Wednesday, September 29, 2010

Told to Eat Its Vegetables, America Orders Fries

New York Times article "Told to Eat Its Vegetables, America Orders Fries" (September 24th, 2010) gives potentially misleading statistics about vegetable-consumption in the United States and fails to tell a cohesive story about the incentives for healthy eating.
At restaurants, salads ordered as a main course at either lunch or dinner dropped by half since 1989, to a mere 5 percent, he said.
The profile of diners has changed significantly since 1989, making the average number of salads ordered at restaurants incomparable over time. This is because among modern diners, those who would have ordered salad if they were transported to 1989 may continue to order salad, making the mean number of salads ordered among this group constant between 1989 and 2010. However, this group does not include all restaurant go-ers. Some people who eat out today may not have done so in 1989.

Even if we believe that the population of restaurant goers is unchanged, some meals eaten out would not have been eaten out in 1989 because the number of meals eaten away from home has increased. According to a 1999 study in the Family Economics and Nutrition Review, titled "Contribution of Away-From-Home Foods to American Diet Quality" (available here), between 1989 and 1995, the percentage of meals eaten away from home increased by five percentage points (more than 20%) even though the number of meals eaten daily was unchanged. A graph of the trend is included below (click here to enlarge).

To its credit, the article makes some note of the difference between consumption trends in different demographic groups. What is missing is a solid economic interpretation.

To be sure, vegetables are making strides in certain circles. Women, as well as people who are older and more educated and have higher incomes, tend to eat more vegetables, said Dr. Foltz, the pediatrician who worked on the C.D.C. report.
Vegetables are commodities that cost a great deal in the short-run, but pay off in the long-run. We can think of the true price of vegetables as lower than the market price, since they make people richer in terms of health. Because the length of life (and productivity) is a function of health, avoiding vegetables costs those who make higher wages more (they lose more lifetime income by dying early from unhealthy eating). So, the total price of vegetables is lower for the wealthy than the poor, even though the market price is the same. We can also expect that health is a stronger determinant of life-span in later years, so the elderly, as well as women (who live longer than men on average) can be expected to consume more vegetables.

Monday, September 27, 2010

High Court reveals anonymous donor paid men to grant bills of divorce

Haaretz article "High Court reveals anonymous donor paid men to grant bills of divorce" (September 21st, 2010) notes a curious and uneconomic practice in Israel. Female Jews married in Israel are not allowed to divorce men without their permission, but instead must obtain a "get." This distinction carries legal and not just religious consequences because there is no civil marriage in Israel, but only religious marriages (Christian, Jewish, and Muslim). Because men hold their wives "hostage," anonymous donors give money to the divorcing body, the Chief Rabbinate, to bribe the men to provide a get.
The rabbinical courts' administration already has an arrangement to pay men who refuse to divorce their wives in certain cases, as an incentive to grant the divorce. The money is budgeted by the state. However, the verdict shows that in 2004-2005 an anonymous donor gave the rabbinical courts money to pay off dozens of men and even a few women, to divorce their spouses.

The unintended consequences of paying off spouses are threefold. First, in the long run it's not clear that bribes to Jewish men to divorce their wives will change the equilibrium number of "trapped" wives. Potential wives will simply be free to choose a lower threshold of men to marry (private donors subsidize their gamble). Second, if they're monetary expected value maximizers it's in the interest of men to raise their asking price for a divorce by the amount the Rabbinical Court is willing to bribe them. Otherwise, they will raise their asking amount, though not necessarily by the exact amount. In this respect any donation may simply be a pure transfer to husbands without any change in outcome, and private donors subsidize "kidnapping" husbands. Third, it takes away motivation for any reform of Rabbinical Courts (such as allowing civil marriage or intermarriage in Israel) by reducing the benefit of a complementary good. That is, legal reform of Rabbinical power presumably is a bundled good--if bribes are successful, it reduces the benefit of reform.

Friday, September 24, 2010

Post-racial officials finding it's difficult to hold gains

Houston Chronicle article "Post-racial officials finding it's difficult to hold gains" (September 23rd, 2010) concludes that "black is black, white is white," and denotes the end of post-racial relations. Corrections suggests it gives little data for its conclusion.
A mere four years ago, for example, Americans celebrated the rise of two hope-filled post-racial stars: District of Columbia Mayor Adrian Fenty and Newark's Mayor Cory Booker. Each was touted as a young, energetic, post-civil-rights-era savior in the mold of then-Sen. Obama.

Multiracial coalitions of voters elected them both. Each managed to transcend race-based politics and make gains worthy of national praise regarding schools, crime, housing, economic developing and other issues that are either nonracial or should be.

Yet despite those successes, Fenty was voted out of office on Sept. 14. White voters still supported him almost two-to-one, but black voters in the majority-black city turned on him by a similarly wide margin.
What the article does not state is that Adrian Fenty lost to another black man, Vincent C. Gray. When one black man beats another black man in a Mayoral race, it's rather odd, without including more data, to conclude that skin color was a factor in the political race. Individual candidate race holds no predictive power in a simple regression (there is no variance in candidate race).

Our view on consumer protection: When cable guys don't show, give customers some dough

USA. Today article "Our view on consumer protection: When cable guys don't show, give customers some dough" (September 22nd, 2010) is ill conceived. USA Today's editorial advocates a New York City bill to penalize cable companies when repairmen don't show.
In response to complaints about bad repair service, the city has drafted a contract with its major cable TV providers, Time Warner and Cablevision, with this provision: If a technician fails to show up inside the promised service "window," the company has to give the customer a month's service for free.
The only good news is that this gives phenomenal evidence that the government is unable to craft an effective law. It is hardly worth noting what is wrong with this sort of regulation, save to note that if this were effective, why not make cable companies pay $1,000,000 for each late repairman? One thing an economist and the government could agree on: there would be no late repairmen ever again.

