recession was a case of "the dog that didn't bark." Corrections would first ask to see the dog; in order for it not to bark, it had to exist in the first place. As the only evidence on the table is weak evidence that there is reverse-discrimination, a Correction appears to be in order.

The More, The Better

Wall Street Journal book review "The More, The Better" (March 24th, 2010) discusses the book "The Next Hundred Million", by Joel Kotkin. It gives Kotkin's hypothesis, that come 2050, the U.S. will be vastly better off than its European and Asian counterparts, both of whom are aging or projected to age greatly while the U.S. stays relatively young.

For Mr. Kotkin, population growth translates into economic vitality—the capacity to create wealth, raise the standard of living and meet the burdens of future commitments. Thus a country with a youthful demographic, in relative terms, enjoys a big advantage over its global counterparts. In the next four decades, Mr. Kotkin observes, "most of the developed countries in both Europe and Asia will become veritable old-age homes" because of stagnant population growth. And the economies of these countries, already devoted to a vast welfare-state apparatus, will face crushing pension obligations—but without the young workers to defray the cost.

Corrections largely sees Mr. Kotkin as correct about the implications for the welfare states of Europe and a mis-formed age structure in China due to its one-child policy. However, Corrections does not see youth and population as the driver of economic vitality, but only a relatively small portion of it. What matters for international comparisons, Corrections conjectures, is human capital. In the world today, there are relatively few technological state secrets that allow one state to be wealthier than another. Natural resources and human capital, instead, are the drivers of per-capita wealth.

As displayed graphically below, Corrections has used Robert Barro and Jong-Wha Lee's dataset from "International Data on Educational Attainment: Updates and Implications" (WP 2000) to construct a graph of the populations and educational trends of four different regions of the world: Advanced Countries, East Asia/Pacific, South Asia, and Transitional Economies. The data can be found here. Note that a drop in population for Transitional Economies is due to the exit of several countries of the Soviet Union and a move of East Germany from transitional to Advanced after German reunification.

The phenomenon Corrections wishes to point out is the difference between population, (click to enlarge) proportion of population at an educational level (click to enlarge), and total population with a given education (click to enlarge). A discussion of the graphs follows their display.

Corrections suggests that while the population of the West and advanced economies has slowed in growth and has been shrinking, the total population with higher education has been rising. Insofar as population shrinkage hampers specialization, then Corrections can recognize the process through which population shrinkage suggests a declining GDP. However, in the case of advanced economies, we expect per capita GDP to grow dramatically, as institutions (such as Universities) shrink less quickly than population, and human capital per capita rises. Corrections could see Europe as being subjected to these forces positively.

California's quality-blind layoffs law harms teachers and students

Los Angeles Times article "California's quality-blind layoffs law harms teachers and students" (March 24th, 2010) while making a valid point, misunderstands optimal hiring practices. It suggests schools, rather than retaining teachers who have been employed the longest, should only keep the best teachers.

After all, if layoffs are unavoidable, you would think that it would be in the interest of everyone to keep the best teachers and cut those who are least effective.

Corrections agrees that length of tenure is suboptimal. However, only hiring the best is similarly suboptimal. While the problem of optimal hiring given a fixed budget and discretely heterogeneous population can take on the dimensions of a Knapsack Problem requiring a dynamic programming solution, Corrections suggests that the essence of the problem is quite simple: hire the best teachers per dollar, which may or may not be the best teachers.

Imagine there are six types of teachers, as displayed graphically below (click to enlarge). Teachers quality is denoted by number of boxes--teacher price and quality units per dollar are also displayed numerically. Then, let us say that we have $1260 dollars. We could hire 105 Type I Teachers, 140 Type II, 180 Type III, 252 Type IV, 420 Type V, or 1260 Type VI (we could also hire a combination of the teachers--our point is robust to allowing this). We would then get 630, 700, 728, 756, 840, or 1260 units of quality by hiring each type. We can see that we are best hiring the worst teachers, because they are the cheapest teachers per unit of quality. While the Times is correct that firing based on tenure is poor decision making, it is not correct that schools should hire the best teachers if they want the highest quality education possible.

Gridlock May Not Be Constant, but Slow Going Is Here to Stay

New York Times article Gridlock May Not Be Constant, but Slow Going Is Here to Stay (March 23rd, 2010) makes a causal claim it does not have identification for. Relaxed drivers on the weekend due to faster traffic is cointegrated with it being the weekend itself. The Times ignores this.

