More on Markets

There is a good post over at the Incidential Economist that discusses games that companies can play with drug patents.  I think that this highlights one of the issues that we always neglect -- modern economic systems are based in a system of regulations.  In the absence of regulations we would not have patent protection and these games would be more difficult to play.  But a complete absence of rules (anarchy) isn't usually a very economically profitable equilibrium.

Once you have a government (with laws and soldiers), you are really just picking your poison.  Hyper-free market approaches have the same issues as communism does, only in reverse.  Communism removes private property, which weakens those parts of society that work best in private markets where ownership incentives productivity and long term care of the resource (think subsistence farming).

In the same sense, Randianism removes public goods, resulting in other problems (like the failure to have an educated workforce, a strong military, or a system of roads).  Health care seems to be one of those areas where treating it as a public good seems to lower costs no clear drop in outcomes.

So I think the authors of the above post are correct to doubt that free markets will improve health care anymore than communism improved agriculture.  The right tool for the right job should be the goal.

A lemma for a lemma -- Mike, Psmith and Orwell

I'm working on a long post that will refer to a post on British school novels (such as Tom Brown's School Days). That post will, in turn, refer to this literary evaluation of P.G. Wodehouse:

In 1909 came Mike, which George Orwell long afterward called "perhaps the best light school story in the English language." It is here that Psmith makes his first appearance, the initial P silent as nothing else about him is silent. He even had his monocle then, and the devious mind that makes him a pleasure to follow through all the rannygazoo of the later novels when he is, in a manner of speaking, grown up

Orwell's fondness for Wodehouse is one of those things that seem strange at first glance but make more sense the longer I think about it. Both were tremendously inventive writers and, at the same time, skilled craftsmen. Both brought a rare precision to their prose. Both were masters of plot. And though Wodehouse may have been gentler, both were still sharp satirists.

While on the subject of dystopian visions, the sometimes symbiotic, sometimes parasitic relationship between Wodehouse's servants and their childlike aristocratic masters has often reminded me of Wells' Morlocks and Eloi but that's a subject for another post.

Composition of the Economy

Brad Delong:

Second, over the past generation our our economy has shifted in directions--toward education and toward healthcare--where the private competitive market is much less effective. As a result, a good society now would have a significantly larger role for government than a good society then. And it is thus bad policy to drop any of our sources of revenue to fund government.

I think that this point is interesting and not one that I have thought much about before.

I notice, for example, that private universities actually pay higher salaries than public universities (or at least the top 10 list skews in that direction).  Or if we look north (to Canada) it is true that health and education seem to be sectors that a country with a larger government sector seems to do well with.  They have much more cost-effective schools and manage universal health care (at a much lower cost per person).  Sure, there are issues with quality of care between the the two countries (although it is not absolutely clear which one wins out in aggregate).   

Student Loans

This is a really good question by Steven Taylor:

Likewise, states are facing increased demands to pay for prisons and Medicaid and universities are facing increased health care costs (and increased enrollments). At a minimum we have to recognize that we have developed a system in which we expect a large number of high school graduates to go onto get college degrees at the same time we have cut spending to higher education. It is a problematic model, to be sure. Is it too much to ask that people who are in positions of power to acknowledge these complexities?

The context of this question is Virginia Foxx questioning the wisdom of student loans.  It is true that we have created a situation where state funding is declining but a university degree is a key element for a young person to enter the workforce.  After all, human capital development is one of the keys to increased productivity.  We can argue whether universities are ideal (hopefully in a context of the real world where waste, inefficiency and problems are present in all human systems) for this role.

But if we are not going to create alternatives then we should not be surprised that students see no good options.  In particular, is the trade-off of more prisons for less education really the ideal choice?

Looking at the same graph -- seeing an entirely different picture

There's plenty to talk about with this chart (which comes to us via Andrew Gelman), but the thing that struck me (and this happens a lot) is that, when you look at it closely, the graph actually undercuts the point it's supposed to be making.


The idea that technology is coming at us faster and faster is one of the most ingrained ideas in our society. Given the title of this chart, its creator would certainly seem to share this notion, but does the chart really show what its name indicates or are we seeing something more like a distant cousin of Simpson's paradox where shifts in make-up and other factors create the illusion of a trend?

(Before we get into these factors, though, take a minute to look at the graph. It looks like the steepest curve is associated with the VCR. That's over thirty years ago, a long time for a record to hold if we really are seeing an upward trend.)