Thursday, September 23, 2010

Value of College Degree Is Growing, Study Says

New York Times article "Value of College Degree Is Growing, Study Says" (September 21st, 2010) gets the correlation/causation distinction correct. However, it doesn't give the clear causal reasons why better educated and wealthier people eat more healthily and exercise more: while people often face the same price of an activity, they often face different shadow prices, the relevant price for making decisions.
The report, first issued in 2004 and updated in 2007, also described social benefits: those with a bachelor’s degree, it said, are more likely to volunteer, vote, exercise and have health insurance and pensions. They are also less likely to smoke, be obese or have low-birth-weight babies. It did not assert that a college education, by itself, was responsible for all those differences.

'Correlation is not the same as causation,' Ms. Baum said. 'But that said, the people who have done careful statistical analyses, controlling for demographic characteristics like income and family background, have overwhelmingly concluded that there’s some causation here, that some things that happen to you in college, for example, would make you more likely to adopt healthier behavior.'

Better educated and wealthier people have more incentive to live longer because their time is worth more. Take Kevin Murphy's shadow price of a cheeseburger example (briefly mentioned at the end of this interview). Eating unhealthy cheeseburgers shortens your life, but you gain happiness from them. The time of a low-wage person should be valued by that low-wage person as their wage (or outside wage, if the two are only approximately equal). While state-dependent utility disclaimers apply, the thrust of our argument will be robust to secondary and tertiary corrections.

Let us imagine that the time a rich person is willing to give up for an extra hour of his life is $200, but a poor person is only willing to give up $100. Then if a cheeseburger takes an hour off of an individual's life (for instance), then the true cost to a rich person is $204, while the cost to a poor person is $104. The shadow prices the two individuals face are different. Unhealthy decisions cost rich people more because they value their lives more.

When people decide to become educated, they induce themselves to have different marginal utilities and therefore make different decisions due to facing different shadow prices--a cheeseburger is more expensive for a rich person.

Wednesday, September 22, 2010

Bridging the achievement gap

Los Angeles Times opinion editorial "Bridging the achievement gap" (September 22nd, 2010) discusses the achievement gap between black males and all other students (black females and white males being the primary groups of comparison). It speaks only of educational means to fix the graduation gap, while discussing crime. Corrections would like to entertain a different possibility that might help solve both. The Times also confuses correlation and causation.
These disparities aren't new — the Schott report could have been published a generation ago. What is new and noteworthy is solid evidence that this gap can be bridged, with well-tested approaches that don't require massive changes in public education and don't depend on superhero teachers and administrators.
An economic idea might be that individuals, both black and white, make decisions about education today based on what they believe their income differentials will be tomorrow. One way to encourage education is to ensure higher wages for the educated. Another is to ensure lower wages for the uneducated.

The Times suggests that some of these students might be on the "prison track." "All too often they're on what educators privately dub 'the prison track.'"

If the Times is concerned that black males (or, for that matter, individuals of any race or gender) are opting out of educations and into lives of crime, one way of reducing their involvement in crime and increasing their graduation rates might be to lower their future wages as criminals.

We do a quick back-of-the-envelope calculation to test this hypothesis. We should see a correlation between an increase in law enforcement officers tomorrow and an increase in graduation rates. For the 50 states from 1998-2003, we plot the two, and offer a fitted least squares line. This is displayed graphically below (click to enlarge).
The relationship is indeed positive, which is itself phenomenal. If high schoolers were myopic and unresponsive to future police presence, we would have expected a drop in graduation rates to result in an increase in police next period--an increase in bad high school students should make more police next period a necessity. The fact that we see this indicates that the difference between our two effects is rather large. At a first glance, while the relationship is only near significant, it would appear tantalizing. For those concerned about the outliers, the relationship remains positive dropping them from a fixed effects panel data regression.

The Times discusses young black males, their graduation rates, and crime. Following our above analysis, we might think that a way to increase the graduation rates of young black males (who head into crime at higher rates than young white men or young black women) might be to decrease their wage differential between crime and legitimate employment through the hiring of more law enforcement officials over the course of several years. This would have the added effect of decreasing crime. Indeed, if individuals are forward looking and we have a believable commitment mechanism, we needn't wait to see the effects.

Clearly the analysis Corrections provides is both preliminary and inconclusive--it is merely suggestive. Nevertheless, it offers an interesting avenue to improve education by rational forward-looking individuals of all races and genders.

Beyond this discussion of heterogeneous impacts by race of an increase in future police presence on future crime and graduation rates, we might also add a particularly offensive quote by the Times:
A large-scale study in Chicago found that 74% of the boys who attended preschool graduated from high school, compared with 57% of those who didn't.
This is a correlation. It is not clearly causal.

Monday, September 20, 2010

The Recession Officially Ends

Newsweek Magazine/The Street article "The Recession Officially Ends" (September 20th, 2010) struggles with even marginally objective journalism. Throughout an article discussing the decision by the National Bureau of Economic Research (NBER) that the recession had ended in June 2009, it can't help itself but snipe, repeatedly. Newsweek, doing its best to imitate Pravda, would doubtless desire the reformation of the Tsentralniy Komitet Kommunistitcheskoi Partii Sovetskogo Soyuza, the Soviet Central Committee, to make centralized decisions concerning recessions.
The recession isn't just over, it actually ended in June 2009, according to a statement made Monday by the elite, ivory tower cadre of U.S. economists known as the National Bureau of Economic Research (NBER).


