How sure are you that your models are correct?

Karl Smith makes a really good point:

Now imagine that you withheld a payroll tax cut or food stamp relief or any other program on the basis of fear about long term budgets. Depending on your macro estimates somewhere between millions and hundreds of millions of people suffered for this. 

What did you get in return for their suffering? 

Absolutely nothing. Nothing. Nothing. 

Every time you ask a real living person to suffer for some future goal you have to know that you are betting their well-being on your being right about the future. 

How sure are you that you are right? 

Austerity costs with probability one. Attempting to effect long term growth is always a gamble.

I do think that this point is worth remembering in policy discussions.  Models of distant time periods (say 30t o 50 years in the future) are subject to dramatic changes in assumptions.  Could the people living in 1890 (who had never seen a plane) have imagined what 1940 (and the air war of the Battle of Britain) would be like?

This is not to say that we should be reckless.   But policies like austerity in a time of high unemployment have immediate and real costs.  To presume that one is really preparing for the future one should be really, really confident that one can predict it . . .

EDIT: As a clarification, this is much more salient for things like Health Care costs where things like technological progress could completely change the growth curve and less of an issue for Global Warming where we have an observable and deterministic physical process.

And things get worse . . .

Avik Roy part 2:

The VA system could be turned into a huge asset for our nation's health-care system if it were privatized. One of the big drivers of rising health spending is hospital monopolies: when one or two hospitals dominate a particular region, those hospitals have the power to charge whatever they want to insurers and patients. If civilians were allowed to use VA hospitals, and vice-versa for veterans, we could significantly improve this problem. In addition, if the VA hospitals have indeed come up with operational efficiencies, competing private-sector hospitals would be forced to adopt those efficiencies, or lose patients.

If liberals are right, and the VA is a model, competition will force private hospitals to improve on both quality and cost. If conservatives are right, and VA hospitals are terrible, privatization would allow veterans to gain access to superior private-sector health care, while increasing provider competition. Seems like a win-win.

So if I think that a single payer model creates efficiency then the way to test that would be to privatize the system so that we could see if it was equally good as a multi-payer system.  The things that make a single payer system efficient -- less adminsitrative overhead, rationing, ability to implement cost-effective standards of care, no need to run at a profit -- would all vanish in a competitive market place.  Because each insurance plan would have different rules and paperwork requirements which would rapidly undermine a lot of the single payer efficiency. 

So how is abandoning the model used by liberals (single payer) to privatize VA hospitals going to work out as a "win-win"? 

The best analogy I can come up with is comparing a privately held company to one that is publicly traded.  The idea that the private company should become publicly traded so that one can judge if it is more efficient than the publicaly traded company ignores the possibility that it is more efficient because it is privately held. 

So I think that this idea isn't going to show what Mr Roy claims it will show. 

Megan McArdle is on hiatus

But there are people carrying on her work.  The argument in Avik Roy's most recent piece (a guest blogger at the Atlantic) seems to be less than well thought out.  It tries to argue that MedicAid is suboptimal insurance and that, therefore, increasing access to MedicAid will reduce health care access overall.  This is the ultimate straw person argument.  Nobody will enroll in MedicAid if they have private health insurance available to them as an option.  So the real issue is whether the uninsured would be better off under MedicAid or under no insurance at all.  Note that you could always choose not to enroll in MedicAid and stay uninsured, if that was your preference.  Nor is it guarenteed that private insurance will always be available to people as costs rise and employers rebel.   

So the real questionm here is whether MedicAid is worse than no insurance at all.  The good folks at the Incidental Economist have a post with a dense series of links as to the complete lack of evidence for this hypothesis. 

Now one could argue that it would be nice if MedicAid were better insurance, but that doesn't seem to the concern of the author of the post.  Instead, it seems to be about reducing support for health care reform without really positing a superior solution.

UPDATE: It seems that the Incidental Economist addressed this twice, with another post pointing out that reimbursements under MedicAid are set to increase (and that this should increase the number of physicians willing to accept MedicAid).

