Economics puzzle

Some choice quotes from a report tweeted by Felix Salmon:

We researched the 100 U.S. corporations that shelled out the most last year in CEO compensation. At 25 of these corporate giants, we found, the bill for chief executive compensation actually ran higher than the company's entire federal corporate income tax bill.

Accounting games like "transfer pricing" have sent the corporate share of federal revenues plummeting. In 1945, U.S. corporate income taxes added up to 35 percent of all federal government revenue. This year, corporate income taxes will make up just 9 percent of federal receipts. In 1952, the year Republican President Dwight Eisenhower was elected, the effective income tax rate for corporations was 52.8 percent. Last year it was just 10.5 percent.

Among the nation's top firms, the S&P 500, CEO pay last year averaged $10,762,304, up 27.8 percent over 2009. Average worker pay in 2010? That finished up at $33,121, up just 3.3 percent over the year before.

The last is especially puzzling. When salaries rise faster for a specific category of jobs, it tends to signal that the market is finding a shortage of qualified people. It's also the golden time of opportunity for outsiders to break into the market and drop wages.

Or, option B, it is a feature of rent seeking due to a protected market. Which one strikes out humble reader as more likely?

A different point of view on Michael Lewis

See here.

My favorite part:

Yet, Germany is a prosperous and pleasant nation to live in; one of the best in the world. Germany manages to have lower unemployment than the US, despite all their unions and socialistic regulations for hiring and firing: laws which Harvard economist ding a lings will insist would be the ruination of the American economy. How did the Germans manage this?

The stuff on Iceland is first rate as well. Definitely worth the read.

More Freakonomics causality

I tuned in to APM's Marketplace recently and heard the following from Stephen Dubner:

Since the introduction of the ultrasound in Asia, in the early 1980s, it's often been used to determine the gender of a fetus -- and, if it's female -- have an abortion. In a part of the world with big populations, these sex selection abortions have had a big, unintended consequence.

Hvistendahl: I mean there are over 160 million females missing from the population in Asia, and to put that in perspective, it's more than the entire female population of the United States.

So, what happens in a world with too many men? For starters, there's more sex-trafficking, more AIDS, and a higher crime rate. In fact, if you want to know the crime rate in a given part of India, one surefire indicator is the gender ratio. The more men, the more crime. Now, the ultrasound machine didn't create these problems, but it did enable them. So, you have to wonder. What's next?

The hypothesis that increasing the ratio of men to women would produce "more sex-trafficking, more AIDS, and a higher crime rate" is entirely reasonable, but like so much observational data there's a big self-selection factor here. Families and women not involved in the sex trade tend to avoid rough neighborhoods and red light districts. There's also a question about outliers -- a few very bad areas with very high male to female ratios.

Once again, the suggestion that changing gender ratios would have significant social consequences makes perfect sense, but if you want to go from sensible suggestion to well-supported hypothesis, it's not enough to mention a fact that points in the right direction; you also have to show how other explanations (self-selection, sampling bias, etc.) can't explain away your fact. That, unfortunately, is where Freakonomics and many other economists-explain-the-world books and articles fail to make the grade.

"Picked so green you could kick them to market"

That was the dismissive phrase my paternal grandfather used to describe some of his fellow farmers back in the Rio Grande valley. By picking early you got produce that was easier to harvest and to handle but which was absolutely flavorless. It was not something done by farmers who took pride in their work.

At the time my grandfather was engaging in a bit of comic hyperbole. These days he might be understating the case (Barry Estabrook, author of Tomatoland, from an NPR interview):

Yeah, it was in southwestern Florida a few years ago, and I was minding my own business, cruising along, and I saw this open-back truck, and it looked like it was loaded, as you said, with green apples.

And then I thought to myself wait, wait, apples don't grow in Florida. And as I pulled up behind it, I saw they were tomatoes, a whole truckload mounded over with perfectly green tomatoes, not a shade of pink or red in sight. As we were going along, we came to a construction site, the truck hit a bump, and three or four of these things flew off the truck.

They narrowly missed my windshield, but they did hit the pavement. They bounced a few times, and then they rolled onto the shoulder. None of them splattered. None of them even showed cracks. I mean, a modern-day industrial tomato has no problem with falling off a truck at 60 miles an hour on an interstate highway.

In addition to being tasteless, Estabrook also points out that compared to tomatoes from other sources or from a few decades ago, the modern Florida variety have fewer nutrients, more pesticides (particularly compared to those from California), and are picked with what has been described as 'slave labor' (and given the use of shackles this doesn't seem like much of an exaggeration).

As problems go, that one really is pretty fundamental

From Forbes via Salmon:

“Groupon’s fundamental problem is that it has not yet discovered a viable business model,” writes Harvard Business School’s Rob Wheeler. “The company asserts that it will be profitable once it reaches scale but there is little reason to believe this.”

