Saturday, December 29, 2012

Satz and Noxious Markets

Watching a speech by ethicist Debra Satz on noxious markets, left me quite underwhelmed.  Noxious markets, like markets in child labor, prostitution, and kidney exchange are markets that society sometimes chooses to outlaw.  For some reason, trade in noxious markets is or should be restricted.  I firmly believe that economics needs to absorb insights from other disciplines and that this argument is important, but I find the paradigm Satz offers us to think about these markets falls well short.

She offers these major criteria for identifying noxious markets:

1. Weak Agency
2. Vulnerability and Inequality
3. Extreme harms to individuals
4. Extreme harms to society

She then walks through what her paradigm would say about kidney exchange.  For weak agency, she argues that 40% of kidney sellers in India didn't know how many kidneys they had; they aren't informed enough to make a decision.  For inequality, how do we feel about the poorest in the world becoming the world's kidney sellers?  She argues that allowing kidney markets changes the price of credit.  Those willing to use a kidney as collateral have more access to credit, hurting those unwilling to donate, which in some sense in an externality of the kidney market.

As a test of your intuition on whether this is a problem, imagine, she says to the group of Stanford students, that Stanford had required that they put up an arm as collateral for their student loans.  I thought the comment starkly showed the weakness of here discussion.  Strikingly, no where in her discussion of kidney markets does she consider all of the people that wouldn't die, because they got new kidneys.  But, of course, that's the whole game.  Contrast a legal market in arms, where peculiar wealthy people enjoyed the sense of power they felt by purchasing arms to the poor.  Surely that market is much more noxious than a person whose kidney is failing and just wants a chance to keep living.

It's quite possible that a world with legal kidney donations has in it many kidney donors that regret their decision to donate, but it also has a lot more people that didn't die waiting for a kidney.  Any serious discussion, must attempt to grapple with both possibilities.

Additionally, is there a worse way to test your intuition about kidney markets than by considering a market in arms?  Markets in things that don't exist are really weird and really hard to think about.  I expect my intuition especially likely to fail me.  That the student loan market can saddle an 18 year old with $150,000 debt that they can't get rid of through bankruptcy is also potentially noxious, but it isn't nearly as weird to think about, since it actually exists.  

A lot of her talk is about weird markets and sales that make us cringe, but we also need to think hard about noxious markets we allow, like pornography, gambling, and plasma donations.  We can check all of the noxious boxes and still be better off with a legal market than an illegal market.  

Friday, December 28, 2012

Lawyers (Other Than Me) Aren't Useless

I've noticed a weird trend of smart, pragmatic type thinkers assuming that lawyering isn't really a sector of the economy we want to expend resources on or see a lot of innovation in.  Here's Matt Yglesias.

It seems to me that having smart, ambitious, hardworking people become lawyers is a huge waste. When Apple and Google compete to produce the best smartphone operating system, consumers win as products improve. But while there's presumably some level of lawyerly incompetence that would be socially problematic, at the margin, big firms getting better and better at suing one other doesn't help anyone.

I think the basic idea is that law is a zero sum game, and more resources spent on lawyering just turns it into an arms race. Party A gets better lawyers so Party B has to get better lawyers and now we are spending more on lawyers, but it is still Party A vs Party B with the same facts and the same law and the same equally good lawyers (if better than the last ones) representing each client.  We don't gain anything, just more expensive and subtle legal tricks to get to the same outcome

This way of thinking about the legal profession is breathtakingly stupid.

The basic problem here is that once Party A and Party B get better lawyers, they also might get a different outcome.  Maybe Party A was going to win, but there is some subtle and obscure point of law or argument or fact that can only be dug up by great lawyering, so now Party B will win.  It doesn't matter that the arms race means they *both* have great lawyers capable of making subtle arguments, once they got there it turned out that the subtle arguments are all in Party B's favor.

This happens.  I've seen it.  Sometimes, as things get elevated to better and more senior attorneys, someone catches something or writes something or thinks something that worse lawyers missed, and it changes the whole case, without the great lawyers on the other side having their own set of innovative tricks to change things back again. Better lawyers can change outcomes, and that means they can help society in three ways:

1. They Make Better Laws

In our country, courts make law.  Better lawyers means better judges (who are normally required to be lawyers) getting better, fuller arguments presented to them by both parties before they make that law.  I would guess that smarter judges hearing smarter arguments from smarter lawyers make smarter laws.