As you're looking at the graph, think about these three things:

Infrastructure

Depression/War

Big ticket items

Going last to first, big ticket items requiring heavier manufacturing always had slow adoption curves regardless of when they were introduced (check out the dishwasher). Much of the appearance of acceleration can be attributed to a shift in composition to smaller items.

Then there's the period of 1930 to 1945, pretty much the ultimate in anomalous data. During the Depression most people couldn't afford new products. During the war, new technology was rapidly developed and adopted, but by the military, not consumers.

Finally there's infrastructure. The adoption curves of electricity and telephones are almost entirely governed by the hard work of developing infrastructure (something we have arguably gotten slower at) and infrastructure at least indirectly constrains every line on this graph (check out the Reivers for an account of what cross country driving was like at the beginning of the last century).

The infrastructure constraint points to perhaps the most impressive case of a technology exploding. Take a look at the curve for radio. Now look at the curve for electricity. Even allowing for a few crystal radios and battery operated sets, you have to conclude that radios achieved almost 100% penetration of houses with electricity in about a decade. By that standard, the record for fastest adoption is over eighty years old.

Update: There's a good string of comments on this over at Andrew Gelman's site, some of which make some of the same points I've made here..

A par-baked* idea for a programming competition

Here's a notion I've been kicking around for a while, sort of the opposite of Deep Blue. In the IBM initiative a single team of computer scientists (with the help of a grandmaster) built an extraordinarily complex machine to master a specific task. In what I have in mind (I'm tempted to call it "shallow pink" but I'm afraid the name might stick) a number of teams will write simple programs (at least simple by today's standard) that will do something extremely general.

The task is to write a program to play a game without knowing exactly what the game is.

This is how it would work:

The game will be played on a rectangularly or hexagonally tiled board of dimensions no more than 20x20 or 15x15x15. It would involve placing and/or moving pieces that may or may not be differentiated. The rules should be simple enough for a human player to get up to speed relatively quickly (no humans will actually be playing; this is just a rule of thumb to keep things manageable). The rest of the rules won't be announced until the programs have been submitted for that year's competition.

I'll leave the details to those better qualified to supply them but here are the basics. The programs will be size constrained, held to a format, set up so that game rules can be entered as a separate set of parameters, and configured for automated play.

Of course, the quality of play won't be that impressive but that's not the point. The idea is to get lots of bright people trying to come up with innovative, elegant and flexible approaches to problem solving.

I suspect most OE reader are better programmers than I am so I'm opening the floor for suggestions.



* Yeah, I mean half-baked, but this way sounds better.

More thoughts on the growth fetish

I recall a quote from investor Peter Lynch saying (if memory serves) that he didn't like it when companies invested his money, meaning that if a company he owned stock in was sitting on piles of cash he would prefer for it to send him his share of the money as a dividend (or use it for a stock buy-back) rather than spend it acquiring new companies.

I don't have the passage in front of me but I think it's safe to say that Lynch would consider exemptions for expansion and vertical integration. Acquisitions in those categories have to be examined on a case-by-case basis. I doubt, for instance, Lynch would have objected to Tyson picking up pork producers after it achieved dominance in the chicken market.

Instead, we're talking about something like a tobacco company acquiring a cookie manufacturer -- different markets, different vendors, different everything. There are a lot off these acquisitions that don't make a great deal of sense to the casual observer (how did Starwood hotels end up with ITT Tech?). Obviously, the people who made these decision had access to information not available to the general public and there are undoubtedly cases where these decisions would have made more sense had the casual observer been thoroughly briefed. Still, given sheer number of odd-looking acquisitions, I have to suspect that at least some of them are attempts to cash in on the growth fetish.

A brief argument in favor of splitting infinitives

I was listening to a public radio story on Facebook's recent billion-dollar acquisition and I heard the reporter say that the first order of business was "not to screw [the company] up." Of course, what he meant was that the first order of business was to not screw it up. The first statement simply says that there were other things more important than screwing up.

If it comes down to a choice between splitting an infinitive and not saying what you mean, always take the first option.

Today's required reading

On this blog, we have been talking about budget deficits on the blog recently and I thought that some perspective on the factors driving the US debt would be worth considering.  Aaron Carroll goes into the real drivers of the debt: increased interest on the debt (due to tax cuts) and increased health care costs.  It is well worth reviewing in detail.

Joseph lurches to the right

I have to admit that I'm a little perplexed. I always thought my co-blogger Joseph was fairly liberal on health care issues, but in his last post he voiced his support for a single payer system.