In its typically obtuse economist language, NBER noted in calling a June 2009 end to the recession that in "determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month."


To support their claim that the recession ended over a year ago, while for many Americans there has been little indication of a recession lessening, NBER notes 'economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.'
The problems associated with assigning recessions in real time are manifold. With noisy information that changes over time, changing relationships between economic variables, different predictions from different variables, and multiple variables of interest, it is a task that's easy to criticize when an institution hates economics, like Newsweek. However, Newsweek's criticism is not well-placed.

The NBER's approach is to avoid denoting recessions until they have a relatively large amount of data. For example, The NBER's Business Cycle Dating Committee waited 28 months to declare the end of the 2001-2003 recession. In this case, it agrees with a "real-time" approach James Hamilton developed using Stock and Watson's historical work. An example of Hamilton's work that this article has been influenced by was "Calling Recessions in Real Time" (Working Paper, 2010).

Hamilton runs a regime-switching Kalman Filter, a general tool discussed elsewhere by Corrections in "How to Lose an Election Without Really Trying" and "Census as a Celebration". Starting with the data, we can observe his assigned probability of whether the United States is in a "recession" state or not, along with the current Bureau of Economic Analysis issue of the GDP growth rate (click to enlarge):
Hamilton's approach generates results very similar to the NBER's based solely on GDP, not NBER's recession dates. We can see this by depicting Hamilton's probabilities of recessions, and coloring in both his recessions in red and NBER's in blue (click to enlarge).  Near-complete overlap with red can be seen on most blue bars.
We can see Hamilton's methods find this recession only lasting one more quarter than the NBER's Business Cycle Committee's. The calling of recessions is not a falsifiable endeavor, though updates are possible if the call is made in real time.  Nevertheless, when the NBER and James Hamilton, (who literally wrote the book on time series analysis) are susceptible to the same criticism by Newsweek, it is vastly more likely that Newsweek's understanding of the world is flawed, not theirs.

Saturday, September 18, 2010

Old age robs criminals' skill

Boston Herald article "Old age robs criminals' skill" (September 18th, 2010) offers a rarity for opinion editorials: an intellectually stimulating article and relatively original idea. The article's interesting question is: why does crime rise in some recessions, and fall in others? The article's proposed answer is recessions with high inflation drive crime because criminals see individuals as holding large amounts of cash now in anticipation for needing it in the future (implicitly, an economic "cash-in-advance" model). Recessions with low inflation will simply find individuals with less in their pockets, and therefore less to steal.
But in previous recessions, in the 1970s and ’80s, the crime rates went up. The difference perhaps was that those recessions were in times of high inflation, giving robbers an incentive to take your money while it still held its value.

Being broke, people don’t go out late and thus are less likely to be mugged. And if folks do travel, the thieves know they’re probably not carrying much of value.

If newspaper writers are going to undertake causal analysis or conjecture, it's enjoyable when they use good structure or thoughtful analysis. If the reflexive premises of the New York Times are that firms are evil and people are very dumb and easily tricked, this article argues that even criminals respond to incentives, and puts forth their testable conjecture--the pinnacle of a non-empirical opinion editorial.

As Corrections sees it, the testable prediction the Herald's conjecture offers is as follows: real goods, such as automobiles or jewelry, are relatively robust to inflation. Cash is not. If burglary and robbery are substitutes for one another, but inflation causes robbery to become relatively less valuable than burglary, then a difference-in-difference will bring out the causal link between inflation and crime.

That is to say when inflation changes from low to high, we should expect the difference between the change in robbery and the change in burglary to be negative. Below, we first graphically display the data: inflation rate, robbery and burglary rates over time (click to enlarge), from 1960-2003.

A graphical and first-approximation is to plot percent change in inflation on the x-axis and the difference between percent changes in robbery and burglary on the y-axis. As we can see from the positive slope, if anything an increase in inflation appears to lead to a relative increase in robberies, not burglaries, as the Herald's theory might predict (click to enlarge).
Of course, this is only a first-pass approach. Consumers, recognizing that inflation will cause more robberies, could reinforce their homes and cause less total robberies (due to security) that has a larger effect than inflation causing more robberies. However, the empirical evidence behind the Herald's theory appears weak--rather than burgling more inflation-robust assets when inflation increases, individuals are robbing more inflation-insecure assets when inflation increases.

Friday, September 17, 2010

Recession Raises Poverty Rate to a 15-Year High

New York Times article "Recession Raises Poverty Rate to a 15-Year High" (September 16th, 2010) fails to acknowledge the poverty rate's intertemporally unstable nature. It compares poverty rates over time, an improper comparison due to the way poverty rates are calculated.

The share of residents in poverty climbed to 14.3 percent in 2009, the highest level recorded since 1994. The rise was steepest for children, with one in five affected, the bureau said.

One might think that individuals in the U.S. were only as well off as they were in 2004, when chained GDP/capita was approximately the same as it is this quarter. However, Corrections contends that we are actually even better than this. Below, find graphically depicted U.S. GDP over time in chained 2005 dollars (click to enlarge), and U.S. GDP per capita over time in chained 2005 dollars (click to enlarge). Note that chaining dollars is an attempt to introduce new products for comparison (otherwise, comparing cell phone prices from 1960 and today would not be well-defined).