UPDATE 2: Karl Smith has a rather clever point here on the same piece:

Is the suggestion here that the fixed costs associated with running an office are so high that the breakeven point is achieved from a maximum throughput of full insurance patients? And, further that there is simply no way of operating an office with lower overhead? I can see how its not profit maximizing to accept Medicaid patients. I can even see how in a perfectly competitive market providers would have bifurcate into Medicaid and non-Medicaid providers. However, I do not see why the market cannot find a way to provide paying customers with some level of service.

A randomized test of welfare

In the Economist, no less. Consider:

When the results were in, the team found that the unpaid women had suffered more than twice the HIV infection rate experienced by the paid women over the course of the 18 months of the experiment, and four times the infection rate of genital herpes. Intriguingly, there was no difference between the infection rate suffered by those required to go to school and those who received the money unconditionally. Whether the actual amount of money mattered was not clear. For that to emerge a larger sample would be needed. What is abundantly clear, however, was that the money did make women behave differently. They had younger boyfriends than those in the control group, and had sex less frequently.

What should be noted is that this was a randomized experiment so you can actually infer causality.  I am positive Mark will have a lot more to say about this experiment.

But let me note, for the record, that this is the opposite result of what conventional thinking would yield about giving young people cash subsidies.  It's also notable that requiring school did not change the good results so unconditional transfers are not inferior to conditional transfers.  Are we sure that a social safety net would result in worse outcomes?  What about giving grants to college students?  

Airports in the sky

2012 Skyscraper Design Competition



The idea of an airport suspended above a city was a plot point of the classic screwball comedy the Palm Beach Story. I find it remarkable that the wildly ambitious notions of seventy years ago are still the wildly ambitious ideas of today.

Remarkable and terribly depressing.

Back on the higher ed beat

Paul Krugman weighs in on recent comments from GOP candidates on the subject of higher education:

About that hostility: Mr. Santorum made headlines by declaring that President Obama wants to expand college enrollment because colleges are “indoctrination mills” that destroy religious faith. But Mr. Romney’s response to a high school senior worried about college costs is arguably even more significant, because what he said points the way to actual policy choices that will further undermine American education.

Here’s what the candidate told the student: “Don’t just go to one that has the highest price. Go to one that has a little lower price where you can get a good education. And, hopefully, you’ll find that. And don’t expect the government to forgive the debt that you take on.”

Wow. So much for America’s tradition of providing student aid. And Mr. Romney’s remarks were even more callous and destructive than you may be aware, given what’s been happening lately to American higher education.

For the past couple of generations, choosing a less expensive school has generally meant going to a public university rather than a private university. But these days, public higher education is very much under siege, facing even harsher budget cuts than the rest of the public sector. Adjusted for inflation, state support for higher education has fallen 12 percent over the past five years, even as the number of students has continued to rise; in California, support is down by 20 percent.

The choice of California is sadly apt. The state's three-tiered UC/CS/community college system is, even after these devastating cuts, a remarkable achievement. Residents have access to an impressive spectrum of educational options, ranging from inexpensive schools designed to be friendly to disadvantaged and non-traditional students to some of the world's best public universities (with surprisingly reasonable tuition).

In case you think I'm exaggerating, check out this post from Joseph:

From the Academic rankings of world universities:

1. Harvard University (private)

2. Stanford University (private)

3. Massachusetts Institute of Technology (MIT) (private)

4. University of California, Berkeley (public)

5. University of Cambridge (British)

6. California Institute of Technology (private)

7. Princeton University (private)

8. Columbia University (private)

9. University of Chicago (private)

10. University of Oxford (British)

11. Yale University (private)

12. University of California, Los Angeles (public)

13. Cornell University (private)

14. University of Pennsylvania (private)

15. University of California, San Diego (public)

16. University of Washington (public)

17. University of California, San Francisco (public)

18. The Johns Hopkins University (private)

19. University of Wisconsin - Madison (public)

20. University College London (British)

Some interesting patterns immediately jump out. Of the top 20 schools, 17 are American, which is pretty impressive given the share of the world population held by the United States. Of the 17 American schools, six of them are public (which is amazing given how many resources the private schools have). Of the public schools, 4 of them are in California.