2. Our Legal System Can Bear More Complexity

I think there is a dumb idea among non-lawyers that the law is complex because lawyers and judges and legislators make it so.  That ain't the case.  The law is complex because the world is complex.  *Really* complex.  It is nice when the legal system can be complex too, because excessively simple rules either lead to 1. Unjust and inefficient outcomes as a mess of complex real world fact patterns are decided with too-simplistic rules not designed to account for them or, 2. A lack of predictability as the rules are made wishy-washy enough to deal with complexities on a case-by-case basis.  So, as an example, here's a dude complaining that the world has gotten more complex with the advent of driverless cars, and we desperately need a bunch of complex new law to deal with it.  New weird facts have raised uncertainties under the old, general laws, so now people want the law to be more specific and complex.  Happens all the time.

But if we want a complex system where outcomes can hinge on subtleties, we need minds that can grasp subtleties to work that system.  The basic limits on how complex the law can be without costs becoming unbearable are library sciences and lawyer smarts.  The smarter the lawyers, the less we have to trade off flexibility for predictability.

3. It's fairer

There's probably a reason, once we dug up all the best, most subtle arguments, Party B won.  When a party wins after the court has been exposed to all the arguments -- subtle and simple -- they are more likely to be the party we want winning then when a party wins after being exposed to only the most obvious arguments.


Anyways, I'm not claiming we should pay lawyers more or less or the same.  Obviously the benefits of spending more on lawyering has costs.  I'm just saying, the benefits exist in the first place.  You can't unthinkingly dismiss the idea that spending a lot on lawyering is socially useful.

Friday, December 21, 2012

What is the Conundrum?

Arnold Kling posts the following:
1. Policy has no effect. Markets do what they will do, regardless. The market uses the best prediction model, so economists’ macro models can, at best, replicate the market’s implicit model. 
2. Policy has an effect, but markets try to anticipate policy. The expected component of policy has no effect. Only policy surprises have an effect. 
It seems to me that the market monetarists (e.g., Scott Sumner) believe something closer to (2) than to (1). But (2) can get you into some strange conundrums. Does the Fed have free will? That is, does it have the ability to surprise markets, other than by acting randomly? If its actions are not random, they should be anticipated by markets. If they are anticipated by markets, then they should have no effect. etc.
 But what is the conundrum?  He could just as truly be writing about Congress.  Congress can write legislation that effects the market.  Congress can effect long-term growth, price to dividend, and interest rates.  Does Congress have free will?  Does it act randomly?

The same "conundrum" surrounds firms.  Only unexpected news about firms moves markets.  Does that mean Bill Gates can have no effect on the price of Microsoft's stock?  Could he wake up tomorrow and deliberately tank it?  In fact, markets are always trying to anticipate what CEOs are doing and evaluate how their actions will change the value of the underlying stock.

So where is the conundrum?  Why does thinking about the Fed this way make Kling so uncomfortable?

HT: Scott Sumner (with his own comments)

Monday, December 17, 2012

Defending Macro Research Against People Who Aren't Really Attacking It

    Paul Krugman again laments the state of macro, and links to a blog reaction to a Delong interview.  Yet, I'm struck that the conversation maligning the state of macroeconomic research never actually feels the need to mention macroeconomic research.  For instance, Krugman and Delong both agree that we have inadequate aggregate demand.  They both believe that monetary stimulus should be tried, meaning raising the expected future rate of inflation and/or NGDP.  So if we have a monetary disequilibrium, should we not ask the top monetary economists what to do?

So who are they?  Let's check the rankings:

1. Ben Bernanke
2. Lars Svennson
3. Michael Woodford
4. Mark Gertler

Bernanke and Gertler are long-time coauthors.  Both of their research focuses on monetary policy, the macroeconomy and financial frictions.  Also, Bernanke was an outspoken critic of Japan's central bank and the lost decade.  If there was anyone with the type of intellectual pedigree and viewpoint that would be able to prevent a similar occurrence here, it was widely agreed Bernanke was that person.  (I'm pretty sure Krugman said as much and he supported Bernanke's appointment).  

Svennson and Woodford are the preeminent New Keynesians.  Especially in Woodford's case, he's been outspoken for price level targeting and some measure of fiscal stimulus.   Svennson is best known for the "target the forecast" view.  The idea that central banks should be forward looking.  The view championed on the blogosphere by Scott Sumner.  Here are Woodford and Svennson writing together on the idea.