More from Salmon on Dalberg

I'm not surprised when a slick consulting firm like Dalberg turns out to be better at spin than they are at purported job, but I am caught off guard when they can't even manage damage control for a couple of negative stories without digging themselves in deeper. Salmon has the details here.

(while you're there, make sure to check out his take-down of Steve Brill.)

From the New Republic. Seriously.

Here's the actual, honest-to-God headline:

Rick Perry Is a Higher-Education Visionary. Seriously.

I'm way too busy to give this the attention it doesn't deserve but I thought it was a data point worth noting.

Update: Dean Dad (who's generally much more impressed with Kevin Carey than I am) isn't very impressed by Carey's case.

The larger flaw in Carey’s analysis, though, is that it mistakes saying for doing. If Governor Perry really wanted to remake Texas’ higher education system into something more teaching-focused and less research-focused -- a debatable goal, but not an absurd one -- I’d expect to see him beef up the teaching-focusd institutions that already exist. If he shifted state funding from, say, Texas A&M to the state and community colleges, then yes, I could start to buy the argument that he actually means it. If he decided that other parts of the country have the whole “research” thing well in hand, and he wanted to focus Texas on teaching, I’d expect to see him divert money from UT-Austin and send it to the K-12 districts and the community colleges. One could argue the wisdom of that, but at least it would be a vision.

No. He’s endorsing an attack on universities for not being high schools, an attack on community colleges for being high schools, and an attack on K-12 for, well, being there. Yes, some isolated bits of rhetoric could make sense in another context, but that’s not what’s happening. I agree with Carey on the oft-noted paradox that academics who are otherwise liberal become dogmatically, idiotically conservative when discussing their own profession, but their skepticism about Perry is fairer than that. Some of Perry’s rhetoric may be interesting, but at the end of the day, his only vision for higher education is hostility.

Medical Free Markets

This is a very interesting post by Karl Smith:

Lack of jobs is why everyone feels bad, not because they have less or are poorer or the country isn’t producing or consuming as much. And, not to get to meta – in what I hope is an easily readable post – but an economy that makes lots of people feel bad is by definition a bad economy.

Moreover, the feeling that you have now about the economy is not the feeling of lack of value creation. Its not the feeling of socialism.

I wish I had more time to go into this because “what socialism feels like” is an important concept. However, my more conservative readers will may readily get the following example.

Have you ever been pissed off at the fact that your neighborhood school doesn’t teach any of the stuff you want and it feels like your kid is just wasting her valuable time going to all of these pointless classes for no reason. THAT, is what socialism feels like. That is what the lack of value creation feels like.

Its not that you are afraid of losing what you have or that budget constraints are pinching. Its that the stuff which is available to you sucks. It – in extreme cases – is a world where everyone has a job but where no grocery store has fresh milk. It’s a world where everyone gets a pay check but no one can find shoes that fit.

That is what socialism feels like. That is what government getting in the way of the market feels like. In many ways it’s the exact opposite of the way this feels.

Because you know I can’t resist: When you are waiting in your doctor’s office and she is 50mins late and proceeds to be rude to you and not give you “permission” to go buy the drug that you are dying to buy because its finally been “approved.” That’s what socialism feels like.

It is an important insight that much of the current crisis is not caused by excessive government intervention. Now, it could be true that we could get to a bad place with the addition of excessive government oversight, but I think it is fair to accept that we are not there yet.

That being said, I think the argument about seeing medical doctors (and how familiar this experience is in the US) should give us pause when we argue that the current medical system is free market. It isn't. It's also one of our few areas of growth (which Tyler Cowen sees as rent seeking areas absorbing the unemployed) which is also worth thinking about.

I wonder if we are asking the right questions about the long term?

More on Medicare

I had barely finished my last post when Austin Frakt presented the hard numbers:

All told, the cost to the system of raising the Medicare age to 67 would be $11.4 billion in 2014, which is a high price to pay for $5.7 billion in federal savings. It’s exactly a factor of two too high. That’s a massive cost shift. Let’s put it this way, how much would you want to pay for the federal government to save $5.7 billion? I hope your answer is no greater than $5.7 billion. (If not, I’ve got a business proposition for you.) Paying $11.4 billion is a rip off.

It is actually worse than I thought it would be!!

Medical Expenses

From Igor Volsky:

The Center On Budget and Policy Priorities’ (CBPP) Paul N. Van de Water is out with a new report warning lawmakers on the Super Committee against considering proposals that would gradually raise the Medicare eligibility age from 65 to 67 . . .

Van de Water argues that raising the age would actually increase overall system costs and only save the federal government money “by shifting costs to most of the 65- and 66-year-olds who would lose Medicare coverage, to employers that provide health coverage for their retirees, to Medicare beneficiaries, to younger people who buy insurance through the new health insurance exchanges, and to states”

I think that this outcome is obvious from the structure of the problem. It seems obvious to me that single payer systems are able to reduce costs by exerting market power. When I look at procedures, they generally have three costs: out of pocket, insurance reimbursement rates, and medicare rates (in descending order of costs). For a lot of procedures, the costs are thousands of dollars apart.

