Archive for the ‘Economics’ Category.

Government Supply-Side Health Care Restrictions that Raise Costs

One of the least reported issues related to health care cost inflation is the existence of artificial government restrictions on health care supply, often called "certificates of need".

The COPN [certificate of public need] law is supply-side Obamacare: top-down, command-and-control restrictions on which providers can offer which services. A certificate of public need is, essentially, a government permission slip. Without one, a Virginia doctor can’t put an MRI machine in his clinic. A hospital can’t build a new wing. A hospital company can’t add a satellite campus. And so on.

Getting such permission slips is a long and costly process. The owner of a Northern Virginia radiology practice, for example, spent five years and $175,000 asking permission to buy a new MRI machine. The state said no.

One reason the process takes so long is that competitors often fight such requests. When Bon Secours proposed the St. Francis Medical Center in Chesterfield, rival chain HCA fought it vigorously, arguing there was insufficient demand. The hospital was approved and enjoys a robust business. You’d think state regulators would laugh off competitors’ arguments, but sometimes they’re actually taken seriously. When a Richmond radiology practice wanted to move—not add, but move—a radiation device to its Hanover offices, the state said no in part because Virginia Commonwealth University’s Massey Cancer Center worried the project “could take some of their business.”

This is cronyism and protection of incumbent competitors, pure and simple.  It is often justified by the economically-ignorant as reducing costs because it reduces expenditures on expensive machinery.  But in what industry can you think of does restricting supply ever reduce costs?

In any other industry, the proper response to that would be: So what? If Kroger sets up across the street from Food Lion, we consider that good for consumers: They have more choice. And if they migrate from Food Lion to Kroger, that’s not a bad thing. It means they’re getting more utility for their grocery dollar.

Studies of the COPN system around the country have confirmed what seems intuitively obvious. A joint examination by the Justice Department and the Federal Trade Commission found that COPN regulations hurt competition, fail to contain costs, and “can actually lead to price increases.” Restricting supply raises prices? Imagine that.

On Income Inequality

Most folks who lament income inequality have the following model in their head:  Wealth comes at a fixed rate from a fountain in the desert, and the rich are the piggy ones who hog all the output of the fountain and won't let anyone else in close to drink.  The more anyone takes from the fountain, the less that is available for everyone else.  And this was probably a pretty good model for considering pre-capitalist societies.  The actual robber barons, before the term was abused to describe successful industrialists of the 19th century, were petty nobles (ie the government of the time) who did absolutely nothing useful except prey on those around them and on those who passed by conducting rudimentary commerce, taking from them by force.  That is not how most people become wealthy today, with the exception of a few beneficiaries of cronyism (e.g. Terry McAuliffe).

These issues are dealt with quite clearly from a surprising source -- this review by an economist of the movie "Elysium".   I don't really get the schtick at the end with the Adam Smith cameo, but the rest is quite good

Postscript:  A while back I was reading the Devil's Candy (terrific book) and thinking about movie-making.  Perhaps it is not surprising that wealthy movie stars think in zero-sum terms.  I suppose much of their success can be thought of as zero-sum.  If I get the part, someone else does not.  If I get an extra point of the gross, that is less for everyone else.  If this movie does well, that probably means less revenue for another movie that came out the same weekend.   Particularly for actors trying to make it or on the rise, movies have a fixed sum of value and they are trying to grab a larger share of that value.

It is interesting that in their own sphere of influence, I never hear about such folks seeking any sort of income redistribution.  Perhaps I have missed it, but I never hear Matt Damon say "hey, take one of my gross points and split it up among all the craft folks on the movie, or share it out with the 20 guys who didn't land my part."

Thoughts on the Japanese Economy

I would characterize long-term Japanese economic policy this way:

  • Technocratically planned economy where the government chose winners and losers and directed capital to industries favored for development (e.g. MITI with steel, autos, electronics).
  • Strong government favoritism for exports and exporters over the domestic economy -- export industries are heavily protected at the cost of raising costs for internal consumers and limiting competition in domestic markets.
  • Enormous, near Herculean commitment to deficit spending as stimulus.  With deficits consistently running in the 8% of GP range and total government debt a stratospheric levels, Japan is the poster child for Krugman's anti-austerity

To these three I would add something that is seldom mentioned, that Japan has a near Scandinavian GINI index, with income inequality well under that of the US.  Oh yes, and they were an enthusiastic adopter of CO2 limits.

And the result of all this has been... 25 years of stagnation.

I remember when every one of these three planks was enthusiastically lauded by the US elite.  I was at Harvard Business School in the late 1980's and much of the discussion was about the US needing to adopt MITI-like government industrial planning and management.  If pressed at the time, people might kind of sort of acknowledge that life wasn't so good for Japanese consumers, but we were in a Michael Porter big picture competitiveness-of-nations phase, and no one seemed to care that their definition of national success did not turn out so well for the people actually living there.

To me, Japan is a giant case study in Austrian economics.  It's like they set out to run a quarter-century test: "let's see if mispricing of credit and forced misallocation of capital is really the cause of recessions."  So it is amazing that no one seems to want to acknowledge the results of this experiment.  Paul Krugman appears weekly in the New York Times to frequently advocate for exactly this same economic plan.

Net Neutrality is Not Neutrality, It is Actually the Opposite. It's Corporate Welfare for Netflix and Google

Net Neutrality is one of those Orwellian words that mean exactly the opposite of what they sound like.  There is a battle that goes on in the marketplace in virtually every communication medium between content creators and content deliverers.  We can certainly see this in cable TV, as media companies and the cable companies that deliver their product occasionally have battles that break out in public.   But one could argue similar things go on even in, say, shipping, where magazine publishers push for special postal rates and Amazon negotiates special bulk UPS rates.

In fact, this fight for rents across a vertical supply chain exists in virtually every industry.  Consumers will pay so much for a finished product.  Any vertical supply chain is constantly battling over how much each step in the chain gets of the final consumer price.

What "net neutrality" actually means is that certain people, including apparently the President, want to tip the balance in this negotiation towards the content creators (no surprise given Hollywood's support for Democrats).  Netflix, for example, takes a huge amount of bandwidth that costs ISP's a lot of money to provide.  But Netflix doesn't want the ISP's to be be able to charge for this extra bandwidth Netflix uses - Netflix wants to get all the benefit of taking up the lion's share of ISP bandwidth investments without having to pay for it.  Net Neutrality is corporate welfare for content creators.

Check this out: Two companies (Netflix and Google) use half the total downstream US bandwidth.  They use orders and orders of magnitude more bandwidth than any other content creators, but don't want to pay for it (source)

sandvine-2h-2013

Why should you care?  Well, the tilting of this balance has real implications for innovation.  It creates incentives for content creators to devise new bandwidth-heavy services.  On the other hand, it pretty much wipes out any incentive for ISP's (cable companies, phone companies, etc) to invest in bandwidth infrastructure (cell phone companies, to my understand, are typically exempted from net neutrality proposals).  Why bother investing in more bandwidth infrastrcture if the government is so obviously intent on tilting the rewards of such investments towards content creators?  Expect to see continued lamentations from folks (ironically mostly on the Left, who support net neutrality) that the US trails in providing high-speed Internet infrastructure.