Look, its no secret that this is great research that Krugman and Delong love.  It also turns out that it has been incredibly rewarded by the profession.  The profession agrees that these are all top monetary economists.  So what happened?  

I would say one thing that happened is that business cycle research and monetary economics became less cool.  During the great moderation business cycles didn't seem that bad.  For instance, macroeconomists spent more time asking questions about the income distribution and wealth distribution.  Mapping the U.S. income distribution into the U.S. wealth distribution is a puzzle.  It seems wealth is too unequal.  Macroeconomists started trying to map stylized facts of finance.  Why do stocks have such a high return compared to bonds?  

Even this marginalization of monetary economics might be overstated.  Looking at the H-Index, Woodford only drops to 16th and above him are names like Rogoff, Blanchard, Summers, and Stiglitz that I don't think Krugman and Delong feel any need to distance themselves from.

So what's the problem with academic research?  Lots of economists that Krugman, Delong and I think are great are getting lots of citations and top publications.  And if they want to go after Fama, Lucas, Barro and Cochrane for their research, then do it!  Don't quote newspaper articles and lament that macroeconomic research is to blame.

Update:  Noah Smith with comments and links.  Scott Sumner also comments.  (neither comments are directed to me, just the more general debate).

Sunday, December 16, 2012

Restricting Guns to Prevent Mass Shootings is Dumb

The majority of gun deaths in America are suicides.  Suicides are also the type of death most easily deterred by restricting access to guns: Israel has had success curbing military suicides by not letting soldiers access guns on their downtime and Australia saw a sharp drop in suicide rates when it instituted its gun buyback program, with states with more aggressive buyback programs seeing a bigger drop faster.  These are not the only studies that indicate this, and the result has "microfoundations" in psychological literature: restricting the means by which someone can kill themselves is a key step in treating patients, having a gun in the home is a risk factor for suicide, etc.

Meanwhile, mass shooting deaths are a fraction of a fraction of America's 31,000 plus annual gun deaths, and the relationship between gun control and crime is harder to suss out.

So gun control is about suicides.  This is good, because it gets us to a core reason we might need state paternalism -- to protect the mentally ill from their crazy decisions.  It has the added benefit of being less condescending to gun owners: "we know you are responsible, we know you can handle your weapon safely, but we are worried that some depressed member of your household is going to use that gun to off themselves when they aren't thinking straight."

And it gets the numbers into a world where severely restricting gun rights makes sense: the economic impact of the firearms industry was about 31 billion dollars last year (by their trade group's estimates), meaning, if we value lives at about $7,000,000 (a standard figure in public policy planning, I think), we only need to save just under 4,500 lives a year to make the complete death of the gun sales industry worthwhile.  Not only do I think that is a realistic figure (there are 17,000 plus firearm suicides a year; deterring just a quarter of them from killing themselves would get us there), I think we can stop short of completely ruining all the utility people get out of gun ownership and completely bankrupting the industry (licensing guns to people when need can be shown (security guards, cops, etc), allowing rentals for firing ranges and hunting, perhaps still allowing a tightly regulated collecting hobby, etc).

So passing a restriction on big magazines or assault rifles to prevent mass shootings might be a marginally good idea, but it is going after a really small problem.  The problem is suicide.  The solution is heavy gun restriction.

If you think that people have an individual right to bear arms in the constitution, the solution is repeal of that right and heavy gun restriction.

Saturday, December 15, 2012

Hot Opinions: Slavery Sucks!

In the comments to this post, J Billings asks, "Not asking because I disagree, just haven't thought about it before, but what are your reasons for opposing self selling?"