Small changes in speeds also seem to have an outsize psychological impact on impatient New Yorkers. On weekdays, when few people expect a trip to go quickly, speeds in east Midtown average about 6.3 m.p.h. in the daytime. On Saturdays, the average speed is about 8.5 m.p.h. — not an enormous difference, even though drivers report feeling more comfortable on weekends.

We expect traffic to be lighter and therefore faster on days when people are less rushed (therefore less stressed). It is unclear whether or not there is a third cause (less weekend responsibility) that confounds the causal conclusion offered by the Times.

Tuesday, March 23, 2010

In Health Bill, Obama Attacks Wealth Inequality

New York Times article "In Health Bill, Obama Attacks Wealth Inequality" (March 23rd, 2010) foregoes any pretense to journalism when it does not allow for the possibility that health costs will rise due to medical reform, as they, in the view of Corrections, surely will.

Much about health reform remains unknown. Maybe it will deliver Congress to the Republicans this fall, or maybe it will help the Democrats keep power. Maybe the bill’s attempts to hold down the recent growth of medical costs will prove a big success, or maybe the results will be modest and inadequate.

The Obama adminstration and its fiscal incompetents have banned use of pre-existing conditions while putting a weak mandate on buying insurance. This all but ensures a rise in premiums as individuals duck health care, paying weak fines, until they become sick, and then buy it from insurers who cannot discriminate against them. For the Times to tow the adminstration's murderous follies is revolting as well as requiring Correction.

Monday, March 22, 2010

Ex-Offenders and the Vote

New York Times editorial "Ex-Offenders and the Vote" (March 21, 2010) displays ignorance of political theory as well. While Corrections attempts to eschew "ought" for "is" at times it becomes necessary to delve into, and correct in, other fields. In this case, the words of John Locke are echoed in an attempt to give force to an argument in the Times.

Millions of ex-offenders who have been released from prison are denied the right to vote. That undercuts efforts to reintegrate former prisoners into mainstream society. And it goes against one of democracy’s most fundamental principles: that governments should rule with the consent of the governed. [Emphasis added].

John Locke, in his Second Treatise of Civil Government (Chapter VIII), wrote "MEN being, as has been said, by nature, all free, equal, and independent, no one can be put out of this estate, and subjected to the political power of another, without his own consent." This was the phrase the Times echoed.

However, Locke had also written (Chapter I), "Political power, then, I take to be a right of making laws with penalties of death, and consequently all less penalties, for the regulating and preserving of property, and of employing the force of the community, in the execution of such laws, and in the defence of the common-wealth from foreign injury; and all this only for the public good." So long as a law is providing for the common good (e.g. not impoverishing everyone, not taking their property, and so forth), it is within the capacity of the legislature.

Yet we might continue further, because our subjects are former criminals. When an individual enters society, in the Lockeian concept, he gives it the power to make laws. When he then breaks those laws, he forfeits his power to manage those same laws by re-entering a state of nature (temporarily, and if he uses force)--by breaking them.

The use of Lockeian phrasing deserves the same. It is unimaginable that an ingenuous mind, reading John Locke, could come to the conclusion that disenfranchisement of someone who broke the social compact was out of the scope of a state's power.

Sunday, March 21, 2010

Health care reform bill 101: Who will pay for reform?

Christian Science Monitor article "Health care reform bill 101: Who will pay for reform?" (March 21, 2010) does not offer the full story on who will pay for Health Care Reform. It notes that the wealthy will pay:

Higher Medicare taxes on rich people

If you are an individual making more than $200,000 a year, or a married couple making more than $250,000 a year, get ready to pay more for your Medicare if health care reform passes.

Labor supply of the wealthy is elastic. When they are taxed, they work less--their labor supply decreases. When their labor supply decreases, the cost of that labor as an input increases. As the costs of normal inputs increase (which labor is) supply decreases. That decrease reduces consumer surplus as well as producer surplus, depicted graphically below (click to enlarge). The left diagram displays an increase in marginal cost (of labor). The right diagram displays the resultant shift in supply. The light blue box in the right diagram displays the loss to consumers from the taxation of the rich.

The Christian Science Monitor offers discourse on "who pays for reform" without noting how surplus-destroying taxes spread loss of surplus to everyone.

Could Obama Be Invincible?