Don't believe me?  Well, AT&T and Verizon have halted their fiber rollout.  Google has not, but Google is really increasingly on the content creation side.  And that is one strategy for dealing with this problem of the government tilting the power balance in a vertical supply chain:  vertical integration.

Postscript:  There are folks out there who always feel better as a consumer if their services are heavily regulated by the Government.  Well, the Internet is currently largely unregulated, but the cable TV industry is heavily regulated.  Which one are you more satisfied with?

Update:  OK, after a lot of comments and emails, I am willing to admit I am conflating multiple issues, some of which fit the strict definition of net neutrality (e.g.  ISP A can't block Planned Parenthood sites because its CEO is anti-abortion) with other potential ISP-content provider conflicts.  I am working on some updates as I study more, but I will say in response that

  1. President Obama is essentially doing the same thing, trying to ram through a regulatory power grab (shifting ISPs to Title II oversight) that actually has vanishly little to do with the strict definition of net neutrality.   Net neutrality supporters should be forewarned that the number of content and privacy restrictions that will pour forth from regulators will dwarf the essentially non-existent cases of net neutrality violation we have seen so far in the unregulated market.
  2. I am still pretty sure the net effect of these regulations, whether they really affect net neutrality or not, will be to disarm ISP's in favor of content providers in the typical supply chain vertical wars that occur in a free market.  At the end of the day, an ISP's last resort in negotiating with a content provider is to shut them out for a time, just as the content provider can do the same in reverse to the ISP's customers.  Banning an ISP from doing so is like banning a union from striking. And for those who keep telling me that this sort of behavior is different and won't be illegal under net neutrality, then please explain to me how in practice one defines a ban based on a supply chain rent-division arguments and a ban based on nefarious non neutrality.

Poverty and the Minimum Wage

Mark Perry had this chart on the demographics of income distribution.  From it, I want to draw a couple of conclusions about minimum wage and poverty

Click to Enlarge

Note the household income per earner for the lowest quintile.  It equates to something over $14 an hour, well above minimum wage almost everywhere in the US and nearly as high as the $15 national minimum wage proposed as an anti-poverty program.

The problem with most poor households is not wage rate, it is getting full time work.  The household income per earner is nearly as high as the average income of the second quintile.  The problem is that most poor households do not have full-time earners.   The key stat is that only 16% worked full-time and only 30% had any sort of job at all.

This is what always amazes me about the minimum wage discussions.  An increased minimum wage doesn't address the root problem of poverty at all, and in fact will tend to make it worse by pricing the 85% of the poor who need a job or need more hours out of the job market.  If they can't find a job at $8, it is the purest insanity to think they will have a better chance with their limited skills of finding a job at $15.**

 

**Postscript:  I suppose there is one set of facts that would lead to a minimum wage increasing employment in this lowest quintile:  If people who don't work in this quintile are not seeking work because they are happy to live on government benefits and other sources of charity.  This would imply that the reason they are not working full-time is not because no work is available but because they choose indolence.  If this were the case, then a rising minimum wage would provide enough incentive, I suppose, for some to get off the couch and go to work.  I am reluctant to buy into this explanation, but I am SURE that those on the Left who promote the idea of rising minimum wages increasing employment would not accept these assumptions.

My Son, the Libertarian Economics Major

Conversation over text today between my wife and my son who is in Venice:

wife:  "So the gondola ride wasn't the highlight?"

son:  "It was pretty fun... I just kept thinking about the economic barriers to entry into that field.  They are basically a closed guild."

 

So Why Is Paul Krugman Now Defending the Privileges of the 0.1%?

Apparently Paul Krugman has weighed in on Amazon and has concluded that it has "too much power".

I just cannot believe progressives are falling into the trap of defending major publishers against Amazon.  People like Krugman who bash Amazon are effectively setting themselves up as defenders of a small oligarchy of entrenched publishers who have, until recently, done a very good job of making themselves the sole gatekeeper of who gets into print.  Amazon is breaking this age-old system down, in the same way that Uber is challenging taxi cartels and Tesla is challenging traditional auto dealer networks, and giving most everyone access to the book buyer.

The system that Krugman is defending is the system of the 1%.  Or 0.1%.  The current publishing system benefits about 200 major authors who are in the system and whose work has traditionally been spammed by the large publishers to every bookstore and news outlet.  When you walk into an airport book seller, how much diversity of books do you see on the front table?   You just know that you are going to see Sue Grafton's "AA is for Aardvark" and Janet Evanovich's "Fabulous Forty-Six".  The publishers have risk-return marketing incentives to push the 46th Stephanie Plum novel over trying any new author.

So while the traditional publishers flog the 0.1% of authors, Amazon has empowered 20,000 authors.   Those who sell just a few thousand copies (or fewer) of books have found an outlet in Amazon that never existed for them (as disclosure, I am one of those).  And writers who distribute mainly through Amazon get a far higher percentage of their book revenues than they ever would get from the traditional publishers.

So Amazon is helping the consumer (lower prices) and 99.9% of authors (better access and higher profits).  It is perhaps hurting the top 0.1% and a few century-old entrenched corporations.  So what doesn't Krugman like?

Great Example of the Completely Insane Way We Manage Water

Virtually every product and service we purchase has its supply and demand match by prices.  Higher prices tell buyers they should conserve, and tell suppliers to expend extra effort finding more.

Except for water.

Every water shortage you ever read about is the result of refusing to let prices float to dynamically match supply and demand.  And more specifically, are the result of a populist political desire to keep water prices below what would be a market clearing price (or perhaps more accurately, a price that maintains reservoir levels both above and below ground at target levels).

So, some groups in Arizona are offering a$100,000 prize to help solve the water shortage.  And what is it they are looking for?  A better price system?  Nah:

A $100,000 prize awaits the group that comes up with the most innovative ­campaign to push water scarcity into the forefront of public ­conversation...

The competition wants to create a public-service campaign that raises awareness about the challenges facing Arizona's long-term water supply so residents will feel an urgency to start working on them now.

If Arizonans don't change how they consume water and start brainstorming new solutions for dwindling supplies, shortages won't be a choice, they will be an unavoidable reality. Planning for the future of water now will help ensure there is enough water for future generations, Brownell said.

The message isn't new; it has been taught with puppets, posters, television spots, brochures and landscape-design classes for years.

But experts, researchers and industry workers agree that as long as taps gush clear,drinkable water, it's hard to keep water scarcity part of public conversation.