This is strange because Talking Points Memo quotes the following from an Associated Press story:

“[I]f Republicans have moved to the right on health care, it’s also true that Obama has moved to the left,” reads an AP wrap on the Obama speech. “He strenuously opposed a mandate forcing people to obtain health insurance until he won office and changed his mind.”

As TPM noted, Obama's previous position had favored single payer. Therefore, we would seem to have two possibilities:

1. Single payer is significantly to the right of individual mandates, a market-based approach with a solid conservative pedigree, thus making Joseph quite conservative, or;

2. A reporter for one of the world's most recognised news organisations was willing to misrepresent a move to the right as a move to the left in order to support a cherished but flawed narrative of partisan equivalence.

I wonder which is more likely?

Following up the follow-up

Following up on Joseph's latest, I actually think the problem here is more James Stewart than Paul Ryan. Ryan's budgets have been fairly obvious attempts to form a more Randian union. That's not surprising coming from an avowed follower of Ayn Rand. Ryan also comes from a Straussian tradition so I'm not exactly shocked that he would try to sell proposals that are likely to increase the deficit as a path to fiscal responsibility.

But that's OK. The Ryan plan is exactly the kind of bad idea that our national immune system ought to be able to handle. Liberals should savage its underlying values (Rand is always a hard sell); centrists and independents should spend their time pointing out the endless ways that the numbers don't add up and the evidence contradicts the basic arguments; respectable conservatives should damn it with faint praise or simply avoid the topic. The Republicans would then come back with a new budget, hopefully a proposal based on valid numbers and defensible assumptions, but at the very least one that obscures its flaws and makes a cosmetic effort at advancing its stated goals.

For Ryan's proposals to maintain their standing as serious and viable, the system has to have broken down in an extraordinary way. Specifically, the centrists such as James Stewart have had to go to amazing lengths to make the budget look reasonable, up to and including claiming that Ryan intends to take steps that Ryan explicitly rules out (from James Kwak):

Stewart is at least smart enough to realize that a 25 percent rate is only a tax increase if you eliminate preferences for investment income (capital gains and dividends, currently taxed at a maximum rate of 15 percent):

“Despite Mr. Ryan’s reluctance to specify which tax preferences might have to be curtailed or eliminated, there’s no mystery as to what they would have to be. Looking only at the returns of the top 400 taxpayers, the biggest loophole they exploit by far is the preferential tax rate on capital gains, carried interest and dividend income.”

So give Stewart credit for knowing the basics of tax policy. But he is basically assuming that Ryan must be proposing to eliminate those preferences: “there’s no mystery as to what they would have to be.”

Only they aren’t. Stewart quotes directly from the FY 2012 budget resolution authored by Ryan’s Budget Committee. But apparently he didn’t notice this passage:

“Raising taxes on capital is another idea that purports to affect the wealthy but actually hurts all participants in the economy. Mainstream economics, not to mention common sense, teaches that raising taxes on any activity generally results in less of it. Economics and common sense also teach that the size of a nation’s capital stock – the pool of saved money available for investment and job creation – has an effect on employment, productivity, and wages. Tax reform should promote savings and investment because more savings and more investment mean a larger stock of capital available for job creation.”

In other words, taxes on capital gains should not be increased, but if anything should be lowered.

These distortions aren't just journalistic laziness or rhetorically overkill on Stewart's part; it's essential to a narrative that writers like Stewart have built their careers on.

Here's Paul Krugman:

But the “centrists” who weigh in on policy debates are playing a different game. Their self-image, and to a large extent their professional selling point, depends on posing as high-minded types standing between the partisan extremes, bringing together reasonable people from both parties — even if these reasonable people don’t actually exist. And this leaves them unable either to admit how moderate Mr. Obama is or to acknowledge the more or less universal extremism of his opponents on the right.

The point about self-image and professional selling points is remarkably astute and when you combine those with the decline in fact-checking, diminishing penalties for errors, and a growing trend toward group-think, you get a journalistic system that loses much of its ability to evaluate policy ideas.

And for a democracy that's a hell of a loss.

Follow-up to Mark

There is a good follow-up to Mark's post yesterday here.

The central issue is that the Ryan budget only works if you can find a huge number of tax expenditures to remove and/or enormous cuts in the budget.  Removing all taxes on capital gain plus dropping the rate on the top tax bracket is an extreme change in the historical structure of the United States government.