New York Times article "Could Obama Be Invincible?" (March 19th, 2010) by Charles M. Blow offers the latest in absurdities from the Times. If history repeats itself first as tragedy, then as farce, Charles M. Blow is the farce to Jayson Blair's tragedy.  Blow argues that Barack Obama's polls have not declined much over time.
First, let’s take his job approval rating. Yes, it slid during the summer, but it stabilized around 50 percent in November and has hovered there ever since.
According to Gallup, Barack Obama, starting with the 6rd highest approval rating of the 13 comparable presidents since Herbert Hoover, now is has the 9th highest approval rating. He is now below presidents Richard Nixon, and George W. Bush, narrowly beating Jimmy Carter and post-pardon Gerald Ford due to a recent uptick. The approval ratings of these thirteen presidents is displayed graphically below (click to enlarge; note that because the graphics are dense, this link provides a very large display).

He has the 3rd highest disapproval rating, (recently beating Harry Truman for the worst at that moment in time). He started with the 5th highest.  The disapproval ratings of the same thirteen presidents is displayed graphically below (click to enlarge; note that because the graphics are dense, this link provides a very large display).

Barack Obama's meteoric fall in polls is surpassed only by the unctuous and disingenuous bile Charles M. Blow spews.

Census as a celebration

Chicago Tribune editorial "Census as a celebration" (March 21st, 2010) offers a proposition that is not necessarily true. Specifically, it speaks about how important the current U.S. Census is, and how its consequence has increased due to a change in structure.

And something new: The old long-form questionnaire, sent to one in six addresses, has been eliminated, replaced by an ongoing statistical poll called the American Community Survey. This is mailed to about 250,000 addresses every month, thus providing a constant updating of the data.

But the survey is rooted in the findings of this year's census. All of the extrapolations that will be made from the survey's statistics will be based on the 2010 census. So, this year's head count is even more important than in the past.
The degree to which this is true depends on the methods by which extrapolations are computed. On the one hand, statistics can be calculated as, for example, the mean given the census's data. Researchers have more data than the census. For example, they have prior beliefs about population means (e.g. proportion of the population that is white). In such a case, they can update their prior beliefs using current census data to generate a posterior distribution by Bayesian updating. Furthermore, they can continue to do this using new population updates. This may be especially useful as it relates to possibly unknown and unobservable data.

Let us imagine that we cannot observe the true number of whites in the population ever. However, we can observe our survey results, and the true number of whites is some function of the number of survey responses plus noise from that period (the noise could, for example, be normally distributed a mean zero and some standard deviation). Then having more observations over time could give more accurate data. This is especially true if the target is "moving," like in a Kalman Filter's setup. Below, we show an example in which incorrect prior beliefs are "corrected" and a never-known moving target is guessed at. In this case, we call it the true number of whites. We see that when our observable, with its own shock or error, is a function of the truth, which evolves in some manner plus its own shock or error, then more time periods help correct for time-period-specific errors. The noisy signal and true, never-known information is displayed graphically below (click to enlarge), along with the "best guess" using the Kalman Filter is displayed graphically below, along with the "true" value (which one never knows in theory, though because this is random sample data we do) (click to enlarge).

Corrections concludes that it is not clear whether or not the Tribune is correct that this census is more important.

Saturday, March 20, 2010

Number of People Living on New York Streets Soars

New York Times article "Number of People Living on New York Streets Soars" (March 19th, 2010) fails to note the contradictory forces present when one tries to helping the homeless.

Tim Marx, the executive director of Common Ground, a nonprofit organization that provides homeless street outreach services in Brooklyn, Queens and parts of Manhattan, said he was not surprised by the increase.

“It just says that we have to keep up our efforts and intensify them,” Mr. Marx said. “The more people we have on the streets, the more they are making demands of our emergency shelter system, emergency rooms, detox centers and jails.”

The times should also note, as Corrections does here that intensifying outreach programs (subsidizing poverty in New York city limits) removes disincentives for marginal individuals to become homeless, removes incentives for the currently-homeless to change their lifestyle, and perhaps most pertinently gives incentives for the homeless to migrate to New York.

As an interesting side note, the solution to ending poverty locally would seem quite clear to Corrections: end all local welfare programs. Indeed, Corrections is surprised that the sort of Prisoner's Dilemma payoffs that local politicians face to solve their poverty program by encouraging the homeless to migrate (a localized Mariel boatlift of sorts) does not appear to take place very often.