"One challenge is getting people to take ownership of their decisions and how they contribute to the demand side of the equation," said Dave White, co-director of Arizona State University's Decision Center for a Desert City, which studies water use and sustainability....

Possible solutions to meeting Arizona's future water needs include:

• Desalination of sea water, which requires large financial investment and collaboration between government agencies and possibly Mexico.

• Rebates for water-efficient systems. Tucson offers up to $1,000 for households that install gray-water recycling systems to reuse water from sinks, showers and washing machinesfor irrigation.

• Increasing the use of recycled or reclaimed water. Arizona already uses this water to irrigate landscaping and recharge aquifers, but not as drinking water.

• Cloud seeding. The Central Arizona Project has spent nearly $800,000 to blast silver iodide into clouds to try to increase snowfall in Colorado, Utah and Wyoming, where the snowpack feeds the Colorado River.

I will say that it is nice to see supply side solutions suggested rather than the usual demand side command and control and guilt-tripping.   But how can we possibly evaluate new water supply solutions like desalinization if we don't know the real price of water?  Accurate prices are critical for evaluating large investments.

If I find the time, I am going to tilt at a windmill here and submit an entry.  They want graphics of your communications and advertising materials -- I'll just show a copy of a water bill with a higher price on it.  It costs zero (since bills are already going out) and unlike advertising, it reaches everyone and has direct impact on behavior.  If you want to steal my idea and submit, you are welcome to because 1. The more the merrier and 2.  Intelligent market-based solutions are never ever going to win because the judges are the people who benefit from the current authoritarian system.

PS-  the site has lots of useful data for those of you who want to play authoritarian planner -- let some users have all the water they want, while deciding that other uses are frivolous!  Much better you decide than let users decide for themselves using accurate prices.

The Stupid, Autocratic, and Corrupt Way We Manage Water

With every item or service we buy, supply and demand are matched via prices.  Except water.  Because, for a variety of populist and politically scheming motives, no one wants to suggest "raising prices to consumers" as the obvious solution to reducing California water use in a drought, despite the fact that it would reduce demand in -- by definition -- the lowest value uses as well as provide incentives new sources and alternatives.  So instead we get authoritarian stuff like this (press release from CA Senator Fran Pavely):

SACRAMENTO – Governor Jerry Brown signed Senate Bill 1281 by Senator Fran Pavley (D-Agoura Hills) on Thursday to require greater disclosure of water use in oil production.

Oil well operators use large amounts of water in processes such as water flooding, steam flooding and steam injection, which are designed to increase the flow of thicker oil from the ground. In 2013, these enhanced oil recovery operations used more than 80 billion gallons of water in California, the equivalent amount used by about 500,000 households and more than 800 times the amount used for hydraulic fracturing (“fracking”).

The impact of this use on domestic and agricultural water supplies is not known because oil companies are not required to disclose details about their water use

“At a time when families, business and farmers are suffering the effects of severe drought, all Californians need to do their part to use valuable water resources more wisely,” Senator Pavley said. “The public has the right to know about the oil industry’s use of limited fresh water supplies.”

Oil well operators have an available source of recycled water known as “produced water,” which is trapped deep underground and often comes to the surface during oil production. More than 130 billion gallons of produced water surfaced during oil production in California last year.

Many oil companies already recycle some of their produced water, but the amount is not known because of the lack of disclosure. Senate Bill 1281 requires oil well operators to report the amount and source of their water, including information on their use of recycled water.

The ONLY reason for such disclosure is because they want to impose some sort of autocratic command and control rules on oil industry water use -- not water quality mind you, but the amount of water they use.  Add this to all the other creepy Cuba-style water actions, like having neighbors spy on each other to monitor water use, and you will understand why folks like Milton Friedman argued that free markets were essential to free societies.

In honor of the California water situation, I have created the second in my series of Venn diagram on economic beliefs.

 

click to enlarge

Non-Monetary Job Benefits Example

The other day I wrote about non-monetary job benefits.  Here is an example:

A small-time vintner's use of volunteer workers has put him out of business after the state squeezed him like a late-summer grape for $115,000 in fines -- and sent a chill through the wine industry.

The volunteers, some of them learning to make wine while helping out, were illegally unpaid laborers, and Westover Winery should have been paying them and paying worker taxes, the state Department of Industrial Relations said.

"I didn't know it was illegal to use volunteers at a winery; it's a common practice," said winery owner Bill Smyth.

State law prohibits for-profit businesses from using volunteers.

Before the fine, volunteer labor was common at wineries in the nearby Livermore Valley, said Fenestra Winery owner Lanny Replogle.

...

About half the people the state considered Westover employees were taking a free class at the Palomares Canyon Road winery. Students learned about growing vines, harvesting and blending grapes and marketing the finished product.

"This was an incredible opportunity for me," said Peter Goodwin, a home winemaker from Walnut Creek who said he dreams of opening a winery with some friends. "I got to learn from someone who knows the business."

The winery sometimes asked Goodwin if he wanted to assist in different tasks.

"That's what I wanted, to be as involved as much as possible -- it was all about learning," he said. "I don't understand the state's action. It was my time, and I volunteered."

I have mixed feelings on this.  On the one hand, this demonstrates the appalling violation of individual freedom that minimum wage laws create -- not just for the employer, but for the employee as well.  Minimum wage laws mean that you are not allowed to perform labor for less than that minimum, even if you choose to and get non-monetary benefits that you feel fully compensate you for the time.

On the other hand, you have to be particularly clueless, especially in California, to claim ignorance on this.  I work in an industry that 10 years ago routinely accepted volunteer labor (illegally) and I was never lulled by the "everyone else is doing it in the industry" excuse.  I will say that it is irritating to try to run a business in compliance with the law and to find yourself undercut by folks who are avoiding the more expensive parts of the law.  Years ago there used to be a couple of non-profits who competed against me running campgrounds.  They were really for profit - they just paid their president a large salary rather than dividends - but used the non-profit status** as a dodge to try to accept volunteer labor.  Eventually, they were stopped by several courts from doing so.

Yes, I know this is kind of odd.  You might ask yourself, why are there so many people willing to take their volunteer position when you are offering paid jobs?  It turns out here are a lot of non-monetary benefits to this job such that people will do it for free.  In fact, that huge fountain of hypocrisy that is the Federal Government exempts itself from paying minimum wage and accepts volunteers to run its campgrounds where I must pay them.

 

** the non-profit status helped them in one other way.  We take over operation of recreation areas under concession contract from the government.  Many government employees hate this sort of outsourcing partnership, and really find it - for the lack of a better word - dirty to sully themselves interacting with a profit-making entity.  The non-profit status helped my competitors seem friendlier -- ie less capitalistic -- than I.  California recently passed a law allowing lower cost third party operation of certain parks functions but only if this was performed by a non-profit.   I had a US Forest Service District Ranger in Kentucky tell me once that he was offended that I made money on public lands, providing services in the National Forest.  I answered, "Oh, and you work for free?"  I said that I did not know how much he made but I guessed $80-100 thousand a year.  I said that would be over double what my company made in profit in the same forest operating and paying for hundreds of camp sites.  Why was I dirty for making money in the Forest but he thought he as "clean"?