This is why simply switching to a free market (and going to out of pocket prices) is problematic as a transition (as costs, already the highest in the world, will go up). It also explains why other countries (example: France, Britain, Canada) have decided to go with universal single payer systems: it lower costs (and, if you believe the Incidental Economist, it certainly does not lower quality).

Now it may be that there is a benefit to our current health care system and that other countries may be free riding on our innovations. I am open to this argument. But it is also true that we need to make a decision about what are goals are. If we want to reduce costs (in aggregate) then lowering the medicare eligibility age makes sense (why could it not be 60?).

But if we want to both increase and shift (away from government) the total costs of medical care, that is a lot more concerning. From a societal perspective that seems like an awfully bad deal. It seems unlikely that we are going to increase innovation by all that much by growing the private and medicaid markets by a small fraction. But the costs to those effected by the policy are high.

Why is this a good policy?

More on the vanishing business of writing

Andrew Gelman has a good response to Jonathan Rauch's anti-blogging blog post but I think this section deserves extra comment:

Pace Alex, the average quality of newspapers and (published) novels is far, far better than the average quality of blog posts (and—ugh!—comments). This is because people pay for newspapers and novels. What distinguishes newspapers and novels is how much does not get published in them, because people won't pay for it. Payment is a filter, and a pretty good one. Imperfect, of course. But pointing out the defects of the old model is merely changing the subject if the new model is worse.

You'll notice that he said novels and not short stories. The business model that allowed people to make a living selling short fiction (something people used to do in this country) has been dead for decades, long before the arrival of online content. Rates for freelancers have been flat for almost as long. For the past fifty years it has gotten increasingly difficult to make a living as a writer.

These are worrisome trends -- I suspect it will take a few more decades to realize just how much the loss of the creative middle class has cost us -- but you can't blame this one on the internet.

Never give money to a company that has a Director of Thought Leadership

Felix Salmon adds some sharp commentary to Janet Reitman’s Rolling Stone article on Haiti. He also reminds us of just how flaky the consultants who worm their way into these initiatives can be.

Is there a demographer in the house? -- Texas edition

With the population growth of Texas in the news (see Krugman and Salmon), this seems like a good time to raise a question that's been bothering me for a awhile. If you look at a map of population growth over the past decade, it's hard to miss the impact Katrina had on Louisiana and Mississippi. It's safe to say that some of the growth those states would have experienced was diverted to Texas, but estimating the magnitude of that effect is not nearly so straightforward (and is probably something best left to people who know what they're talking about).

Anybody care to give it a shot?

Options have a cost associated with them

This observation bears repeating:

First, a lack of alternative opportunities can force us to concentrate on developing skills. The kid who spends countless hours practicing football or music becomes much more proficient - and possibly rich - than one who, faced with many opportunities, flits between them and becomes a mere dilettante. A big reason why I got into Oxford - and from there a decent income was a small step - was that, in the days before computer games, I had nothing else to do.

There’s an analogy here with the arts. As Jon Elster points out in Sour Grapes, great art often arises because of constraints. 78 records which limited recordings to three minutes produced lots of great music whereas free jazz and atonality is often unlistenable. Old black and white films with no special effects are often superior to multi-million pound CGI ones. And so on. Excellence often arises from limited choice, and mediocrity from freedom.

I think that this is a very important insight. In sports, we have rules that make the games, themselves, more interesting. A game like Calvinball rapidly becomes uninteresting as one gets older. It is only within a cleanly defined decision space that you can compare degrees of excellence.

I think that this insight has a lot of applications to broader contexts. Removing constraints does not always lead to a uniform improvement in the result. If we took away required classes, I suspect the median student would end up less well educated in epidemiology (is this true for other fields? I'd venture to say that the same would be true in statistics but my exposure beyond that is limited).

I think, as I age, I begin to think that Aristotle (with the ideal of the Golden Mean) was a very clever guy. In particular, it's possible we spend a lot of time comparing two local minima (the two extremes of policy) and ignoring the global maxima (the middle ground between these extremes).

Medicare versus Social Security

I hear this point a lot:

At any politically plausible margin, it makes more sense to take $1 out of Medicare than to take it out of Social Security. Social Security checks can be used to buy health care services.

I think that this analysis neglects one key point. Medical care in the United States (or anywhere, for that matter), is hard to bargain with at the time of a procedure (especially an emergent one). It is hard to discuss prices at the ER door during a myocardial infarct, where minutes matter. Here, the real benefit of medicare is the ability to exert market power to set standardized prices (to avoid the power asymmetry otherwise present in medical bargaining).

It is not ideal, but I have not yet come up with a better idea than collective price setting and my own experiences as an uninsured person in the US were certainly eye-opening in this regard. It was amazing how few doctors would even consider accepting cash for services.