Wednesday, March 17, 2010

GOP's Pete Sessions leads party in rate of uninsured constituents

Dallas Morning News article "GOP's Pete Sessions leads party in rate of uninsured constituents" (March 17th, 2010) reports on Republican Pete Sessions of Texas's 32nd Congressional District, near Dallas, and his opposition to the Obama medicare reform. Specifically, it takes issue with his opposition by noting that a number of his constituents have not purchased health care.

Rep. Pete Sessions' Dallas-area district has the highest rate of residents lacking health insurance of any Republican-controlled district in the country, according to census data. No other red districts are even in the top 10 of that unlucky club.

The median family income in the 32nd Congressional District of Texas is approximately the same as the median family income in the United States. The article ignores the possibility that a number of individuals in this district, which is not poor, find insurance a bad gamble.

Individuals purchase insurance because they would rather smooth their potential outcomes. One of the central reasons for this is that they gain less from gaining $100 than losing $100, and have diminishing marginal returns to income. Therefore, they trade the not-valued personal highs with the high-valued personal lows and gain. This is depicted graphically below (click to enlarge). The two red dots are an individual's possible uninsured wealth. For simplicity, let us say they have a 50-50 chance at both wealth levels. The happiness an individual gets out of these wealth levels is depicted as UWealth1 and UWealth2. However, they are able to smooth out their consumption and swap their bundled high and low to an insurance company in return for a single, constant wealth level (depicted as a green dot here), which is midway in-between the two wealth levels, given their 50-50 chance. The straight red line, along with proper weighting of chances, represents all possible fair bets. The green dot also denotes, due to the 50-50 chance, the expected utility, weighting UWealth1 and UWealth2 equally. The purple dot denotes an individual's utility if insured. We can see that the individual is better off with insurance (much of this graphics can be summarized by Jensen's inequality, and how it does not hold given subtraction of a constant).

However, insurance is not quite a fair bet, at the very least due to information asymmetries, overhead, and moral hazard. Note that Corrections refers to a "fair bet" as one whose expected gain or loss in monetary (not utility) terms is zero. It is reasonable to see why some people would not want to take an unfair bet, if they did not have particularly concave utility functions, as depicted below (click to enlarge). Now, our utility if we are insured is lower than our expected utility if we are not insured. This is because even our concave utility function could not overcome the unfair pricing we faced. Note that our bets are no longer constrained to be on the red line. The bet depicted indicates the insurance company essentially weighed the low-wealth state as higher than it actually was (this may not be the case for this pricing to occur, but it helps give intuition).

It is not unreasonable to see this as a possibility for the not-poor residents of the Dallas area. To conclude that the residents of Texas's 32nd Congressional District would be better off being forced to buy subsidized insurance is an empirical question, not one solved simply by noting that they do not currently have insurance.

Within healthcare reform, a push to tax the rich

Christian Science Monitor article "Within healthcare reform, a push to tax the rich" (March 13th, 2010) describes as an incidental note a mastodonically foolish piece of the Obama medicare reform. It notes that one of the administration's new taxes is a tax on capital gains.

Obama would boost the Medicare tax by 0.9 percentage points for households with incomes over $200,000 for singles and $250,000 for joint filers. In addition, he’d impose a 2.9 percent tax on these same people on interest, dividends, annuities, and most other investment income. While the official Obama summary does not say so, the new tax would apply to capital gains as well.

Individual households supply capital. They enjoy consuming today rather than tomorrow. They are only willing to put off consumption today until tomorrow if they are paid for it--otherwise, they consume today. This is due to their discount rate, a primitive that is largely taken as given. Their discount rate does not change, and therefore, household supply of capital is perfectly elastic. If this is the case, then the whole incidence of a tax falls on the firm. However, both households and firms are able to relocate. In this case, government taxation of capital is optimally zero as it only harms production and raises little in taxes. The drastic impact taxation can have when both supply and demand are relatively elastic is graphically displayed below (click to enlarge).

This result is given relatively robustly by Andrew Atkeson, V.V. Chari and Patrick J. Kehoe, in "Taxing Capital Income: A Bad Idea" (Federal Reserve Bank of Minneapolis Quarterly Review, 1999). To quote the paper, "The intuition for why optimal source-based taxes are zero is that with capital mobility, each government faces a perfectly elastic supply of capital as a factor input and therefore optimally chooses to set capital income taxes on firms to zero."

In the hamartiology of economics, there are cardinal and venial sins. The taxation of capital is a cardinal sin.