Because Money Isn't Everything

One of the mistakes people make in economic analysis, IMO, is that they sometimes miss non-monetary benefits.  A great example is how labor law and the minimum wage is structured -- there are many benefits of a having job to a young, unskilled, unemployed person.  That job may teach valuable industry-related skills and will almost certainly help teach some basic life skills (like how to show up on time every day and how to work with others in an organization toward shared goals).  For my kids when they were 15 or 16, these non-monetary benefits dominated, and I would have been happy if they worked for free in exchange for such skills.  That used to be the whole point of unpaid internships, until the government started essentially banning them.  Unfortunately, the government considers only money in computing the minimum wage, and ignores all these non-monetary benefits.

Mark Perry had what I think is another good example a while back, quoting from the Priceonomics blog:

If you want to dine at State Bird Provisions, you’ll have to get in line. The small restaurant, winner of the James Beard Award for Best New Restaurant (2013) and a Michelin Star, only accepts a few reservations that are snapped up as soon as they are released — at midnight, sixty days in advance. So nearly every day, people line up on Fillmore Street in San Francisco an hour or more before State Bird’s 5:30pm opening time to score a table.

It may seem silly to line up for State Bird Provisions in a city full of renowned restaurants and good food. But as anyone who has eaten brunch in the city knows, San Franciscans view long restaurant lines as social proof more than as a deterrent. Besides, State Bird offers determined diners a relative bargain. While its offerings are not cheap — even without indulging on wine, bills can reach $50 per person — State Bird’s prices are more modest than almost any other local Michelin Star restaurant.

This makes State Bird something of an economic mystery.If economists owned popular restaurants like State Bird, they would take one look at the long lines and raise prices.After all, the overwhelming demand is pretty clear. Or at the very least, given how reservations disappear like Coachella tickets, they would start charging for them. In fact, since restaurants do not do this, a number of startups in San Francisco and New York City have started to sell reservations to users, often by reserving tables and scalping them.

In contrast to the executives who run large restaurant chains, the restaurateurs behind celebrated restaurants and local favorites are often chefs first rather than professional managers. This raises the question: Are restaurants like State Bird Provisions, which seems to resist simple economic analysis, the exception or the norm? And if they are the norm, is that because it is somehow self-defeating to raise prices even at booming restaurants? Or are chef proprietors a unique breed in the business world, immune to supply and demand and content to leave money on the table?

I believe that many of these high-end chefs are not driven entirely by money.  Their personal reward system also depends a lot on prestige and recognition.  Making a good profit in a restaurant gets you no recognition in the the circles where chef's crave it.  Name the three most profitable restaurants in town -- you have no idea, do you?  What get's these chef's recognition is being the hot place to dine that is so in demand it is impossible to get a table.  So one makes the restaurant a little too small and keeps the prices a little too low and one trades a bit of money for something that is more valuable:  prestige.

One can see this same effect among, say, US Senators.  In our current corporate, crony state, US Senators can expect a huge spike in income once they leave Congress, getting paid by some large corporation lobbying firm.  The economically rational decision, then, if one were only interested in money, would be to serve just one term, then leave and make some bank.   But you never see that.  Senators stay and stay, even when it is an enormous hassle to do so.  They are essentially collecting and spending millions every election to keep their income low.  Why?  One big reason is prestige.

Going back to the restaurant example, let's consider a famous chef who pretty clearly does care about money:  Wolfgang Puck.  I have never seen this written, but here is what I observe to be Puck's approach.  He creates a small restaurant and lavishes it with a lot of his personal attention.  These restaurants do not have much seating and become the hot places to dine, leading to long lines and difficult reservations.  The difficulty of getting a table generates an elite buzz around the restaurant.  After some time, Puck will buy a huge new location nearby with many times more seating.  He formula-izes his recipes so he no longer has to be involved, and then shifts the operation onto auto-pilot in the new large location.  Perhaps he even franchises it.  The new location cranks out a bunch of money, while he moves on to create a new elite concept.  He also leverages the original buzz in his personal brand, which is applied to all kinds of other items.  In a sense, he is banking prestige in the early venture and then monetizing it later.

Healthcare Deductibles Rising -- Why This is GOOD News

Things like Obamacare cannot be discussed, it seems, in anything but a political context.  So if you don't like Obamacare, everything that happens has to be bad. But I actually think this is good news, and goes against my fears in advance of Obamacare.  I had been worried that Obamacare would just increase the trends of more and more health care spending being by third-party payers.  And my guess is that this is happening, when you consider how many people have gone from paying cash to having a policy, either a regular policy or expanded Medicaid.

A report out today puts numbers behind what hit many workers when they signed up for health insurance during open enrollment last year: deductible shock.

Premiums for employer-paid insurance are up 3% this year, but deductibles are up nearly 50% since 2009, the report by the Kaiser Family Foundation shows.

The average deductible this year is $1,217, up from $826 five years ago, Nearly 20% of workers overall have to pay at least $2,000 before their insurance kicks in, while workers at firms with 199 or fewer employees are feeling the pain of out-of-pocket costs even more: A third of these employees at small companies pay at least $2,000 deductibles.

“Skin-in-the-game insurance” is becoming the norm,says Kaiser Family Foundation CEO Drew Altman, referring to the higher percentage of health care costs employees have to share.

Honestly, this is good news, sort of.  I don't like the coercion and lack of choice, but the main problem with health care is that the person receiving the benefits is not the person paying the bills, which means there is no incentive to shop or make care tradeoffs.  Higher deductibles mean more people are going to be actively shopping and caring what health services cost, and that is a good thing for prices and health care inflation.

Prices, Paul Krugman, and Consistency

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Airplane Seats and the Prisoner's Dilemma

I suppose I should weigh in on the great airplane seat lean back or not kerfuffle.  A number of tall people like Megan McArdle have argued for leaning seats back.  I am in the opposite camp, despite being 6-4 and even taller than Ms. McArdle.  And the reason is sort of ironic, given McArdle's old blog title and twitter handle:  the benefits for leaning a seat back are not symmetric.   When the person in front of me leans their seat back, two things happen:  1:  my knees get scrunched and 2.  I can't use my laptop any more because the screen will not raise (given the position of the table and angle of the seat).  Leaning my seat back does not fully relieve either of these.  In other words, I gain less knee room leaning back than I lose from the person in front of me leaning back.  It is a form of the prisoner's dilemma where looking at only my choices, I  am always better off leaning back.  But I am worse off if everyone leans back.  My gut feeling is that everyone must experience the same thing.  Which is why there has grown up an unspoken agreement among most frequent flyers not to lean seats back, just as the solution to the prisoner's dilemma is for the prisoners to collude and keep their mouths shut.  I greatly appreciate McArdle's work and she is one of my favorite writers, but on airplanes she is the prisoner that cheats.