If you check out the rest of the list you'll find all of the UC schools have respectable rankings. Given their caliber, they are also quite affordable. I took a grad course in Bayesian networks a couple of years ago at UC Riverside. It cost me eight hundred dollars and was an extraordinary bargain.

It should be noted that some pundits don't think much of California's commitment to great universities. Here's Kevin Carey:

If Berkeley’s star professors are lured away to Stanford, it’s bad for the university but not necessarily bad for America, particularly if (as is frequently the case) those professors teach few if any undergraduates. They’ll be the same people doing the same thing at another university an hour away.

Of course, Carey also believes Rick Perry Is a Higher-Education Visionary.

A perspective on Ayn Rand

This is worth reading.

The carried interest exemption

Carried interest as an exemption isn't easy to defend:

The other problem is that private equity partners are not actually like Dan the carpenter. If Dan and Ms. Moneybags are in a true 50-50 partnership, then Dan is on the hook for half of their losses, as well. The great thing about 2 and 20, for private equity partners, is that they get a cut of the profits but they don’t absorb a share of the losses. This means that the 20 is more like a performance bonus than like a partnership share. So if the 20 is in a gray area, as Mankiw argues, it is even closer to ordinary income than Dan’s partnership share—which, as Mankiw shows (although he doesn’t quite come out and say it, for obvious reasons), should be treated as ordinary income

I have begun to wonder if capital gains should be taxed at a different rate than income, especially if we have exemptions on gains resulting from housing (as transaction costs with housing can reduce mobility).  But the only argument for capital gains exemptions (that people have to risk losing their money) clearly isn't applying to hedge fund managers.

But no matter how one looks at this situation, the best that can be said is that some people may sneak labor wages in as capital gains.  But should we not be trying to limit the cases where this happens and not encourage them?

Food Stamps

I was reading this piece by Ed Glaeser (the danger of following links posted at Noahpinion) and came across this rather interesting sentance:

The childhood obesity problem should also make us wonder whether food stamps are really good for kids.

My question is rather simple: how do we know that these two factors are causally related?  Chuldhood obesity is a complicated problem, but one possible driver is low quality food (such as potato chips) that is cheap, easily stored and (per calorie) relatively inexpensive.  Is it not plausible that reducing food budgets could increase obesity by focusing food intake even more on these foods? 

I worry when we attribute a complex phenomonon (seen at all sorts of socio-economic levels) with a single government program.  I am not saying that this statement is incorrect (and it is phrased as speculative), but it seems like too important of a proposition to be confinded to a single sentance.  In particular, I would be interested in the counter-factuals:

1. Food Stamps
2. Cash Transfers
3. No Assistence

And a comparison of childhood outcomes (obesity but also starvation) under these three different scenarios. Or am I missing the relevant research and we already know the answer? 

Landsberg's latest

Noah Smith points out a Steve Landsburg column that doesn't make a lot of sense.  I am going to try (although it is hard) to ingnore the moral dimension here (although I am very much on Sandra's Fluke's side) and focus on the inherent logic of the positions being staked out.  Consider Landsberg's comments:

To his credit, Rush stepped in to provide the requisite mockery. To his far greater credit, he did so with a spot-on analogy: If I can reasonably be required to pay for someone else’s sex life (absent any argument about externalities or other market failures), then I can reasonably demand to share in the benefits. His dense and humorless critics notwithstanding, I am 99% sure that Rush doesn’t actually advocate mandatory on-line sex videos. What he advocates is logical consistency and an appreciation for ethical symmetry. So do I. Color me jealous for not having thought of this analogy myself.

There’s one place where I part company with Rush, though: He wants to brand Ms. Fluke a “slut” because, he says, she’s demanding to be paid for sex. There are two things wrong here. First, the word “slut” connotes (to me at least) precisely the sort of joyous enthusiasm that would render payment superfluous. A far better word might have been “prostitute” (or a five-letter synonym therefor), but that’s still wrong because Ms. Fluke is not in fact demanding to be paid for sex. (Not that there’s anything wrong with that.) She will, as I understand it, be having sex whether she gets paid or not. Her demand is to be paid. The right word for that is something much closer to “extortionist”. Or better yet, “extortionist with an overweening sense of entitlement”. Is there a single word for that?