The poverty rate from 1994 is measuring something completely different from the poverty rate in 2009. Poverty thresholds have changed multiple times, under a "sliding scale" approach. For example, in 1964, ~2.6% of U.S. households owned a color television. Circa 1994, 97% of U.S. households owned a color television. Beyond this, these televisions were not only cheaper, but were of better quality, programming, and durability.

Why is this relevant? Because increasing product quality is not properly measured, even with chained GDP. Below, we take minivans as an example.

In 2003, using Barry, Levinson and Pakes's instrumental method for demand estimation (also discussed in a previous post), Amil Petrin, in his phenomenal paper, "Quantifying the Benefits of New Products: The Case of the Minivan" (JPE 2002) estimates the value in dollars to consumers from the advent of the minivan by Chrysler in its first five years (1984-1988) as $2.8 billion in consumer surplus, and $2.9 billion in total surplus.

This surplus comes solely from an improvement in product quality that is largely unreflected in price due to monopolistic competition by competitors (GM and Ford introduced their own minivans in 1985). This sort of change will not be reflected by even chained GDP numbers. Because of increasing product differentiation (Petrin's "new goods" problem) and monopolistic competition (or competition), life is getting better than we're measuring with our best measures of product-chained GDP. Quality of life is higher.

Poverty indicators are not appropriate for "long" time spans because of innovation. Locally, we might think 2008 and 2009 are comparable. But in 1994, the internet had yet to be invented. Since then, as Austan Goolsbee and Peter Klenow estimate in "Valuing Consumer Products by the Time Spent Using Them: An Application to the Internet" (AER 2006) (gated) (ungated), the median individual gained $3000/year because of the advent (and widespread use) of the internet. The reason for this large gain is largely due to increased price competition and increased value of time. Since 1994, almost everyone in the United States is vastly better off than they were. (Another example might be how much individuals would have paid for a smart phone in 1994, given the millions that have them now and how "little" they paid for them relative for 1994 willingness-to-pay). This massive increase in consumer surplus generated from an increased value of time is unmeasured by GDP (underestimated) and poverty measures (overestimated). Use of these to compare long-run trends is ill-advised, especially when one has an ideological/Malthusian axe to grind.

Unfortunately, the notion that GDP growth generally underestimates utility gains is almost universally ignored in long-run intertemporal comparisons of utility.

Thursday, September 16, 2010

F.D.A. Panel Urges Denial of Diet Drug

New York Times article "F.D.A. Panel Urges Denial of Diet Drug" (September 16th, 2010) discusses the FDA's rejection of a new diet pill and their standards without addressing the improper incentives that lead the FDA to cause the excess deaths of thousands of people a year, and cause excess pain to hundreds of thousands.
The advisers to the Food and Drug Administration voted 9 to 5 that the potential benefits of the drug, called lorcaserin and developed by Arena Pharmaceuticals, did not outweigh the risks.
Let's imagine, for simplicity, that there are two kinds of medical drugs. Drugs that save lives, and drugs that kill people.  When pharmaceutical companies test drugs, they gain a signal with error about whether or not that drug is a good drug or a bad drug. The U.S. Food and Drug Administration will then choose the cutoff. If we assume that error to be normally distributed (this is an innocuous assumption: the difference between the sample average and the true signal converges to a normal distribution by Lindeberg-Levy Central Limit Theorem).

The FDA must choose some threshold for a signal, below which they reject all drugs, and above which they accept.  They save lives by rejecting bad drugs and accepting good ones.  The FDA kills by rejecting good drugs or accepting bad bad drugs.    (Corrections is willing to discuss our precise "moral" phrasing, which we posit as accurate).

The FDA can't tell the difference between good drugs and bad drugs beyond the signal they receive. The point, therefore, is what the proper cutoff should be. Whether or not the FDA should be "very cautious" and kill by denial of more good drugs than prevention of bad, or "loose" and kill by allowing more bad drugs than good drugs. The optimal "life saving" diagram is depicted graphically below (click to enlarge).
Officials at the FDA are not in the business of saving lives, however. If a bad drug gets through their screens and kills, they lose their jobs. If a good drug never gets through, no one is ever penalized, as the consequences are not graphic. Below, we depict the FDA's scheme due to improper incentives (click to enlarge):
As we can see, because the FDA is risk-averse because of its suboptimal incentive scheme, it ends up, at the margin, killing many more individuals through its denial of live-saving drugs than it saves because of the marginal life saved by limiting a dangerous drug.

Individuals often state that among the first things the government should be doing after protection from coercion internationally through the military and internally through the justice system is setting up systems like the FDA.  What is not noted is that the FDA, because of poor incentives, kills many more individuals by withholding drugs than the private market would.  

A private system would be optimally incentivized because of the long-term, monopolistically competitive nature of its brand.  For those that think this wouldn't be a viable private enterprise, consider the 14 Californian kosher-certification services, or dozens of national certification services.  These companies have been successfully serving tiny portions of the United States population for decades.  Further, these companies have reason to avoid regulatory capture (unlike the FDA) because they are competing with other companies for consumer's trust (the FDA does not have competition).  

If anything, the FDA isn't among the first things government-loving individuals should push for--instead, an altruistic government-loving individual should abolish the FDA to save lives.  Any individual with a smidgeon of appreciation for the private market should be chomping at the bit to abolish the FDA and save lives, ease the pain of those denied efficient drugs, save the money of the poor who are denied price-reducing competition, and help improve the lives of individuals who might be benefitted by diet drugs endorsed by almost everyone but an intensely risk-averse FDA.  