PS-  Brian Lowder argues we should go back to dressing up when we travel.  Yeah, we used to put on coats and ties to fly when I was little.  Well, I'll go back to dressing up when airplane travel goes back to being romantic again.  But that ship, not to mix metaphors, has already sailed.  The odds are that in a given week, at 6 feet 4 tall, my four hours on an airplane are the least comfortable four hours I spend all week.  I am not going to make it worse by putting on a coat and tie.  I dress in the most comfortable clothes I can, which means baggy cargo shorts and a polo shirt.

 

Holy Cr*p!

via Mark Perry

click to enlarge

 

Four things I would do to help African Americans

  • Legalize drugs.  This would reduce the rents that attract the poor into dealing, would keep people out of jail, and reduce a lot of violent crime associated with narcotics traffic that kills investment and business creation in black neighborhoods.  No its not a good thing to have people addicted to strong narcotics but it is worse to be putting them in jail and having them shooting at each other.
  • Bring real accountability to police forces.  When I see stories of folks absurdly abused by police forces, I can almost always guess the race of the victim in advance
  • Eliminate the minimum wage   (compromise: eliminate the minimum wage before 25).  Originally passed for racist reasons, it still (if unintentionally) keeps young blacks from entering the work force.  Dropping out of high school does not hurt employment because kids learn job skills in high school (they don't); it hurts because finishing high school is a marker of responsibility and other desirable job traits.  Kids who drop out can overcome this, but only if they get a job where they can demonstrate these traits.  No one is going to take that chance at $10 or $15 an hour**
  • Voucherize education.  It's not the middle class that is primarily the victim of awful public schools, it is poor blacks.  Middle and upper class parents have the political pull to get accountability.   It is no coincidence the best public schools are generally in middle and upper class neighborhoods.  Programs such as the one in DC that used to allow urban poor to escape failing schools need to be promoted.

** This might not be enough.  One of the main reasons we do not hire inexperienced youth, regardless of wage rates, is that the legal system has put the entire liability for any boneheaded thing an employee does on the employer.  Even if the employee is wildly breaking clear rules and is terminated immediately for his or her actions, the employer can be liable.  The cost of a bad hire is skyrocketing (at the same time various groups are trying to reign in employers' ability to do due diligence on prospective employees).  I am not positive that in today's legal environment I would take free labor from an untried high school dropout, but I certainly am not going to do it at $10 an hour when there are thousands of experienced people who will work for that.  Some sort of legal safe harbor for the actions of untried workers might be necessary.

I am Pretty Sure Bastiat Figured This Out 150 Years Ago: Cash For Clunkers Even Worse Than First Thought

From the WSJ

In a National Bureau of Economic Research working paper this month, economists at Texas A&M return to Cash for Clunkers, the 2009 stimulus fillip that dispensed vouchers worth as much as $4,500 if people turned in their old cars for destruction and bought a new set of wheels. Mark Hoekstra, Steven Puller and Jeremy West report their "striking" finding that the $3 billion program's two-month run subtracted between $2.6 billion and $4 billion from the auto industry.

The irony is that the goals were to help Detroit through the recession by subsidizing sales and to please the green lobby by putting more fuel-efficient cars on the road. By pulling forward purchases that consumers would make later anyway, the Obama Administration also hoped to add to GDP. Christina Romer, then chair of the Council of Economic Advisers, called Cash for Clunkers "very nearly the best possible countercyclical fiscal policy in an economy suffering from temporarily low aggregate demand."

The A&M economists had the elegant idea of comparing the buying behavior of Texas drivers who owned cars that barely qualified for cash (those that got 18 miles per gallon of gas or less) and those that barely did not (19 mph). Using state DMV sales records, this counterfactual allowed them to isolate the effects of the Cash for Clunkers incentives and show what would have happened without the program.

The two groups were equally likely to purchase a new vehicle over the nine month period that started with Cash for Clunkers, so the subsidy did not create any extra auto business. But in order to meet the fuel efficiency mandate, consumers who got the subsidy were induced to purchase smaller vehicle models with less horsepower that cost on average $2,500 to $3,000 less than those bought by their ineligible peers. The clunkers bought more Corollas, and everybody else more Chevys.

Extrapolated nationally, auto revenues may have plunged by more than what the government spent. And any environmental benefits cannot be justified under the federal social cost of carbon estimate of $33 a ton. Prior research from 2009 and 2013 has shown that the program cost between $237 and $288 a carbon ton.

A Bad Sign for the Economy

I don't think readers will be surprised to learn that I don't have any particular moral problem with tax inversions, reverse acquisitions that allow companies to take advantage of lower foreign tax rates.  The US has perhaps the most costly and unwieldy tax code in the world, made worse by our unique insistence on double taxation of foreign earnings that prevents companies like Apple from repatriating billions of dollars.  My tax plan begins with the elimination of corporate income taxes altogether, not only as an efficiency and growth step but as a huge step in fighting cronyism.

So I certainly don't share all this creepy Leftist desire for loyalty oaths and such from corporations.  But I do have a concern about the economy.  Over the past couple of years, it appears that a lot of corporate borrowing has been to:

  1. Buy back their own stock
  2. Reduce their tax rate, in part through inversions (apparently over 2/3 of 2014 M&A volume is inversions)

When the two best investments a company can find are in its own stock and in reducing tax rates, then there appears to be a problem with the underlying universe of investment opportunities.

Actually, the best investment our company has found this year is in closing operations in California and escaping that regulatory and litigation mess.

 

Computer Modeling as "Evidence"

The BBC has decided not to every talk to climate skeptics again, in part based on the "evidence" of computer modelling

Climate change skeptics are being banned from BBC News, according to a new report, for fear of misinforming people and to create more of a "balance" when discussing man-made climate change.

The latest casualty is Nigel Lawson, former London chancellor and climate change skeptic, who has just recently been barred from appearing on BBC. Lord Lawson, who has written about climate change, said the corporation is silencing the debate on global warming since he discussed the topic on its Radio 4 Today program in February.

This skeptic accuses "Stalinist" BBC of succumbing to pressure from those with renewable energy interests, like the Green Party, in an editorial for the Daily Mail.

He appeared on February 13 debating with scientist Sir Brian Hoskins, chairman of the Grantham Institute for Climate Change at Imperial College, London, to discuss recent flooding that supposedly was linked to man-made climate change.

Despite the fact that the two intellectuals had a "thoroughly civilized discussion," BBC was "overwhelmed by a well-organized deluge of complaints" following the program. Naysayers harped on the fact that Lawson was not a scientist and said he had no business voicing his opinion on the subject.

...

Among the objections, including one from Green Party politician Chit Chong, were that Lawson's views were not supported by evidence from computer modeling.