I've got lots!  But I think the one that most appeals to libertarians is pointing out the obvious public choice problems.  Markets -- including markets in self selling -- only work if the societal institutions around them are good.   But societal institutions are made by the people in society, and in societies with slaves they tend to be made by slave holders.  And that pretty much never results in good public policy.  Here in Texas back in the 1870's, convict labor could be rented out to help defray the cost of incarceration.   Which is no,t necessarily a terrible idea.  But, of course, it gave the politically powerful class -- business owners -- a huge incentive to screw over the politically powerless class -- the newly freed african american population.  Suddenly the law was changed so that a black man could be arrested and given a good sized sentence for just about anything ("loitering" being the great example), they were in fact arrested, in droves, and we had a new sort of slavery

That's really common.  Here was a trick in ancient Rome the rich people tried: go to war, laboring class has to go fight, laboring class can't tend to crops, laboring class gets in debt to you, laboring class can't pay debt, you get their land and themselves as slaves (early roman law was big on debt bondage, I think that got relaxed).  So on the one hand, maybe there was a rational decision to take on a debt, knowing failure to pay could result in slavery.  But on the other hand, the only reason the poor dude was in that position in the first place was that the rich dudes launched a war!   

So yeah, I am not convinced you could ever structure a society where 1. Labor can be coerced, and 2. when it is, it is completely the result of free market forces, with no other nudges from public policy getting people to sell themselves.  If you want a model, try this: we've got a rich guy who wants to abuse the slave system and a poor guy who doesn't.  Then the rich guy buys the poor guy.  Now, in effect, we've got two people who want to abuse the slave system, since the political voice and power of the slave now belongs to the master.  Rinse and repeat and eventually the laws and customs around self-selling will take on a coercive, brutal nature.

I don't know if that model is right, I just know that, historically, coerced labor tends to be brutal, ugly, and not fair, even if your definition of "fair" is extremely libertarian. 

Which raises the question, are our society's two big forms of coerced labor (convict labor and the draft) good ideas?  My answer: probably not!  Exhibit A: we don't have a draft anymore and have sharply limited how we use convict labor, because both systems were unpopular and cruel.  

Friday, December 14, 2012

Williamson: How should the Fed work?

A top monetary economist, Stephen Williamson, blogs at New Monetarist Economics (50th in monetary by this ranking).  I check in with Williamson's blog, which is easy to do, because he is not that prolific of a poster.  He spends a lot of time on the blog criticizing, but I understand very little about what he would consider optimal policy.

In the comments of this recent post, he is starting to spell it out:

1. I would not have set any numerical thresholds at all. I didn't like specifying the calendar dates either. I thought that was bad policy if it was a commitment, and bad policy if it wasn't a commitment. 
2. Generally, I think there's no substitute for taking a particular action at a point in time, and then carefully articulating why you are doing it. No need to map out the future. Once everyone understands how the state of the world maps into policy actions, we've reached bliss. No point in trying to describe how you map the state of the world into actions, as that will only confuse people, as we see here. 
3. "At least now we have some idea of what they want to do..." No we don't. All we know is that they will raise the policy rate, if every, at some date after we cross the 6.5% threshold. When does QE end? When will the policy rate rise? Who knows?

I still find the position strange.  He wants lots of transparency for the Fed's decision right now, but no information about the Fed's expectation for policy in the future.

He really doesn't like forward guidance:
The Fed says it is trying to get more leverage from its policy by being more explicit. But in its struggle to do that, it is not increasing the information content at all; if anything it is telling us less.
 I find it really hard to make sense of how providing more information can really be providing less information.  If the new information was worthless, market participants can just ignore it and it does not harm.
On forecasting inflation, the monetary circumstances are so unusual now that there is a huge amount of risk in anyone's inflation forecast, including what you can infer from market prices. So risk is a problem, and its also a problem that the Fed gets to choose the inflation forecast that determines its policy actions.
It's a fair point that forecasting inflation is hard.  I think forecasting future stock prices is much, much harder, but I still think current stock prices have lots of valuable information about the future prospects of firms and the economy.

I wish he'd flesh out his views more on his blog.  I'd like to understand his position better, as it seems very far from my ideal position. 

Wednesday, December 12, 2012

The Fed Moves...A Little

Scott Sumner and Matt Yglesias comment on the Fed's move.  Basically, the Fed has giving more forward guidance that they will not raise rates until the unemployment rate is below 6.5% or the inflation rate is above  2.5%.  Scott thinks this is a small move and Matt thinks this is a big move.  I just check the market.  The TIPS break even spread (the 5 year Treasury minus the 5 year TIPS) is an estimate of future inflation.  The spread moved from 2.07% to 2.12%, so five basis points.  So I think this is a pretty modest move, but that seems to be outside the range of noise (after an eyeball test).