3-D girl a reminder for B.C. drivers in school zone

Toronto Star article "3-D girl a reminder for B.C. drivers in school zone" (September 9th, 2010) describes the decision of Vancouver officials to put an optical illusion of a girl playing in the road to slow drivers down. Corrections thinks this is a mistake.
The visual image of the girl is believed to be the first time a child is being used to drive home the message of the dangers in excessive speeding. In 2008, the city of Philadelphia began using virtual images of fake speed humps of white, blue and orange triangles to get drivers there to slow down.

Vancouver officials are "crying wolf." The lesson to be learned from hyperinflation or the story of the boy who cried wolf is rational expectations. Individuals are not fooled over the long run. Drivers get a signal of a child playing in the road. They then make a decision on whether or not to slow down, and if so by how much. Normally, the stronger the signal the more a driver would break. By "muddying" the signal by making it unclear whether or not it is a trick or a real child, drivers are rationally less likely to slow down. This, in turn, is likely to be a mistake.

Depicted graphically below is the ordinary relationship between signals of kids playing (balls in the street, summer days, hockey nets in garage ways) and the likelihood that kids are actually playing--that they are going to rapidly dart out into the street from behind a car, or are in the street playing already (click to enlarge).

Vancouver's optical illusions change that relationship by making strong signals mean less (click to enlarge).

Consequently, drivers break less when their signal means less--when the cry of "wolf" is less likely to yield a wolf (click to enlarge). The blue line indicates the original regime, the red line indicates the new regime, and the mixed line is the two lines overlapping.

Corrections notes that this is our own application of the "Lucas Critique" to almost all "behavioralist" policy advisements. Too often policy is suggested by small-scale experiments, when macro conditions change, given the adoption of certain policies. While experimentation yields valuable results, its generalizability outside the localized field (in which the policy it is testing has not been adopted) should always be in question.

Wednesday, September 15, 2010

Can New Orleans schools thrive in democracy?

New Orleans Times-Picayune "Can New Orleans schools thrive in democracy" (September 14th, 2010) discusses the quality of public schools in New Orleans. It makes the case that New Orleans schools are rather bad, and the article questions whether or not public schools are reconcilable with democracy in New Orleans.
Understand, anybody who tells you the pre-Katrina Orleans Parish School Board had made a good case for democracy is a liar. The truth ain't in 'em. Our schools were mostly awful. The system's finances were even worse, and the board members were hostile to the very idea that they had anything to do with the way things were. Ellenese Brooks-Simms, the president of the board who later pleaded guilty to bribery charges, liked to blame the poverty of its students for the school system's woeful performance.
Corrections would simply note that bad, dysfunctional schools with concordant low taxes likely raise overall utility--at the very least, their presence along with the presence of school districts that aren't dysfunctional is likely a net benefit. Why? Some people have preferences for low-tax, low-quality schools. Others have a preference for high-tax, high-quality schools. Assuming that low quality is a function of low taxes and not simple inefficiency, more options are better.
In order to see this in a "guns and butter" like diagram, imagine there are two types of people, as described above. The first type, preferring disposable income, in depicted in blue. The second type, preferring education, is depicted in red. Then both types are unambiguously better if they are allowed to live (or move to) cities that they prefer. This is depicted graphically on the left (click to enlarge). On the right, we see that individuals forced to have the same measure of income and schooling make both worse off.
As we can see, allowing Tiebout sorting can enhance utility. Not everyone has the same preferences, and a distribution of public services rather than a single quality/standard is likely to make everyone better off.

Sunday, September 12, 2010

Trading Away the Stimulus

New York Times OpEd "Trading Away the Stimulus" (September 9th, 2010) presents a foolish analysis of trade, completely neglecting the notion of opportunity cost.
Also essential is a border tax to counter foreign export rebates. In countries with value-added taxes, those levies are returned to producers when they export their goods — which allows them to lower their products’ prices in our market. In response, we can ensure fair competition in our home market by applying a tax equal to the rebate upon a product’s entry to the American market.

COnsumers in the US are made unambiguously worse off by a tax on foreign imports. We show this in a graph depicting the US market for some good both before and after a border tax meant to counter a Chinese export subsidy. An analysis of the market in the US requires that we consider the total supply of goods, both Chinese and U.S.-made. Then, the total supply in the US market is found by adding US supply and Chinese supply. It may be that, due to a Chinese government subsidy of s per unit, Chinese suppliers are able to produce every unit more cheaply than US suppliers. This means that even with the same technology, their supply curve could lie below that of US producers. We depict the equilibrium in such a market below (click here to enlarge).

If the US counteracts the Chinese subsidy of s dollars with an import tax of t=s dollars, then the Chinese supply becomes identical to US supply, and we have a new equilibrium. We depict this market below (click here to enlarge).

Now consumer surplus (the green shaded area) is smaller than before, while US producer surplus (the red shaded area) is larger. Nonetheless, because the equilibrium price is higher in this regime, and quantity is lower, we as a country are worse off than we were without the tax. The gray shaded area shows the total loss to the US from a tax that would benefit a few marginal (high cost) producers. This again gives our rule of thumb for politics: whenever a group is pushing for more taxes or regulation, it is because they and government officials they fund are "putting one over" on consumers, taking their surplus and dividing it between them.