I see this all the time.  A lot of things astound me in the climate debate, but perhaps the most astounding has been to be accused of being "anti-science" by people who have such a poor grasp of the scientific process.

Computer models and their output are not evidence of anything.  Computer models are extremely useful when we have hypotheses about complex, multi-variable systems.  It may not be immediately obvious how to test these hypotheses, so computer models can take these hypothesized formulas and generate predicted values of measurable variables that can then be used to compare to actual physical observations.

This is no different (except in speed and scale) from a person in the 18th century sitting down with Newton's gravitational equations and grinding out five years of predicted positions for Venus (in fact, the original meaning of the word "computer" was a human being who ground out numbers in just his way).  That person and his calculations are the exact equivalent of today's computer models.  We wouldn't say that those lists of predictions for Venus were "evidence" that Newton was correct.  We would use these predictions and compare them to actual measurements of Venus's position over the next five years.  If they matched, we would consider that match to be the real evidence that Newton may be correct.

So it is not the existence of the models or their output that are evidence that catastrophic man-made global warming theory is correct.  It would be evidence that the output of these predictive models actually match what plays out in reality.  Which is why skeptics think the fact that the divergence between climate model temperature forecasts and actual temperatures is important, but we will leave that topic for other days.

The other problem with models

The other problem with computer models, besides the fact that they are not and cannot constitute evidence in and of themselves, is that their results are often sensitive to small changes in tuning or setting of variables, and that these decisions about tuning are often totally opaque to outsiders.

I did computer modelling for years, though of markets and economics rather than climate.  But the techniques are substantially the same.  And the pitfalls.

Confession time.  In my very early days as a consultant, I did something I am not proud of.  I was responsible for a complex market model based on a lot of market research and customer service data.  Less than a day before the big presentation, and with all the charts and conclusions made, I found a mistake that skewed the results.  In later years I would have the moral courage and confidence to cry foul and halt the process, but at the time I ended up tweaking a few key variables to make the model continue to spit out results consistent with our conclusion.  It is embarrassing enough I have trouble writing this for public consumption 25 years later.

But it was so easy.  A few tweaks to assumptions and I could get the answer I wanted.  And no one would ever know.  Someone could stare at the model for an hour and not recognize the tuning.

Robert Caprara has similar thoughts in the WSJ (probably behind a paywall)  Hat tip to a reader

The computer model was huge—it analyzed every river, sewer treatment plant and drinking-water intake (the places in rivers where municipalities draw their water) in the country. I'll spare you the details, but the model showed huge gains from the program as water quality improved dramatically. By the late 1980s, however, any gains from upgrading sewer treatments would be offset by the additional pollution load coming from people who moved from on-site septic tanks to public sewers, which dump the waste into rivers. Basically the model said we had hit the point of diminishing returns.

When I presented the results to the EPA official in charge, he said that I should go back and "sharpen my pencil." I did. I reviewed assumptions, tweaked coefficients and recalibrated data. But when I reran everything the numbers didn't change much. At our next meeting he told me to run the numbers again.

After three iterations I finally blurted out, "What number are you looking for?" He didn't miss a beat: He told me that he needed to show $2 billion of benefits to get the program renewed. I finally turned enough knobs to get the answer he wanted, and everyone was happy...

I realized that my work for the EPA wasn't that of a scientist, at least in the popular imagination of what a scientist does. It was more like that of a lawyer. My job, as a modeler, was to build the best case for my client's position. The opposition will build its best case for the counter argument and ultimately the truth should prevail.

If opponents don't like what I did with the coefficients, then they should challenge them. And during my decade as an environmental consultant, I was often hired to do just that to someone else's model. But there is no denying that anyone who makes a living building computer models likely does so for the cause of advocacy, not the search for truth.

Our Maturing Economy -- The Value of Labor vs. Other Resources

I was reading Stephen Ambose's Band of Brothers the other day, and there was a story in there that really struck me.  One of the paratroopers was hauling his reserve parachute, something usually ditched right at landing, all over Europe with him.  When asked why,  he said he was getting married and he wanted the silk (what parachutes were made of at the time) for his wife's wedding dress.

For some reason this struck me as odd and economically irrational.  It took me a while to figure it out.  I was applying my intuition to the situation based on modern price levels, where the value of the silk would be just a minor part of a wedding dress -- the larger part of the value is in the design and cutting and sewing, ie the labor.  We live in a time where skilled labor is far more dear than basic materials, which are relatively cheap.  The hard part of making a wedding dress would not be getting the silk, but finding someone skilled enough to manufacture the dress.

This soldier grew up in the 1930's, where exactly the opposite conditions obtained.  Skilled labor was cheap.  In fact, unlike today, most every household likely had someone who could sew a dress in their spare time, labor that might well be donated for free to the wedding dress cause.  It was raw materials that were expensive, particularly those like silk that had to be imported at great expense from afar.

Why We Are Seeing Long Waits And Shortages of Doctors and Basic Medicines in Health Care

This is a re-post of an article I wrote in 2012.  I am re-posting it to demonstrate that recent stories about doctor shortages and wait times are absolutely inevitable results of government interventions in the health care economy.

My son is in Freshman econ 101, and so I have been posting him some supply and demand curve examples.  Here is one for health care.  The question at hand:  Does government regulation including Obamacare increase access to health care?  Certainly it increases access to health care insurance, but does it increase access to actual doctors?   We will look at three major interventions.

The first and oldest is the imposition of strong, time-consuming, and costly professional licensing requirements for doctors.  At this point we are not arguing whether this is a good or bad thing, just portraying its inevitable effects on the supply and demand for doctors.

I don't think this requires much discussion. For any given price for doctor services, the quantity of doctor hours available is certainly going to increase as the barriers to entry to the profession are raised.

The second intervention is actually a set of interventions, the range of interventions that have encouraged single-payer low-deductible health insurance and have provided subsidies for this insurance.  These interventions include historic tax preferences for employer-paid employee health insurance, Medicare, Medicaid, the subsidies in Obamacare as well as the rules in Obamacare that discourage high-deductible policies and require that everyone buy insurance rather than pay as they go.  The result is a shift in the demand curve to the right, along with a shift to a more vertical demand curve (meaning people are more price-insensitive, since a third-party is paying).

The result is a substantial rise in prices, as we have seen over the last 30 years as health care prices have risen far faster than inflation

As the government pays more and more of the health care bills, this price rise leads to unsustainably high spending levels, so the government institutes price controls.  Medicare has price controls (the famous "doc fix" is related to these) and Obamacare promises many more.  This leads to huge doctor shortages, queues, waiting lists, etc.  Exactly what we see in other state-run health care systems.  The graph below posits a price cap that forces prices back to the free market rate.

So, is this better access to health care?