You can back out the breakeven rate here.  Potentially, looking at the five year rate is misleading as this could have been a bigger short term move (say the one year rose 15 bps and the four year forward 1 year rate hardly moved).  I honestly don't know how to find those rates, though I hope to spend some time with a Bloomberg terminal and do my best to figure it out some time soon.

Saturday, December 8, 2012

How Large is the Aggregate Capital Stock?

Most people know the U.S. GDP is about $15 trillion.  GDP represents aggregate income.  But how large is total aggregate wealth.  Here is one UN study across nations.  Not only do they include physical wealth, but they also try to estimate human capital wealth -- the wealth we have due to our skills and education.  Below is from the Economist blog Free Exchange.  The UN estimates aggregate wealth in the U.S. is about $120 trillion, but three quarters of that is in human capital.  Human capital is hard to measure accurately, but it's plausibly quantitatively quite important.  Most asset pricing models in finance start with a notion of aggregate wealth and the return on aggregate wealth.  In the end, we end up assuming the return on aggregate wealth is the return on the stock market, but that may end up being a bad proxy for the return on wealth if wealth is so concentrated in human capital.  Of course, figuring out what to use instead is no simple matter.

Wednesday, December 5, 2012

Arnold King is Basically Solomon

Arnold King is the fairest blogger on the internet, and smarter than me.  So I feel bad criticizing him, but I think he missed the boat here.  In a recent post, he argued that liberals have an exaggerated willingness to see issues in terms of oppression; conservatives have an exaggerated willingness to see issues in terms of barbarism encroaching on civilized life; and, as for libertarians:

A libertarian will exaggerate the extent to which a practice represents coercion. They are fond of saying, “If you don’t comply with xyz policy, men with guns will come and take you to prison.” I understand this argument and I generally take it as valid. However, I can also understand how someone with a different point of view might argue that when they pay taxes what they get in return is a fair deal.

That's characteristically open minded of him, since I think he mostly identifies with the libertarian position.  But sadly, I think it rings false to anyone who has argued with libertarians.  Maybe it's just me, but I most see libertarians exaggerating the extent to which human behavior is dominated by rational economic forces, both in terms of  morality (what's really important here is material goods) and human behavior (people default to engaging in a series of mostly rational economic transactions).  So take selling yourself into slavery: most people immediately dismiss the idea that that should be legal.  But to a lot of libertarians, this just looks like an economic transaction -- a long term employment contract, of sorts.  So the libertarian community has big arguments about whether this sort of thing should be allowed.

The point isn't that all libertarians endorse indentured servitude (most don't, I think, including King) or even that the ones who do endorse it are wrong.  It's just that libertarians tend to see the world in terms of fair, rational, arms-length bargaining, to a super exaggerated extent when compared to other people.  To pick a hyperbolic example, if, in the state of nature, a big man with a club meets a little man with a prosperous farm, in the libertarian world the little man is about to hire the big man as a body guard.

Errata (I am not good at short blog posts, but maybe I can get good at separating the stray observations from the main point.  Feel free to stop reading here):

1. Of course, it isn't a bad thing for people to see the world in different ways, as King makes clear.  Sometimes people do act like rational economic actors and libertarians figure it out before the rest of us and make good policy proposals, so go them.

2.  Just for the record, I oppose letting people sell themselves into slavery, for a variety of reasons.  If anyone cares I can make a blog post about it.

3. This makes libertarians sort of the anti-liberal/conservatives.  If conservatives are constantly fearing barbarism and liberals constantly fearing oppression, libertarians are constantly pretty confident that everything will work out fine if we just give people the right incentives.  This is even true of their big bugaboo, government.  You hear the "men with guns will rob you" argument, yes, but in the main libertarians are surprisingly willing to ascribe what they see as bad government conduct to public choice problems.  They very rarely think the government is a bad actor simply because it is full of oppressive barbarians, though historically some governments are.

4. Seeing the world mostly in terms of rational economic forces also explains King's argument about susan rice:

If you look at the biography of UN Ambassador Susan Rice, she apparently both inherited and married into wealth, received an elite education, worked for McKinsey, and now has a net worth of over $20 million. Yet people on the left describe her as oppressed, because she is African-American and female. I want to say, “Really?”