College tuition is expensive enough, let alone the textbooks

Los Angeles Times article "College tuition is expensive enough, let alone the textbooks" (March 15th, 2010) offers an interesting but empirically faulty conjecture concerning textbook revisions. Textbooks are durable goods that may be bought, used, and sold. Furthermore, they are in monopolistic competition with one another. The Times suggests that editors come out with new editions to generate revenue.

A US Government Accounting Office report shows that textbook prices rose 40 percent between 2002 and 2007, and 186 percent between 1986 and 2004, so that a college student’s annual book bill averages $900!

Publishers claim sky-high prices are necessary to offset losses from used-book businesses that recirculate titles, killing sales of new books.

So publishing reps compete for their piece of the multibillion-dollar pie, throwing book release parties with refreshments and gifts for faculty, including free examination copies. Additionally, they lure professors to tweak and rewrite new editions each year, to render obsolete the slightly used copies and create new demand.

In an NBER Working Paper, "Are Durable Goods Consumers Forward Looking?" Judith Chevalier and Austen Goolsbee find that students do indeed spend approximately $900 purchasing textbooks every year. Chevalier and Goolsbee examine student sensitivity to price. Students buy books and often sell them back, used, at the end of the term. They are able to sell them for a fraction of the price (between 50%-75%) if no new edition has come out, and a smaller sum (approximately 20%) if a new edition has come out. Corrections notes in passing that this indicates students are not paying $900 net, but quite a bit less than that.

A student's willingness-to-pay, absent discounting (which Goolsbee and Chevalier do not neglect) for a book will be equal to the difference of price paid and cost recovered through resale, plus the gain a student gets from using the book in the meantime. If companies accelerate their revision cycle, a student's willingness to pay will go down.

Indeed, Goolsbee and Chevalier find just that: students are patient and forward-looking, and become more sensitive to price as the likelihood of a new revision increases. Indeed, they find that textbook firms cannot increase profits by accelerating their product cycle--the decrease in value to a patient student causes fewer sales.

They find that students are not myopic in their purchase decisions, and their sensitivity to reap greater profits appears to be incorrect, due to the patience and rational expectations of college students.

The argument offered by the Times, that textbook companies accelerate their revision cycles to gain profit, appears to be contradicted by empirical evidence.

Sunday, March 14, 2010

Cox: Raise lottery ticket price to boost school funding

The Atlanta Journal-Constitution "Cox: Raise lottery ticket price to boost school funding" (March 12th, 2010) reports on the question of pricing lottery tickets without delineating any of the economics at hand.
Cox floated the idea on Thursday during a state Board of Education meeting, saying a 50-cent surcharge per ticket could bring in $350 million a year and help address Georgia’s massive education funding gap.
The article continues,
And the move could backfire if enough players balk at paying higher ticket prices, said David Gale, executive director of the North American Association of State and Provincial Lotteries.
This comes close to naming the way to determine whether or not the State should raise lottery ticket prices. Assuming the state is describing a tax increase rather than an increase in ticket prices that is passed through to higher lottery prize, as it seems it is, then the optimal price increase is determined by the elasticity of demand for lottery tickets. The government has a monopoly on lottery ticket sales in Georgia, and seeks to simultaneously maximize its profits from lottery ticket sales and provide a small amount of the wealth re-distribution as a public good. In principle, the state always knows this and was pricing optimally. Justification for a 50% increase in price requires some serious doubts in the government's ability to price optimally to begin with.

The question is not whether or not enough payers will "balk" at a price increase, but rather, whether or not the people who are almost indifferent between buying a lottery ticket and not doing so will decide not to when faced with a higher price. Raising the price by a full 50% will certainly deter some of these consumers. Without providing any evidence on the sensitivity of demand to price, the state runs the risk of losing a great deal of wealth by increasing ticket prices so severely.

The auction site that’s pure temptation

Financial Times article "The auction site that's pure temptation" (March 13th, 2010) analyzes Swoopo, an online auction site that (broadly speaking) allows bid increments of some small amount, and charges for the bid itself. This has lead Swoopo to have some seemingly contradictory results that the Times does not offer to explain simply.

Richard Thaler, a behavioural economist who also has a New York Times column, looked at 26 occasions on which Swoopo had simply auctioned $1,000 cheques. The average revenue was $2,452. No wonder the pitchforks are out.