I know that Obamacare proponents claim that top-down government operation is going to reap all kinds of savings, thus shifting the supply curve to the right.  Since this has pretty much never happened in the whole history of government operations, I discount the claim.  When pressed for specifics, the ideas typically boil down to price or demand controls.  Price controls we discussed.  Demand controls are of the sort like "you can't get a transplant if you are over 70" or "we won't approve cancer treatments that only promise a year more life."

Most of these do not affect the chart above, since it is for doctor services and most of these cost control ideas are usually doctor intensive - more doctor time to have fewer tests, operations, drugs.  But even if we expanded the viewpoint to be for all health care, it is yet to be demonstrated that the American public will even accept these restrictions.  The very first one out of the box, a proposal to have fewer mamographies for women under a certain age, was abandoned in a firestorm of opposition from women's groups.  In all likelihood, there will be some mish-mash of demand restrictions, determined less by science and by who (users and providers) have the best lobbying organizations.

My longer series of three Forbes articles on this and other economic issues with Obamacare begin here:  Part 1 InformationPart 2 IncentivesPart 3 Rent-Seeking

Update:  Pondering on this, it may be that professional licensing also makes the supply curve steeper.  It depends on how doctors think about sunk cost.

 

Root Cause

Arnold Kling argues that the root cause of mortgage and student debt problems is not the structure of mortgage and student debt contracts

What these forms of bad debt have in common, in my view, is that they reflect clumsy social engineering. Public policy was based on the idea that getting as many people into home “ownership” with as little money down as possible was a great idea. It was based on the idea of getting as many people into college with student loans as possible.

The problem, therefore, is not that debt contracts are too rigid. The problem is that the social engineers are trying to make too many people into home “owners” and to send too many people to college. Home ownership is meaningful only when people put equity into the homes that they purchase. College is meaningful only if students graduate and do so having learned something (or a least enjoyed the party, but not with taxpayers footing the bill).

The Effect of the Black Death on Labor and Grain Prices

Long time readers will know that if I were asked to relive my life doing something entirely different, I would like to try studying economic history.  Today, in a bit of a coincidence, my son called me with a question about the effect of the Black Death in Europe on labor and grain prices ... just days after I had been learning about the exact same part of history in Professor Daileader's awesome Teaching Company course on the Middle Ages (actually he has three courses - early, high, late - which are all excellent).

From the beginning of the 14th century, Europe suffered a series of demographic disasters.  Climate change in the form of the end of the Medieval warm period led to failed crops and several years of famine early in the century.  Then, later in the century, the Black Death came... over and over, perhaps made worse by the fact that Europeans were weakened already from famine.  As a result, the population of Europe dropped by something like half.

It is not entirely obvious to me what such a demographic disaster would do to prices.  Panic and uncertainty usually drive them up in the near term, but what about after that?  Both the supply and demand curves for most everything will be dropping in tandem.  So what happens to prices?

In the case of the 14th century, we know the answer:  the price of labor rose dramatically, while the price of grain dropped.  The combination tended to bankrupt the landholding aristocracy, who went so far as to try to reimpose serfdom to get their finances back in balance (some things never change).  The nobility pretty much failed at this in the West (England, France) and were met with a series of peasant revolts.  They generally succeeded in the East (Germany, Poland, Russia) which is why a quasi-feudal agricultural system persisted so long in those countries.

But why?  Why did grain price go down rather than up?  Why did labor go in the opposite direction?  I could look it up, but that is no fun.

A first answer, which does not satisfy

People who think of all of the middle ages as "the dark ages" miss the boom that occurred between 1000-1300.  Population increased, and technology advanced (just because this technology seems pedestrian to us, like the plow harness for horses or the stirrup, does not make it any less so).  It was the only time between about 300 and 1500 when the population was growing (a fact we climate skeptics will note coincided with the Medieval warm period).

But even without the setbacks of the 1300's, historians probably would argue that Europe was headed for a Malthusian collapse no matter what in the 14th century.   An enormous amount of forest had been cleared and new farmland created, such that by 1300 some pretty marginal land was being farmed just so Europe could barely keep up with demand.  At the margin, really low productivity land was being farmed.

So if there is a sudden 50% population cut, then that means that all that marginal farm land will be abandoned first.  While the number of farmers would be cut in half, production would be reduced by less than half because presumably the least productive farms would be abandoned first.  With demand cut by half and production cut by less than half, prices would fall for grain.

But this doesn't work for labor.  The same argument should apply.  To get everyone fed, we would actually need less than half the prior labor force because they would concentrate on the best land.  Labor prices should fall in this model as well, but in fact they went up.  A lot.  In fact, they went up not by a few percent but by multiples, enough to cause enormous social problems across Europe.

A second answer, that makes more sense

After thinking about this for a while, I came to realize that I had the wrong model for the economy in my head.  I was thinking about our modern economy.   If suddenly, say, online retailing reduces demand for physical stores dramatically, people close stores and redeploy capital and labor and assets to other investments in other industries.  That is how I was thinking about the Middle Ages.

But it may be more correct to see the Middle Ages as a one product economy.  There was agriculture, period.  Everything else was a rounding error.

So now let's think about the "farmers" in the Middle Ages.  They are primarily all the 1%, the titled nobility, who either farm big estates with peasant labor or lease large parts of their estates to peasants for farming.

OK, half the population is suddenly gone.  The Noble's family has lots of death but someone is still around to inherit.  They have a big estate where growing grain supports their lifestyle as well as any military obligations they may have to their lord (though this style of fighting with knights on horseback supported by grants of land is having its last hurrah in the 100 years war).

Then grain prices collapse.  That is a clear pricing signal.  In the modern economy, that would tell us to get out and find a new place for our capital.  So, as Lord Coyote of the Castle Aaaaargh, I am going to do what, exactly?  How can I redeploy my capital, when it is essentially illiquid?  I can't sell the family land.  And if I did, land prices, along with grain prices and the demographic collapse, are falling through the floor.  And even if I could sell for cash, what would I do for a living?  What would I reinvest the money in?  Running an estate is all I know.  It's all anyone knows.  I have to support myself and my 3 mistresses and my squires and my string of warhorses.

All I can do is try to farm the land I have always farmed.  And everyone else does the same.  The result is far more grain than anyone needs with the reduced population, so prices fall.   But I still need the same number of people to grow the food, irregardless of the price it fetches, but there are now half as many workers available so the price of labor goes through the roof.  When grain demand collapsed, there was no way to clear the excess capacity.  It turns out everyone had a nearly vertical supply curve, because irregardless of price, they had nothing else they could do with their time and money.  You can see now why they tried to solve their problem by reimposing serfdom (combined with price controls, a bad idea for Diocletian and for Nixon and everyone in between).