Friday, September 10, 2010

Seatbelts are the lifesavers in your car

New Orleans Times-Picayune editorial "Seatbelts are the lifesavers in your car" (September 9th, 2010) speaks positively of seat belts.  While they have undoubtedly saved lives, they have also undoubtedly cost them through the externalities their cost-shifting generates.
More Louisianians buckled up this year compared to last, according to the Louisiana Highway Safety Commission, but the New Orleans area actually saw a 1.1 percent decline in the percentage of people using seat belts.

Even with the statewide increase for drivers and front-seat passengers, which went from 74.5 percent to 75.9 percent, Louisiana still lags behind the nationwide usage rate of 83 percent.

That's discouraging, because buckling up is a simple and easy thing to do, and it's a proven life-saver.
The most interesting economic concept when it comes to seat belts and safety regulation is the "Peltzman Effect", as Sam Peltzman discusses in his 1975 Journal of Political Economy article "The Effects of Automobile Safety Regulation" (gated).  Below, we reproduce his diagram graphically (click to enlarge).  What the diagram indicates is that risky driving gives us something we enjoy--for example getting to our destination more rapidly.  Our first bit of risky driving is particularly beneficial--perhaps when we are in a hurry.  As we increase our risky driving, the marginal benefit decreases.  This is represented by the downward sloping red line. Under a regime with no seat belts, we end up at an equilibrium represented by point A on the risky driving schedule.  Under a regime with seat belts, we end up at an equilibrium represented by point B.  As driving becomes safer, we drive more riskily.
This, in turn may cause more pedestrian deaths, whose cost is presumably not fully borne by drivers.  Below, we graphically depict the relationship between risky driving and pedestrian deaths (click to enlarge).  We can see that pedestrian deaths rise as we go from point A and B.  (Point C will be discussed below).
As a thought exercise, famous among Austrian economists, is what would occur if instead of seatbelts or airbags, we installed a large spike in driving wheels, faced toward the driver a driving wheel looking similar to this:
In this case, we would have the following relationship between risky driving probability of death to driver (click to enlarge):

If this is the case, we end up at point C on the diagram above (again, click to enlarge).

This article serves to demonstrate a few concepts.  First, a common refrain on Corrections: when we reduce the cost of behavior that has benefits and costs, we increase the partaking of that behavior.  Second, when that behavior has externalities, as it does with driving, we may actually foist the cost of risky driving onto pedestrians rather than consumers.    

Thursday, September 9, 2010

Who Should Provide Anesthesia Care? (Redux)

Recently, Corrections wrote on the New York Times article "Who Should Provide Anesthesia Care?" (September 6th, 2010), a post that elicited widespread interest, enough to warrant further analysis.

Corrections would like to further note that even if anesthesiologists are harmed in the short run by the law, they're unlikely to be harmed in the long run. Our reasoning is that there are substitute specialties for individuals who practice anesthesiology. While currently-practicing anesthesiologists might not quit, if there are substitute professions (for the sake of an example we name surgery), then the relevant marginal individuals are new medical school students.

Observing declining wages in one profession, they opt into the other. This consequently reduces wages into that profession until the wages equalize (assuming they are perfect substitutes) or the difference is mitigated, not by immediate exiting of the profession but instead by a lack of new entrants.

Below, we graphically depict what we would expect to happen to anesthesiologist wages, surgeon wages, and nurse wages and stock before and after nurses are allowed to practice particulars of anesthesiology (click to enlarge). The idea is as follows: the supply of nurses in the short run is fixed, and therefore their wages immediately rise. As their wages rise, more nurses are trained until, as discussed previously, their wages go back to the reservation wage of the (presumably) vast reservoir of individuals who can become nurses.

For doctors, more newly-minted doctors will be surgeons, and fewer anesthesiologists. As the number of anesthesiologists drop, their wages begin to rise. As the number of new surgeons begins to rise, surgeon wages fall, eventually rising as wages converge back to equilibrium. (Note we operate off the assumption of a vast reservoir of positions substitutable to anesthesiologist positions. Otherwise, the long run equilibrium wage would be slightly lower than the original wage).

Tuesday, September 7, 2010

Who Should Provide Anesthesia Care?

New York Times article "Who Should Provide Anesthesia Care?" (September 6th, 2010) discusses the ability of a nurse to deliver anesthesia without supervision. It brings in the American Society of Anesthesiologists without properly discussing their stake in government regulation requiring anesthesiologists to supervise nurses.
The two studies — hotly disputed by the American Society of Anesthesiologists — essentially concluded that there is no significant difference in the quality of care when the anesthetic is delivered by a certified registered nurse anesthetist or by an anesthesiologist. The studies were paid for by the professional association for the nurses, a potential conflict of interest, but were conducted by researchers at respected organizations.
The Times notes the conflict of interest of nurses, but not of anesthesiologists.  As Corrections sees it, anesthesiologists have a readily identifiable conflict of interest, while it isn't immediately clear that nurses do, upon further inspection.

The American Society of Anesthesiologists has motivation to artificially constrict supply of anesthesiologists to raise their own wages.  It may do so by raising the quality of new anesthesiologists (more than patients would prefer), reducing the number of residents trained in anesthesiology, or encouraging a general suppression in the number of doctors through the American Medical Association. Their strategy is depicted graphically below (click to enlarge).  They price as monopolists, reducing quantity and increasing price.
One might say nurses have a similar motivation--if nurses can do more, demand for nurses rises, and nurses are paid more.  However, Corrections posits that unlike doctors, there is a vast reservoir of possible nurses; nurses are elastically supplied.  If their wage increased, new nurses would train and bring their wage back down.  Corrections depicts this possibility graphically below (click to enlarge).
Economic grounding gives Corrections reason to believe that while anesthesiologists have a conflict of interest influencing their argument, nurses do not.  This grounding offers a re-statement of a rule of thumb: when an organized group is pushing for governmental regulation, they're likely to be "pulling one over" on consumers.  