The article also notes that Brigham Young professors argue irrational or risk-loving individuals focus on consoles, and that Swoopo gets a 50% increase in price from a comparable amazon good.

All these explanations seem to forgo Occam's Razor: Swoopo is intensely fun to watch (and, without a stretch of the imagination, to play in). It is packaged entertainment and bidding. The clock ticks down, and one grows closer to almost getting a prize. Even losing money on Swoopo makes sense, as the bidding site can be nerve-wrackingly intense. The explanations of "sunk cost fallacy" and "irrational consumers" or "risk-loving individuals" seem to "jump the gun" in the mind of Corrections--it seems pretty straightforward.

Sunday, March 7, 2010

Why we protest education cuts article "Why we protest education cuts" (March 4th, 2010) claims that:
While California is facing the largest cuts to education, similar cuts are happening all over the country, making it harder for students to afford college and lowering the quality of the education they receive.
It would be reasonable to assume that some students of high quality attend lower-quality public universities because they want to save money. We would predict that as the monetary difference between school decreases, student selection into schools will become more quality based. In fact, this would cause the quality of the best institutions to increase, and that of the worst to decrease. The marginal student is the student who expects to gain from a college education exactly what he paid for it. Thus, as the cost of education rises, we should see that students gain more from their education are the ones who continue to receive an education.

This student quality improvement could be met also with an improvement in teacher quality. The article, turning to a discussion of why charter schools are poor makes the following statement:
Furthermore, charter schools are almost always non-union, which means their teachers receive can receive lower compensation and have less job security.
Less job security for teachers would lead to an improvement in teacher quality. First, job security distorts incentives. Without job security, and teachers will work hard to keep their jobs. In addition, without job security the worst teachers get fired and replaced with fresh faces. These younger replacements have lower salaries, saving the state even more. In general, we should expect that increased efficiency would only increase the quality of education.

Saturday, March 6, 2010

Where left meets right: Outsiders? They've always been in

Chicago Tribune opinion "Where left meets right: Outsiders? They’ve always been in" (March 7th, 2010) offers a political analysis as asinine as it is sophomoric. The article compares Huey Long's policies to Sarah Palin's policies.

She was beat to that I'm-just-plain-folks posture three quarters of a century ago by Huey Long, FDR's detractor. When patrician opponents said Long, the governor of Louisiana, lacked dignity, he embraced the put-down for all its political worth. "This state's full of sapsucker, hillbilly and Cajun relations of mine," Long responded, "and there ain't enough dignity in the bunch to keep a chigger still long enough to go brush its hair."

That kind of industrial-strength rabble-rousing got Long elected governor at the age of 35. He went on to be a U.S. senator and, by 1933, Long considered FDR vulnerable. He toyed with making a run for the White House, just as Palin is now.

Long didn't get a chance to make a decision. He was gunned down by an assassin in 1935. But his Share Our Wealth movement - a recipe for ending the Depression by soaking the rich - survived as one ingredient of a political stew similar to the one now bubbling over.

Huey Long, a U.S. Senator from Louisiana from 1932-1935, wanted to tax wealth above $8 million dollars at 100% (approximately $124 million today). He wished to tax income above $7 million dollars at 64%, and the remainder at $100%.

The individual and political movement the Tribune is referring to, Sarah Palin (in some vague sense, the doyenne and the Tea Party, while populist insofar as it purports to

The Tea Party is defined by its Tax-Day Protests, Taxpayer March on Washington, and were, in Correction's memory, ignited by Rick Santelli's haranguing of the government on CNBC in February 2009. It is composed of, according to CNN's survey, individuals with above median education and above median income.

In economic terms, these are individuals who wish to avoid the redistribution of wealth through taxation and medicare. As much as a factional group like the Tea Party can be, they are diametrically opposed to the economic fatuity a boor like Long represented. Comparing the two is not to compare two ends of the same spectrum, but two orthogonally motivated groups.

Wednesday, March 3, 2010

Study Finds Cohabiting Doesn’t Make a Union Last

New York Times article "Study Finds Cohabiting Doesn’t Make a Union Last" (March 2nd, 2010) suggests that living together causes an increased probability of divorce. This deceptive suggestion comes from a mislabeling of correlation for causation.
Just because some academic studies have shown that living together may increase the chance of divorce somewhat, young adults themselves don’t believe that.
quotes the article. Lighters do not cause lung cancer despite the fact that we observe more lighters in the pockets of those who die from lung cancer. Largely, the poorer and the less religious are more likely to live together. Perhaps these factors, not cohabitation, are driving higher divorce rates among co-habiting couples. No one should be advised to avoid cohabitation on the basis of this study alone; it lacks any exogenous variation in cohabitation and so cannot claim causation.