Of course, nothing is stuck forever.   One way capacity cleared was through the growth of the bureaucratic state over the next 2 centuries.  Nobles eventually had to find some new way to support themselves, and did so by taking jobs in growing state bureaucracies.  They became salaried ministers rather than feudal knights supported by agriculture.  At the same time, rising wealth among the 99% non-nobility allowed kings to support themselves through taxes rather than the granting of fiefs, which in turn paid for the nobility to take jobs in the bureaucracy and paid for peasant armies with guns and bows that replaced the lords fighting on horseback.  So in the long term, the price signal was inordinately powerful -- so powerful it helped reshape much of European government and society.

By the way, if you are reading this expecting some point about modern politics, sorry.  Just something I was thinking about and it helped to write it down.  Comments are appreciated.  I still have not cribbed the answer from the history texts yet.

A Slightly Different Take on High Frequency Trading (HFT)

My guess is that HFT will soon become one of those bogeyman words that people automatically associate with "bad stuff" without ever actually understanding what it means.  But it is worth understanding the underlying problem, and that problem is not high speed or frequency per se.

As I understand it, when an order to buy, say, 10,000 shares of Exxon gets placed, the purchase will get pieced together by searching across multiple servers where offers are listed and putting together the 10,000 shares in bits and pieces from these various servers.  What HFT's are doing (and I am sure this is grossly oversimplified) is that once it sees this order pinging  a server, it runs ahead at high speed to other servers and buys up blocks of Exxon at price A and then offers it up to the pokey buying search when it finally arrives at those servers at A+a bit more.  That "a bit more" may be less than a penny, but the pennies add up and if done right, there is almost no trading risk.

This is bad, though generally not for us small investors but for our mutual fund companies.  For my little trade of 100 shares that might be cleared on the first server, HFT's have no opportunity to play.  Moreover, I may not even notice a penny or two difference in the price I get.  This is a much bigger deal for mutual fund companies and large investors clearing larger trades, where a few pennies can add up to a lot of money.

An exchange always has to be really careful to maintain its image of fairness, and systematically allowing such behavior, called front-running, is not good for the health of the market.   Which is why you are hearing a lot about this.

Here is what you are not hearing, and I will admit that it is all a hypothesis of mine.  But it may well be possible that HFT's actually reduce the total cost of front-running to investors.  It may be that HFT's real crime is that what they are doing is more transparent and visible than what market makers were doing in the past -- ie they are not increasing the volume of front-running, they are just making it more obvious.   I would not be at all surprised if such front-running always existed in market-making (certainly Goldman Sachs has been accused of it) and that HFT's are actually the Wal-Mart or Amazon of front-running -- not doing anything new but doing it cheaper on tighter margins.   Kind of ironically, I suppose this is what efficient markets theory would predict for the market in front-running.

If this is the case, while we would rather see front-running eliminated entirely, HFT's may actually be reducing the cost of front-running and making things more rather than less efficient.

Ideological Turing Tests, Climate, and Minimum Wage

Yesterday I was interviewed for a student radio show, I believe from the USC Annenberg school.  I have no quarrel with the staff I worked with, they were all friendly and intelligent.

What depressed me though, as I went through my usual bullet points describing the "lukewarmer" position that is increasingly common among skeptics, was that most of what I said seemed to be new to the interviewer.   It was amazing to see that someone presumably well-exposed to the climate debate would actually not have any real idea what one of the two positions really entailed (see here and here for what I outlined).  This gets me back to the notion I wrote about a while ago about people relying on their allies to tell them everything they need to know about their opponent's position, without ever actually listening to the opponents.

This topic comes up in the blogosphere from time to time, often framed as being able to pass an ideological Touring test.  Can, say, a Republican write a defense of the minimum wage that a reader of the Daily Kos would accept, or will it just come out sounding like a straw man?  I feel like I could do it pretty well, despite being a libertarian opposed to the minimum wage.  For example:

There is a substantial power imbalance between minimum wage workers and employers, such that employers are able to pay such workers far less than their labor is worth, and far less than they would be willing to pay if they had to.  The minimum wage corrects this power imbalance and prevents employers from unfairly exploiting this power imbalance.  It forces employers to pay employees something closer to a living wage, though at $7.25 an hour the minimum wage is still too low to be humane and needs to be raised.  When companies pay below a living wage, they not only exploit workers but taxpayers as well, since they are accepting a form of corporate welfare when taxpayers (through food stamps and Medicare and the like) help sustain their underpaid workers.

Opponents of the minimum wage will sometimes argue that higher minimum wages reduce employment.  However, since in most cases employers of low-skilled workers are paying workers less than they are willing and able to pay, raising the minimum wage has little effect on employment.  Studies of the fast food industry by Card and Walker demonstrated that raising the minimum wage had little effect on employment levels.  And any loss of employment from higher minimum wages would be more than offset by the Keynesian stimulative effect to the economy as a whole of increasing wages among lower income workers, who tend to consume nearly 100% of incremental income.

Despite the fact that I disagree with this position, I feel I understand it pretty well -- far better, I would say, than most global warming alarmists or even media members bother to try to understand the skeptic position.  (I must say that looking back over my argument, it strikes me as more cogent and persuasive than most of the stuff on Daily Kos, so to pass a true Turing test I might have to make it a bit more incoherent).

Back in my consulting days at McKinsey & Company, we had this tradition (in hindsight I would call it almost an affectation) of giving interviewees business cases** to discuss and solve in our job interviews.  If I were running a news outlet, I would require interviewees to take an ideological Touring test - take an issue and give me the argument for each side in the way that each side would present it.

This, by the way, is probably why Paul Krugman is my least favorite person in journalism.  He knows very well that his opponents have a fairly thoughtful and (to them) well intention-ed argument but pretends to his readers that no such position exists.  Which is ironic because in some sense Krugman started the dialog on ideological Turing tests, arguing that liberals can do it easily for conservative positions but conservatives fail at it for liberal positions.

 

** Want an example?  Many of these cases were just strategic choices in some of our consulting work.  But some were more generic, meant to test how one might break down and attack a problem.  One I used from time to time was, "what is the size of the window glass market in Mexico?"  Most applicants were ready for this kind of BS, but I do treasure the look on a few faces of students who had not been warned about such questions.  The point of course was to think it through out loud, ie "well there are different sectors, like buildings and autos.  Each would have both a new and replacement market. Within buildings there is residential and commercial.  Taking one of these, the new residential market would be driven by new home construction times some factor representing windows per house.  One might need to understand if Mexican houses used pre-manufactured windows or constructed them from components on the building site."  etc. etc.

A Question I Have Been Asking For Years -- Effect of Passthrough Entities on Income Equality Numbers

Greg Mankiw wonders how much the growth of pass-through corporations like sub-chapter S corps are skewing income trends, particularly for the highest earners.   With a C-corp, an owner only recognizes corporate income when it is passed through as dividends or when they sell the company.  With an S-Corp or LLC, there are no corporate taxes and corporate income is declared in that year, in full, on one's individual 1040.  I asked about this as far back as 2006 and 2007.

cbo pass through entities