But whether or not he chose the right word, what I just don’t get is why the pro-respect crowd is aiming all its fire at Rush. Which is more disrespectful — his harsh language or Sandra Fluke’s attempt to pick your pocket? That seems like a pretty clear call to me.

 Noah Smith comments that:

First, from an economic efficiency standpoint, in-kind benefits are inferior to direct cash payments, as Ed Glaeser will tell you. Instead of giving Rush a sex tape, it would be more efficient to simply hand Rush some cash and let him buy whatever he wants with it. 

But I think that this critique also misses the point of the most relevant exmaple given.  In this case (a lesbian student who wanted to be prescribed these medications to prevent cyst growth on her ovaries -- which led to surgery to remove an ovary) -- the rationale for taking the drug had nothing to do with sex and everything to do with preventing unnecessary surgery.  From a strict cost perspective, Landsburg should be praising Fluke for trying to save the state money by improving medical efficiency.  From a utiliatarian perspective, it's probably worth a few thousand dollars to preserve a person's otherwise healthy organ.  So this policy (in this case, at least) is costing extra money for all parties involved. 

So I am mystified by Landsberg's clear call.  He wants to spend more money on unecessary medical procedures that could be avoided with inexpensive and commonly available drug therapies?  Is this because Landsberg thinks his personal tax rate is too low? 

Not only do I find the substance of the argument repugnant, it seems to fail on even on it's own terms.  So I am confused by what Landberg is trying to accomplish wit it.  Is he hoping that we will turn it around and support open access to oral contraceptives?  Is he advocating for higher tax rates to enable a greater degree of social engineering?  Or am I missing something here? 

STEM jobs

Derek Lowe:

But there's an even bigger problem with pushing STEM education: the jobs, in many cases, are not there. Now, this is a point of great argument, because the jobs may well be there in some fields. But not over the whole area. A lot of people with physics and chemistry degrees are having trouble finding work, and in my own degree field (synthetic organic chemistry), it's been a real feat not having your job evaporate out from under you. In many cases, these jobs are going off to lower-labor-cost areas like China or India, but some of them are just disappearing outright. In either case, cranking up the number of eager graduates will not help the situation.

I would go further and ask who benefits from a surplus of science PhDs?  After all, getting a PhD is a long investment in time (10-12 years after high school) and money (good luck doing it without $50K in student debts plus many years of living on $10-20K as an income).  But with schools increaisng raising tuition, all of the risk is borne by the student.

Potential employers, on the other hand, can drop wages arbitrarily low if there is a serious surplus of qualified people relative to positions.  After all, switching fields after spending a decade getting a PhD in physics is a huge loss of investment.  So long as there is some chance of this investment paying off, won't most people keep trying? 

So the issue I have is why is pushing STEM a priority?  If there is a richly rewarded set of jobh opportunities out there then market forces will fix this problem.  But if there are a shortage of positions then why would we encourage people to be trained just to reduce employer expenses? 

A brief diversion into Media

The problem with Fox News:

But, there’s a bigger problem, and it goes to the real reason that Republicans who actually care about the future of their party should be concerned. In many ways, the GOP’s incestuous relationship with the “shock political talk” media machine makes it incredibly difficult for it to do what political parties have done in the United States from the beginning, adapt its message for changing times and changing circumstances. By reinforcing the base’s insistence on ideological purity, the Limbaugh’s of the world push the GOP further to the right in a nation that is, at it’s core, a centrist one. That is not in the long term interests of the party, and one would think Republicans would recognize that.

 Remarkably, it is a right wing web site that is writing this piece.  But the whole issue with needing to constantly push boundaries is that, sooner or later, you will start moving where most people don't want to go: see the recent issue with Rush Limbaugh.  I think that this leads to a media strategy that is a lot like naval cruiser construction.  It was always a benefit for your cruisers to be just a little bit tougher than everybody else's cruisers.  After all, if you get into a battle on the high seas, bigger guns and more armor are really helpful.

