Definition of the Day

I hear a lot about "rent-seeking" and have been looking for a very straightforward definition. This is one from Maxine Udall:

The excess of profits over what they would be in a competitive market is called economic rents.

Actually, search engines are like bananas

And Google is like either the the Gros Michel or the Cavendish, but that's a picky complaint (I used to teach SAT prep classes) and it's the only problem I have with Felix Salmon's sharply-written and insightful discussion of the dangers of monoculture:

How Google is like bananas

Definitely worth a look.

Incentives, the TSA, and a question for Tyler Cowen

Tyler Cowen has a post up looking at a Washington Post article on airports considering private options to the TSA. The underlying assumption here is that competition will improve service and satisfaction but neither Cowen nor the Post writer address the big question:

Why should market forces act differently on security than they did on the rest of the industry?

From the moment you miss the shuttle to the long wait for your bags to come down the conveyor belt, air travel may provide the worst customer experience of any major industry. It's true that introducing market-based incentives a few years helped give us cheap flights (though I don't know enough about the underlying economics to say whether they actually bent the curve), but it did nothing to improve a system that was inconvenient, poorly designed and indifferent to the needs (not to mention feelings) of passengers -- pretty much the same problems that market forces are supposed fix in airline security.

In most industries, competition forces players to maintain reasonable customer service and to come up with customer-facing innovations, but only because almost all of the customers can easily choose between different products offered by different sellers. Cars are a good example.

Three years ago, I bought my first new car, a Nissan Altima hybrid. It had been about a decade since I had bought a car and I was amazed by the innovations that were available in mid-priced autos. Some of the innovations were impressive from a technological standpoint like regenerative braking and continuously variable transmission (the first automatic transmission I actually enjoyed driving), others were just well designed like dual climate controls and cleverly arranged storage compartments, but all were indicative of tremendous effort and ingenuity focused on providing me with a car I would like to own.

Nissan invested all of this into my car because they knew that Toyota and Ford and Volkswagen and a number of other companies also made cars I would like to own, just as the dealers I bought the car from knew that other dealers also carried the make and model I wanted.

Market forces don't address every potential automotive concern. There are externalities and asymmetries of information to be taken into consideration but putting those aside, competition has done a great job. The auto industry has produced a stream of innovative, appealing products because the makers and the dealers both know that I have plenty of choices.

But what would happen if customers were frequently forced to buy one particular make and model and having a choice in dealers might mean going a hundred miles out of your way? Then the automotive industry would probably look a lot like the air travel industry.

There are major constraints on where you can build an airport. Even if you put aside safety and environmental concerns, there are limits to how many airports an area can support. At the risk of stating the obvious, every flight is associated with two of these airports and your flying options are based on the worse of the two. For example, I'm based in L.A. My co-blogger, Joseph, teaches in a college town in the Southeast. I have an unusually large selection of airports, including LAX which, as far as I know, is serviced by all the major carriers, but if I want to do a face to face collaboration with Joseph I have to fly Delta because that's the only major airline that services his airport.

For the majority of itineraries, passengers have little choice as to airports and often as to airlines (market forces exert enough pressure on airlines to give a reputation for good customer service some value -- look at Southwest -- but not enough to make it standard -- look at almost everybody else). This lack of choice greatly limits the pressure market forces can exert on airport-based services. How many people would drive an extra hour or two (we're talking about a round trip) to save a few minutes in the security line and to have access to a better food court?

If anything, competition will do less to improve customer satisfaction with security than it will with the rest of the services airports provide. Whether done by the TSA or private firms, the basic procedures remain the same and it's the procedures that have people upset.

Of course you might get people driving out of their way to avoid things like full body scans, but that's an entirely different discussion.

Maybe they're sneaking across the border to have their car accidents

Over at The Incidental Economist (with a h/t to Prof. DeLong), Aaron Carroll looked into a familiar health care meme:

Based on the comments I’ve seen over the last week, many of you are still going with that well used meme in the health care debate that people in other countries – frustrated by wait times and rationing – come to the United States for care. These are almost always anecdotal stories and you should know by now how much stock I put in anecdotes.