I don't know if Susan Rice is oppressed, but I know, "Went to a good school and is rich" does not equal "not oppressed," since society has important, non-economic/educational dimensions along which someone can be flexed with.  You can imagine an American Jew in the 30's who went to Harvard, was born into money, and has a good job, but who is still dealing with very real oppression thanks to antisemitism (IE, can't join the clubs he wants, make the friends he wants, loses out on some business opportunities,  etc.  More importantly, all those real slights add up to living in a society that constantly reminds you you are an outsider, which has a real psychological cost).  I'd add that you should not count a person un-opressed until they are dead: that same jew, were he Polish rather than American, would, in ten years, face clear and brutal oppression.  Just so, Susan Rice may yet pay some sort of real consequence for her gender and race (lose her job?).  Or not.  Again, my criticism is more with the argument than with the underlying point.

Tuesday, December 4, 2012

Facts about Polling

From Paul Krugman:
First, Public Policy Polling found that 39 percent of voters have a view, pro or con, about Simpson-Bowles. Not bad, you might think. But a quarter of voters also had views on Panetta-Burns, a plan that as it happens doesn’t exist. 
 Meanwhile, another poll – internet-based, but by a firm with a good record — finds that, by a margin of almost four to one, people think that going over the fiscal cliff will cause the deficit to increase.

Don't Feed the Trolls?

Scott Sumner has been an amazingly successful blogger.  How successful?  He blogged his way on to Foreign Policy's top 100 global thinkers list.  Besides writing insightful posts on a timely topic (post financial crisis monetary/fiscal policy), one of the amazing things about his blog is that he responds to an amazingly large number of comments.  For quite awhile, he responded to virtually every comment.

While this was amazingly successful at propelling his blog in popularity, it had a side effect.  These extra bits of engagement and insight also turn out to be tasty morsels of troll food.  So much so that to some extent has become a bit of a troll underworld.  I swear several trolls think his comments section is their blog.  Lately, it seems Scott has become a bit exasperated with this situation with some choice quotes:

Greg, The “principle of charity” suggests you might want to read what I actually said:i.e. “I’m not quite sure why”, before setting off on one of your typical mindless rants. It seems that you are agreeing with me, i.e. I was not quite sure why, if what you say is correct. BTW, If you and your fellow Austrians want to go through life with your own private language that no one else understands, you’ll have about as much success as language purists who insist on calling happy people “gay.” Good luck.
Greg Ransom, I really can’t figure out if it’s all an act on your part, a big joke, or if you are just completely delusional. Sincerity? Charitable reading? I don’t think I’ve ever come across a less charitable commenter in my life, except for MF of course. I’m just going to assume you are joking and leave it at that. The alternative is too depressing.

This is from someone so patient he answers virtually all his thousands and thousand of commenters!  I imagine the only counter-tactic is ignoring the troll, which I noticed seems to be the strategy of this latest post.  Yet, there seem trolls he's already ignoring, and they are still trolling strong. Sometimes the trolls troll each other.  I am no expert on troll behavior or troll avoidance, but I'd bet my co-blogger has more insight into troll dynamics.

PS. - Scott's comments are still an excellent source of information.  I find an excellent way to skim them is just looking for his (ssumner) responses.  If he says something interesting, you can go back and check the original comment.

PPS - At least 50% of our commenters so far are top economists.

PPPS. - This PPPS. and the previous PPS. and PS. are homages to Scott.

Sunday, December 2, 2012

Laughing Matters

This is a video of a naked wizard with a micro-penis being repeatedly tased by policemen.  More on that later. 

So the common law makes a lot of use of a concept called "reasonableness."  I think lawyers like to pretend that this is a very precise term of art with different, clear meanings in different situations, but the fact is that is crap.  There's been manful work in trying to convert "reasonable" into a more objective standard -- several federal appellate judges have tried to make "reasonable," in the context of the tort of negligence, mean something like "cognizant of the cost-justified level of risk," for example -- but the fact of the matter is we frequently throw jury instructions to people that basically say, "Do you think the defendant acted reasonably?  Reasonable means acting in a manner that is..." followed by vague bullshit. 

And that's all fine.  The law is never going to produce outcomes with mechanical certainty, there is plenty of room for vague concepts.  But why this vague concept?  Is it unique?  What are the outlines of this "reasonableness?"  Well, we can all agree that there is behavior the bulk of people think is reasonable, there is behavior a majority of people think is reasonable, there is behavior people disagree about, and there is behavior a large or small majority of people think is unreasonable.  For most actions (most things that are done, I mean, not most kinds of actions), there is probably majority agreement about whether the action is reasonable (in a single society, anyway).  And there are probably a lot of cultural, factual, random, and very human factors going into that judgment.  So great.