Some interesting economic side notes are that it would be possible for anesthesiologists wages to increase because of this (for the same reason that if a law that requiring them to build their own cars, or walk to work, was abolished, they'd have more free time to do the things they are paid a large amount for).  This counterintuitive result, that anesthesiologist wages could increase, while the wages of nurses would not is an interesting curiosity, but not likely given opposition by the American Society of Anesthesiologists.

Second, we note that either way, consumers should be better off (even were nurses and anesthesiologists were worse off).  The reason behind this is that they may prefer a different cost-quality combination for anesthesiology than they can get being constrained by government regulation--unconstrained maximization is always greater than or equal to constrained maximization.  

Sunday, September 5, 2010

A Legislature of far too little impact

Los Angeles TImes editorial "A Legislature of far too little impact" (September 5th, 2010) neglects the economic idea that an inefficient government may be desirable.
Unfortunately, those successes must be regarded as exceptions. Smart and important legislation, much of it propelled by substantial public support, fell by the wayside in the final days. Indeed, what is most notable about the recently concluded session is not the little bit of good policy the Legislature made but the great deal that it did not. Not to mention the bad bills it passed.
At first glance, it would appear that an increase in efficiency of government would always be pareto improving. However, it may be that an inefficient government is desirable for some.

Specifically, one might see increased government activity as a long-term drain on growth. If, as Rothbard put it, "the State is nothing more nor less than a bandit gang writ large", then we might consider the societal implications for that band being more efficient (they are better able to steal). In this sense, it may be desirous for us to constrain government to only support inefficient programs.

The Law of Demand holds: if something is more expensive, people will buy less of it. In this case, increasing the price of government makes us demand less of it. This, in turn, helps to maximize freedom. This point would hold for consequentialist libertarians, for instance, who might view any government action as more likely to be from an interest group looking to transfer money from the general public using the government, than out of a real interest of a populace.
Where else might this apply?  Deontological libertarians recognize that behind every state action is the barrel of a gun, to put it bluntly.  Take a parking ticket--it wouldn't seem that a firearm is behind one.  However, if one foregoes payment, either a violation warrant may be issued, at which point at any time a man with a firearm (police officer) may go to your home and arrest you by force.  Alternatively, you may simply run the risk of being arrested (through the use of force) the next time you are pulled over.  The only power The Law has is violence and the threat of violence.  

Deontological libertarians further believe that this initiation of the use of force is wrong.  Consequentialist libertarians have no such issue with the initiations of the use of force.  These libertarians support liberty because they see it as bringing about desirable conditions.  Therefore, a politically savvy Deontological libertarian might desire to make large government inefficient so Consequentialst libertarians essentially adopt all Deontological positions.

Corrections concludes that a government that efficiently takes and spends resources is not necessarily desirable due to these economic concerns.  Indeed, we have indicated that for reasons of political economy, some groups may even desire to make it less efficient to manipulate other groups to the adoption of similar positions.

Saturday, September 4, 2010

After Bargains of Recession, Air Fares Soar

New York Times article "After Bargains of Recession, Air Fares Soar" (September 4th, 2010) ignores the global phenomenon in air fares to concentrate on the recent.
The increase in fares is the result of a remarkable discipline shown by the airlines, which have generally not added more flights this year even as the economy has improved and demand has picked up. For the airlines, flying fewer and fuller planes has paid off.
Passengers are paying the price. For leisure travelers, domestic fares have increased by more than 20 percent in the second quarter compared with a year earlier, according to data compiled by the travel Web site Orbitz.
Steven Berry and Panle Jia examine the changes in air fare demand between 1999 and 2006, finding in their recent article "Tracing the Woes: An Empirical Analysis of the Airline Industry" in American Economic Journal: Microeconomics (ungated working paper) (gated published), that, quoting their abstract:
Compared with 1999, we find that, in 2006, air-travel demand was 8 percent more price sensitive, passengers displayed a stronger preference for nonstop flights, and changes in marginal cost significantly favored nonstop flights. Together with the expansion of low-cost carriers, they explain more than 80 percent of legacy carriers' variable profit reduction.
This analysis (identified with BLP assumptions) occurred on a span of time before the recession pushed down further prices. As its its wont as the flagship of the left, the New York Times then turns around as soon as prices rise after declining for a dozen years and uses weasel words to describe Airline executives: "Airline executives have since been preaching the need to reduce the number of seats they offer."

It rather seems a joke, considering airline companies costs have gone down, low-cost carriers have become more prevalent, tickets have become competitive due to the internet, nonstop tickets are more common. When efficiency rises, marginal costs go down, quantity rises, and profits fall, it's difficult for consumers not to be massively better off (consumers that aren't New York Times consumers should be neutral when it comes to competitive profits--the reason they're relevant here is because when efficiency rises, overall surplus increases--if profits haven't risen, we know consumers have received all of the increased surplus).

Below, Corrections graphs out a way to indicate three stylized facts from Berry and Jia: prices fall, elasticity of demand increases, supply increases, and quantity supplied increases (click to enlarge). This is not the only way to depict these facts, and these are not the only facts from the paper, but they are suggestive enough that a first pass analysis seems to completely identify the direction of consumer surplus (coloring from blue to red, it unambiguously increases).