As always, when we can we should turn to evidence and research, and on this topic it does exist. The most comprehensive work I’ve seen on this topic was published in a manuscript in the peer-reviewed journal Health Affairs. That study looked at how Canadians cross the border for care. Most anecdotes involve Canadians, since it’s easy for those on the border to come here. And, the authors used a number of different methods to try and answer the question*:

1) First, they surveyed United States border facilities in Michigan, New York, and Washington. It makes sense that Canadians crossing the border for care would favor sites close by, right? It turns out that about 80% of such facilities saw fewer than one Canadian per month. About 40% saw none in the prior year. And when looking at the reasons for visits, more than 80% were emergencies or urgent visits (ie tourists who had to go to the ER). Only about 19% of those already few visits were for elective purposes.

2) Next, they surveyed “America’s Best Hospitals”, because if Canadians were going to travel for care, they would be more likely to go to the most well-known and highest quality facilities, right? Only one of the surveyed hospitals saw more than 60 Canadians in one year. And, again, that included both emergencies and elective care.

3) Finally, they examined data from the 18,000 Canadians who participated in the National Population Health Survey. In the previous year, only 90 of those 18,000 Canadians had received care in the United States; only 20 of them had done so electively.

Education thought for the New Year

Here is a point from Matt Yglesias:

I think the evidence suggests that one of the most important skills people learn (or don’t) in school is self-discipline rather than specific knowledge. I don’t think learning the chronology of ancient near eastern empires (Sumeria then Assyria then Babylonia then Persia then Greece then Rome) in elementary school has ever been useful to me, or even that the chronology I learned is especially accurate, but a lot of life involves semi-arbitrary tasks and it’s worth one’s while to get used to performing them.

Going down this path would suggest that a lot of curriculum might be made optional and teachers might be able to focus on what they love (and are best at inspiring the students they teach). This could be another reason why approaches like the "Freedom Writers" could still have decent results despite completely ignoring the normal educational programme.

Unemployment

A new post by Mark Thoma fits in, I think, with recent thoughts about minimum wage. It is true that, as the time of unemployment increases, some workers will find jobs that are vastly inferior (but way better than nothing). This suggests that the unemployment rate will become a less and less reliable marker of the strength of the economy.

Now, it might be true that some of this could be an unrealistic expectation of compensation on the part of workers who had unusually good jobs during the past expansion. But I note that the financial industry (apparently where the recession began) is not necessarily hurting:

"Wall Street earned $21.4 billion during the first three quarters of 2010," Comptroller Tom DiNapoli said.

"While much less than last year's record of $61.4 billion, which was fueled by federal assistance, the securities industry is on track in 2010 for the second-highest level of profitability on record," he said.

So I think we should be sceptics about narratives that include the need for "shared sacrifice" from all segments of society. I do note that the idea that last year's record profits where fuelled by government assistance ironic given the concerns over matters like pay forK-12 teachers. I don't have a good road map forward except to note that simple solutions and metrics seem unlikely to be helpful under these conditions.

Old School versus New School RPGs

A very perceptive quote on the difference:

Old School is about saying smart things, New School is about rolling hot dice. They cannot get any more different than that. In Old School you succeed or fail based on your ability to make clever inferences about the game world and/or say things which count as clever within the context of that world. But it's basically a test of the cleverness of the player. New School, on the other hand, is a test to see whether you can roll high. If you roll high, you win. Those are very different games.

Minimum Wage Thoughts

An interesting point from Worthwhile Canadian Initiative:

That's not to suggest that the minimum wage is necessarily bad for the low-skilled. I suspect most low-skilled workers would rather live in a world with a $10.25/hr minimum wage where it's harder to find worker than a $6.85/hr one where it is easier. But given the possible alternatives (technology, outsource, do without) a higher minimum wage does reduce low-skill employment.

I think that this is a very perceptive point. I have often heard that the minimum wage hurts the working poor because it removes their ability to lower their wage rate to get jobs (by biding under the cost of current employees). But it is an open question whether the cost in employment rates is an aggregate harm to low skilled workers. It might very well be the case that the loss in jobs is more than offset by the higher wages; especially given the low bargaining power of those with few job skills.