But cruisers need to be fast and agile.  The original purpose of these vessels was to catch enemy ships, scout the seas and do other activities that require a fast ship.  After a while of this arms race, a much smaller cruiser can evade the new, clunky heavy cruisers and perform the primary mission of the ship in a superior fashion.

So you will see a dramatic downsizing of the ships, followed by a slow creep upwards.  I wonder if Fox News will follow the same pattern in the near future?

Microfoundations

Via Paul Krugman:

A practical observation: the economists who get most bent out of shape at the notion that maybe we don’t always have to derive everything from optimizing individual agents also tend, with remarkable regularity, to be the economists who make simple, ludicrous conceptual errors when they discuss real-world macroeconomic issues. See many posts here and on Brad DeLong’s blog for examples. I don’t think this is an accident; it really helps your ability to think clearly to have those simplified, ad hoc models always in the back of your mind.

 One of the challenges of models is that they need to make predictions that are true.  If not, then they are (at best) descriptions of some previous time point.  But if we want to inform policy, then it is essential that models are a good description of reality.  So if the model makes a prediction that is obviously untrue then that should be a major red flag.

In my own view, the idea that people maximize "utility" as a decision making process is clearly wrong for any clear definition of utility (the idea that we maximize something that is an unobserved latent variable including social, financial, and cultural factors -- with arbitrary and time-varying weights -- is useful conceptually but unlikely to be a tractable variable for models).  So building models with this as a foundation may or may not improve predictive power.

On the other hand, Newton's laws of physics were successful long before quantum and statistical mechanics were developed.  So useful models may precede an understanding of the underlying microfoundations, at least in theory.

So, needless to say, I agree with Dr. Krugman.

Has anyone heard from Dr. Glaeser recently on this topic?

Here's Edward L. Glaeser back in June of 2009 discussing why the financial bailout was a better idea than the auto bailout:

Since the collapse of Lehman Brothers, the public sector has spent billions saving the banks. While these decisions are certainly debatable, they are understandable. The US financial industry misbehaved badly,... but it is still a sector with a future. ... After all, every other sector in the economy depends on banks for their financing.

But what about cars? ... Does anyone, other than GM's management, believe that this company can come back? The current treatment, cash infusion and a reduction in corporate liabilities, provides a solution for a company that is broke, not for one that is broken.

That passage originally caught my attention because of the rhetorical trick of shifting from an industry to a specific company. It came back to mind today when I saw the following graph in a post from Mike Konczal :

Added Sugars

From Aaron Carroll:

As we talk about how hard it is to combat obesity, it’s worth thinking about numbers like this once in a while. If we could get kids to give up half, not even all, of the added sugar in their diet, their overall calorie consumption would drop by 8%. They’d be dropping about 140-180 calories a day from their diet. And those calories are totally empty – they’re from added sugars they don’t need, and that won’t satiate them. When other research shows that reducing your caloric intake by 20 (yes, twenty) calories per day for three years could lead to an average weight loss of 2 pounds, making this small change could be a big deal.

Okay, there is a good point here and a really bad point here.  The good point is that added sugar seems to be a bad thing.  It promotes tooth decay (with 2 root canals, I can say that this is a big deal), it seems to be efficiently absorbed, it is associated with diabetes (a disease you really do not want), and it's nutrient value is null.

But the idea that a 20 calorie a day change will mechanically lead to a 2 pound weight loss in 3 years is kind of odd.  I mean it works, mathematically.  But it ignores all sorts of issues: like how does the body adapt to less intake, what foods are eaten (is it the same composition with portions shrunk by 1%?), and how this may alter activity levels.  The claim makes something that we know is hard sound very, very easy.

Programs like Weight Watchers seem to partially get good results by restriction, but they also seem to have incentives to change the composition of the diet.  Just look at how fruits and vegetables can be zero points in the current diet.

So, in an odd sort of way, the last point detracts from the main issue here: added sugars are bad and trying to expose your children to less of them is unlikely to be a bad thing.