Monday, March 1, 2010

Profit vs. patience

Boston Globe article "Profit vs. patience" (February 28th, 2010) writes on the possibility that myopic investors might make long-term biotech investment difficult for farther-sighted individuals. Corrections fails to see this as a first-order concern.

“There’s really a nightmare scenario in which raiders come in and they flip the company to get the stock up,’’ Pisano said. “And you really could ruin a biotechnology company like that. On the other hand, if you have an investor with a long-term horizon like a Warren Buffett, that could help a company by holding the management accountable but giving them cover from some of the short-term market vagaries.’’
On its face, the quote sounds quite reasonable. However, in Correction's view, there are only two factors in this problem: profits, and time. Stock prices reflect the value of a company (more specifically, the marginal value of an additional portion of a firm's discounted revenue stream). Therefore, we take stock prices and future profits to be inextricably tied together. We conjecture this stylized fact as relatively robust.

One might imagine two plans for a company's future. The first is a "myopic" plan that extracts value quickly over a short amount of time. The second is a far-sighted plan that extracts a greater amount of value, but that is delayed over time. We display the revenue, or profits, of the two plans graphically below (click to enlarge). The first myopic plan is represented by the dotted red line. The second, farsighted plan is represented by the solid blue line. Each colored dot is the point at which total (undiscounted) profits are maximized, and when a firm would want to exit the market.

A more appropriate graphic might be to examine cumulative profits over time, rather than profits per period. This is displayed graphically below (click to enlarge). The red and blue dots represent the same concept: the time at which it is most advantageous for a firm to exit the market, assuming no discounting of profits.

With the above setup, Corrections suggests that further analysis of which plan to adopt is quite simple. Let us imagine the project above cost us .35, in terms of the diagram's units. Then in two periods the first plan would net us .5 extra units of currency, and the second plan would earn us about 1.7 units of currency in 6.8 units of time. The only question is what the rate of time preference is for return. This will be set by the market. If a project's rate of return is higher than the interest rate, then the project will be undertaken. If the project's rate of return is lower, then it is better to take money and invest it in something that does return the interest rate. We note the interest rates required to invest in each project below.
  • The interest rate that makes us indifferent between saving and investing until the first project's maximum is 30.9% (this is the project's return from time zero until maximum).
  • The interest that makes us indifferent between saving and investing until the second project's maximum is 27.0% (this is the project's return from time zero until maximum).
  • The interest rate that makes us invest in the first project, and save those profits at the market rate, rather than undergo the second project until its maximum, is 28.8%.
Therefore, the decision that will be made concerning a firm is:
  • If the interest rate is below 27%, then we will invest in the second project.
  • If the interest rate is between 27% and 30.9%, then we will invest in the first project, then save our profits.
  • If the interest rate is above 30.9%, then we will invest in no project.
There are several conclusions to draw from this. The first is that it is possible one should not maximize the profits they get out of a firm. Both options are viable, depending on the interest rate. Just because a firm is not living up to its full potential does not mean that money is not. If other projects earn a higher rate of return, then the profit-maximizing decision is to extract money quickly and then invest in other projects (here represented by the interest rate).

The second is that individual investor impatience should not matter. If one investor has an idiosyncratic shock to his discount rate, then this does not mean he should switch from a far-sighted project to a short-sighted one. The maximizing decision is never compared to an individual discount rate but to the interest rate. If the far-sighted project has a higher return than the interest rate, then anyone who is saving should be willing to invest in it--it has a higher return.

Corrections concludes that it is difficult to imagine a real issue arising because of impatience--the market appears too liquid for that. If one investor is impatient, then another person who is saving will be willing to pursue the profit-maximizing course.

Corrections suggests that what makes more sense is asymmetry in information about a company causing a knowledgeable investor to be unable to acquire the real net present value of his investment. This may in turn cause him to choose a "lesser" (but sooner) path.

Finally, Corrections notes that we have ridden roughshod across a few technicalities, especially as it concerns optimal stopping points if investment at the interest rate post-liquidation is possible. We suggest this does not change our qualitative conclusions, and would sacrifice pellucidity.