Friday, September 3, 2010

Enabling prostitution

Philadelphia Inquirer editorial "Enabling Prostitution" (09/03/2010) discusses prostitution in a misinformed manner. It further does not appropriately analyze counterfactual scenarios.
Some misguided observers of this debate actually believe there's nothing wrong with adults offering sex for money online. They ignore the fact that prostitution often involves other dangerous crimes, including robbery and assault. And sometimes these ads facilitate the illegal sex trafficking of women or girls who are being held against their will.

It is the case that forced prostitution is present in the United States. However, it is by no means clear that either a significant portion of prostitution is forced, nor that the level of forced prostitution would decrease when the difficulty of prostitution increases.

On the first point, we can take a recent empirical study on prostitution that requests no citation (citation will be given when the paper is published). What it indicates, however, is that there is a 63% increase in the number of tricks done on the 4th of July weekend. Forty-three percent of that apparently comes from full-time prostitutes. The other 20% comes from 4th-of-July-only prostitutes, part-time prostitutes that only come in because of the $11 average price increase. To Corrections, this sort of short-term supply elasticity, a vast reservoir that enters the market for one weekend only indicates voluntary prostitution.

If we assume that the 4th of July comes solely from a demand shock, that the fundamentals of supply remain the same, and approximating with linearity then we can identify the supply change (this is the source of the supply increase identification).

Below, we depict the pure data:

Here, we take the same data and add supply and demand lines, based on the idea that the 4th of July represents a demand shock:

On the second point, if we think that forced prostitutes are an inferior input into the production of prostitution, then enabling prostitution, causing an increase in the quantity supplied, will reduce their use in prostitution. The same concept might be applied to manual labor in manufacturing computers. It is likely that an increase from one computer demanded a year to several thousand would cause manual labor to all but disappear. So too with forced prostitution--cheapening the cost of supplying prostitution is likely to compete forced prostitution out of business.

Thursday, September 2, 2010

On Course for a Cleaner Hudson

New York Times article "On Course for a Cleaner Hudson" (September 1st, 2010) discusses the best way to clean up polychlorinated biphenyls (PCBs) in the Hudson river. In a previous article, "Don't scorn Germany and Japan; learn from them", Corrections has extolled the near-incomprehensible properties of exponential growth. However, when the discount rate is greater than the growth rate, this may not be the case.
The E.P.A. now says the dredging might end up taking 10 years, which is fine. A job done slowly and right is better than one altered or abandoned.

Fortunately, we will not have to wait until the job is completed to see good things happen. When PCB concentrations start falling in the river, they decline in fish. This means the benefits of the project will start being felt long before the last load of toxic mud is pulled up from the bottom. This is the strongest rebuttal to G.E.’s old argument that the answer is to let the carcinogens lie in the river, decaying on their own.

If the cleanup of a river that has been tainted for 60 years and counting takes a few years longer than first planned, nobody should be complaining.
We can model the type of situation that the New York Times is suggesting. Specifically, we might have something we desire, say the Hudson River's stock of fish. We have two options for the same cost: quick cleaning and thorough cleaning. The growth rate of the stock of fish is increased to a higher long-term level due to thorough cleaning, but more slowly. It is increased to a lower long-term level due to quick cleaning. The difference between the changing growth rates is depicted graphically below (click to enlarge).

What would this mean for fish stocks? Normalizing our starting stock to one, we can display this graphically as well (click to enlarge)
However, we value current benefits more than we value future benefits--we discount exponentially. If our discount rate is greater than our growth rate, then it's quite possible that the net present value of "quick" is more valuable than "thorough". While exponential growth is a powerful force, exponential discounting may make slower growth now preferable to rapid growth later.

One way to illustrate this is to depict how much we value the first period, the first two periods, the first three periods, out to as many as we please. We do so graphically below (click to enlarge). As one can see, while the gap is closed, the net present value from today including any period in the future will always indicate quick growth as better.
Corrections simply notes, therefore, that a job done quickly is not always worse than a job done thoroughly--there are distinct tradeoffs even when considering exponential growth.

Wednesday, September 1, 2010

N.Y. to Try Again to Tax Indian's Cigarette Sales

New York Times article "N.Y. to Try Again to Tax Indians' Cigarette Sales (August 31st, 2010) fails to note why a government tax program is ill-concieved.  New York is currently considering attempting to tax the cigarette sales of Indian reservations.  In an attempt not to tax reservation consumption of cigarettes, it will give vendors a lump-sum tax break.  This is the reverse of efficient taxation.
The state’s plan does make exceptions for cigarettes sold to tribal members, estimating, based on the population of an Indian reservation, what portion of the sales are made to them. Taxes are charged on the remaining packs, on the assumption that they are bought by customers who are not Indians.
In fact, this does not make reservations for tribal members.  Vendor prices should be the same for all cigarettes, sold to Indians on reservation or not.  The reason is that it appears stamps must be on all cigarette packs--there is no "dual supply" problem.  In this case, vendors will raise the price of all cigarettes by whatever the tax is (recognizing competition and constant returns to scale production) and simply take the tax cut as pure producer surplus.  The supply-and-demand equilibrium before and after is depicted below (click to enlarge).  The upper blue-to-red supply line depicts the taxed supply.  The red line depicts supply without tax.  As we can see, because of the law of one price, producers have in effect been given a lump sum transfer, which will not be reflected in their prices.

The structure of taxation will make this effectively a tax on on-reservation Indian consumption of cigarettes.