I think it is worth reflecting on whether the net impact of minimum wage laws might be positive despite the decrease in net employment among these workers.

Settling in

So how long does it take to settle into a new location? I have often figured that it would take about two years to really fit into a new job or a new place. It's funny, I have lived in eight different cities as an adult and i must admit that I have had a very different experience depending on the city. But I wonder how much fitting in can be a self-fulfilling prophecy? If you think it is going badly then do you change how you act to make it harder for things to work out?

Just some thoughts on the cusp of the new year . . .

Warzones and medical research

There was a fascinating story on today's All Things Considered about the ways that our experiences with the Afghanistan and Iraq wars have added to our understanding of emergency medicine:

The medevac choppers land and then taxi over to the gate just outside the emergency room, where gurneys are waiting. Nightfall has brought a bone-chilling wind, and a gang of nurses and orderlies rushes four patients into the warmth of the ER.

It's more than warm inside. In fact it's 100 degrees. It's the first clue that this hospital — the Joint Theater Hospital at Afghanistan's Bagram Air Field — is a little different. Through years of war, combat surgeons have learned that hypothermia is a big risk in patients with significant blood loss. Nine years of conflict in Iraq and Afghanistan have brought some grim benefits: a new wealth of knowledge about treating war wounds.

"At the beginning of this conflict, we were taking the best trauma medicine from the civilian sector, and we brought it to Iraq and Afghanistan," says U.S. Air Force Col. Chris Benjamin, the hospital commander. He says now his doctors tell him it's the other way around.

This got me thinking about another story I heard on the same public radio station last night, the subject of my previous post. In it Steve Levitt said:

One of the easiest ways to differentiate an economist from almost anyone else in society is to test them with repugnant ideas. Because economists, either by birth or by training, have their mind open, or skewed in just such a way that instead of thinking about whether something is right or wrong, they think about it in terms of whether it's efficient, whether it makes sense.

In health and medicine, researchers (some of whom are, admittedly, economists) don't seem to have any trouble getting past the repugnance of ideas like using controversial wars as data gathering opportunities. It's true that these researchers pass up some data that is considered ethically tainted but this has nothing to do with the mentality of the researchers and everything to do with a set of ethical rules that many researchers consider to be overly restrictive and due for an overhaul.

Given these and other counterexamples, Dr. Levitt's quote may, more than anything else, tell us something about the way many economists see themselves.

Freakonomics: disagreeing about why we disagree

On today's Marketplace, Steve Levitt explains why he thinks many people see the world differently than he does:

One of the easiest ways to differentiate an economist from almost anyone else in society is to test them with repugnant ideas. Because economists, either by birth or by training, have their mind open, or skewed in just such a way that instead of thinking about whether something is right or wrong, they think about it in terms of whether it's efficient, whether it makes sense. And many of the things that are most repugnant are the things which are indeed quite efficient, but for other reasons -- subtle reasons, sometimes, reasons that are hard for people to understand -- are completely and utterly unacceptable.

There are few thoughts more comforting than the idea that the people who disagree with you are overly emotional and are not thinking things through. We've all told ourselves something along these lines from time to time.

But can economists really make special claim to "whether [ideas] makes sense"? Particularly a Chicago School economist who has shown a strong inclination toward the kind of idealized models that have great aesthetic appeal but mixed track records? (This is the same intellectual movement that gave us rational addiction.)

When I disagree with Dr. Levitt, it's for one of the following reasons:

I question his analyses;

I question his assumptions;

I question the validity of his models.

Steve Levitt is a smart guy who has interesting ideas, but a number of intelligent, clear-headed individuals often disagree with him. Some of them are even economists.

Not a big deal but...

I generally set up tables so that time goes forward from left to right. Does this bother anyone else?



From CNN via Yglesias via DeLong.