Now, I have no trouble with people arguing for their ideas as to what is an ideal form and structure of government.  But I do think that both sides should be really transparent.  When I argue for single player health care, I try to be enormously transparent with how dramatically it would impact current providers (and how it would change the relation between patients and physicians).  I also suggest what I think might work as ways to mitigate these issues.

But the idea that dropping the top tax rates and setting the capital gains tax rate to zero would increases taxes paid by the ultra-rich only makes sense if there is a tax expenditure that can be targeted.  What that tax expenditure is should be the center of the debate now.

But it sounds like this has got to be one heck of an interesting plan.

Inventing the (original) reasonable Republican

This passage from Paul Krugman about the need to invent reasonable Republicans these days reminded me of something:

What’s going on here? The defenders of Ryan come, I’d argue, in two types.

One type is the pseudo-reasonable apparatchik. There are a fair number of pundits who make a big show of debating the issues, stroking their chins, and then — invariably — find a way to support whatever the GOP line may be. There’s no mystery in their support for Ryan.

The other type is more interesting: the professional centrist.* These are people whose whole pose is one of standing between the extremes of both parties, and calling for a bipartisan solution. The problem they face is how to maintain this pose when the reality is that a quite moderate Democratic party — one that is content to leave tax rates on the rich far below those that prevailed for most of the past 70 years, that has embraced a Republican health care plan — faces a radical-reactionary GOP.

What these people need is reasonable Republicans. And if such creatures don’t exist, they have to invent them. Hence the elevation of Ryan — who is, in fact, a garden-variety GOP extremist, but with a mild-mannered style — to icon of fiscal responsibility and honest argument, despite the reality that his proposals are both fiscally irresponsible and quite dishonest.

The idea of having to invent a politician to fit a need is not a new one. Thanks to an old LP my father had, I grew up listening to one of the most memorable takes on the subject.



* Had Krugman been willing to speak ill of a fellow New York Times writer he probably would have linked to this.

Social Darwinism

John Chait brings up an interesting point:

I happen to think "social Darwinist" captures the prevailing Republican philosophy pretty well. The point of the label, created by historian Richard Hoftsadter, is that a species of laissez-faire economics treated the market the way Darwinians treat natural selection — as the sole natural and correct mechanism for distributing rewards.

I think that this line of thinking fits well into the paradigm of the "magic of markets".  However, markets are man-made constructs and suffer the flaws of all such systems.  For example, it is unclear that there is such a thing as a true free market without issues of fraud (because regulations are subject to capture by political forces) or force (because how do you fund police without taxes).  Once you have a mixed economy, there are inevitably going to be winners and losers based entirely on who gets to develop the rules and who starts off with advantages.

Going back to a state of nature involves either starting from scratch (which nobody appears to be actually proposing) or trying to unwind a harrowing history of inappropriate use of force/fraud (just ask the First Nations about this issue).

Given that, I honestly do not understand the opposition to mixed economies. 

According to Snopes.com, four out of five bills have traces of cocaine on them

That factoid came to mind while reading the last paragraph of the passage below:

Knutson was working at the Fryn' Pan in Moorhead, Minn., when, according to her attorney, Craig Richie, a woman left a to-go box from another restaurant on the table. Knutson followed the woman to her car to return the box to her.

"No I am good, you keep it," the woman said, according to the lawsuit.

Knutson did not know the woman and has not seen her since, Richie said. Knutson thought it was "strange" that the woman told her to keep it but she took it inside. The box felt too heavy to be leftovers, Ritchie said, so she opened it -- only to find bundles of cash wrapped in rubber bands.

"Even though I desperately needed the money as my husband and I have five children, I feel I did the right thing by calling the Moorhead Police," Knutson said in the lawsuit.

Police seized the money and originally told Knutson that if no one claimed it after 60 days, it was hers. She was later told 90 days, Richie said. When 90 days passed, Knutson was still without the $12,000.

Police told Knutson the money was being held as "drug money" and she would receive a $1,000 reward instead, the lawsuit states. Lt. Tory Jacobson of the Moorhead police said he could not disclose much information about the case because it is an ongoing investigation.

"With turning this money over to us, we initiated an investigation to determine whose money this is," Jacobson told ABC News. "The result has been a narcotics investigation."

Police argue that the money had a strong odor of marijuana and therefore falls under a law that allows for forfeiture of the money because it was in the proximity of a controlled substance, the lawsuit states. But there were no drugs in the box and Richie said he believes this law is not being used correctly.