"When $250,000 Equals $315,000"

Good post by David Leonhardt which I've been meaning to link to since it came out (the thing I'll miss most about the holidays is the excuse for procrastination):

There are two aspects of the high-end cuts that often get lost in the public discussion. The first is households with more than $250,000 a year in adjusted gross income would still get a tax cut — on their first $250,000 of such income. On average, this tax cut would equal about $6,500 a year, regardless of whether a household had $250,000 in adjusted gross income or $1 million (or much more) in adjusted gross income. If all the Bush tax cuts are extended, by contrast, households making at least $1 million a year would receive an average annual tax cut of $104,000.

The second issue is that earning $250,000 in adjustable gross income is different from earning $250,000 in total income. High-income households tend to take a significant number of deductions. At our request, Roberton Williams at the Tax Policy Center analyzed the total income of households with $240,000 to $260,000 a year in adjusted gross income. On average, they made $315,000 in adjusted gross income, including $32,000 in capital gains and dividends.

So when you hear talk about taxes on people makes at least $250,000 a year, it really tends to means taxes on income above $315,000 a year.

We have seen numerous pieces telling us how difficult it is to make ends meet on a quarter mil (see Brad DeLong for the latest amusing example). Perhaps when you get closer to a third of a million, life is a bit easier.

"Fixing the economy the scientific way"

Recommended with reservations, this op-ed from the LA Times is worth a read.

Articles that talk about the huge economic pay-offs of scientific research often make me nervous, not because I disagree with the fundamental thesis but because I'm afraid we might make the war-on-cancer mistake, promising an overly specific result in an unrealistic time frame. I also worry about encouraging commentators who argue that we shouldn't bother taking even small steps to address looming problems because some new technology invariably pop up and solve everything.

Take this passage:

Health economists and demographers, surveying the steady aging of the U.S. population, are predicting a dramatic rise in the cost of dealing with neurodegenerative diseases such as Alzheimer's, which already accounts for $172 billion in total spending annually. That number is projected to climb to more than $1 trillion by 2050 as legions of baby boomers reach the age of onset and the population generally ages. Meanwhile, our annual federal Medicare expenditure on Alzheimer's is projected to increase from $88 billion today to $627 billion, far exceeding the current total Medicare budget (about $468 billion this year).

There's just one hope here: scientific advances that will slow the progression of Alzheimer's disease and ultimately uncover a cure. But, ironically, the prospects for scientists who seek federal dollars to study the disease are among the worst in the entire government science infrastructure. The National Institute on Aging, which supports most of this work, is now turning down more than 90% of scientifically meritorious research grant proposals due to an inability to finance them.

Is Alzheimer's research a good use of our money? Almost certainly, but that doesn't mean that these advances will come through or that, if they do, they will arrive in the time to help with the budget problems associated with baby boomers.

Of course, the expected value of this kind of research is very good, particularly when you add in the possibility of an advance in a field that has nothing to do with Alzheimer's. Remember that one of the most profitable drugs in recent memory (Viagra) was originally developed to treat hypertension rather than erectile dysfunction.

Complex Constructs

Andrew Gelman has a very interesting discussion about whether happiness is a U-shaped curve in relation to age. What I found most interesting is how people focused on the "interesting conclusion" (the U-shape) even when there was a broad selection of curves to consider:

At the very least, the pattern does not seem to be as clear as implied from some media reports. (Even a glance at the paper by Stone, Schwartz, Broderick, and Deaton, which is the source of the top graph above, reveals a bunch of graphs, only some of which are U-shaped.)

But what I found the most interesting is that the sub-graphs are on different elements of "well being" (stress, worry,enjoyment happiness, sadness, anger). I wonder if the higher well being among older adults is, in some sense, very different than that of younger adults. Less stress and worry may contribute to increased (overall well being) but it might be a very different positive state than one created by the limitless potential of youth.

So I suppose I wonder if representing a complex vector (as well being has many factors that contribute to it) as a scalar (singl question) might not be eliminating the most useful sources of variability? Even if this approach is the standard in the field, it does not mean that we can't benefit from seeking a more complicated understanding of the phenomenon. I think that Andrew Gelman is on the right track in trying to really understand this complicated (and interesting) relation.