The problem is, that seems very similar to a lot of human concepts: compare thinking about whether stuff is "reasonable" to thinking about whether it is disgusting, funny, sexy, etc.  But the law is really loathe to use those concepts.

Take funny.  Funny comes up in the law.  Whether something is satire matters for copyright purposes.  Whether someone is joking could matter for contract purposes (IE, did he make an offer to contract or was it just a joke).  But the law normally avoids engaging the question of humor directly: it just asks whether a reasonable person would have interpreted it as a joke or contract offer, it defines satire without reference to whether it is *successful* satire, etc. 

More interestingly, we could use "funny" as a concept by which to judge actions, like we do "reasonable."  We don't actually care if someone saw a tortfeasor commit an act of negligence and thought it was reasonable.  We only care whether his actions were, in some objective sense, reasonable.  It's an "objective" standard. 

So take the video of the naked wizard with a micro-penis prancing around a music festival until cops tase him.  Was that reasonable force?  I don't know!  But let's propose another standard: police are justified in using as much force as is reasonable or hilarious.  I think reasonable minds could disagree about whether the cops acted in a way that was reasonable, but they clearly acted in a way that was hilarious.  If you don't think a naked wizard with a micropenis being tased is funny then you, sir or madame, are a stick in the mud.  And maybe we can throw on another check, and get a law like: "force is justified when it is reasonable.  If it isn't clear whether it is reasonable, it is justified if it is hilarious.  If it still isn't clear, it is not justified if it is horrifying."  etc.  Rather than trying to parse close cases of reasonableness, we can set up a hierarchy of vague notions our society cares about and go down the list until it isn't a close case anymore.  I care more about living in a society where cops can't do things that are horrifying than I do living in a society where cops do things that are marginally reasonable to a random collection of jurors. 

This may be a really dumb idea. 

Bartlett on Obama

This line in Bruce Bartlett's recent article has me thinking:

The final line for me to cross in complete alienation from the right was my recognition that Obama is not a leftist. In fact, he’s barely a liberal—and only because the political spectrum has moved so far to the right that moderate Republicans from the past are now considered hardcore leftists by right-wing standards today. Viewed in historical context, I see Obama as actually being on the center-right.
Tell most Republicans this and there evidence against will be a health care plan that was first floated by Heritage.

It still isn't widely appreciated how many of the best ideas from the right (and in particular from neoliberalism and neoclassical economics) have bee co-opted by the left.  Every wonk's preferred climate solution is Cap and Trade or gas taxes, not regulation.  When Obama attacked Hillary Clinton on trade, he had his chief economic adviser call Canada to reassure them that we don't really believe this stuff.  Remember Romney's plan to limit tax deductions, that was Obama's idea first.

Listening to Free to Choose debates, Milton Friedman sounds like Matt Yglesias: stop restrictive zoning, fight poverty with the earned income tax credit, increase immigration...

In a better world, the political parties would be separating Bruce Bartlett and Matt Yglesias.  In many ways, the wonk spectrum is divided that way.  Unfortunately, the public is not.

Saturday, December 1, 2012

John Cochrane on Health Care

John Cochrane (famous Chicago economist) gives an interesting podcast on health care with host Russ Roberts.  You can find more thorough remarks in this paper.  I find myself amenable to both free market critiques and lefty critiques of our health care system, because I think the U.S. is at a local minima.  Moving a long distance toward more market oriented Singaporean health care or a single-payer Canadian health care would both be improvements.

I was hoping Russ would press him on one point I can't comprehend, which is central to Cochrane's argument.  First, we agree that insurance should be long-lived and guaranteed renewable.  Meaning, if a person gets sick, the insurance company can't drop them or raise their premiums.  This makes perfect sense to me.  The reason we buy insurance is to insure ourselves from risk.  In this case, the risk of getting really sick in a way that will cost a ton of money for care.  If I buy insurance that only lasts one year and I get cancer, I'll get the benefit for one year, but the next year when I try to renew my premiums will go sky high.  What good is that?  The answer is obvious.  I need to buy "insurance insurance."  I need insurance against the risk that my premiums rise.  Of course, if insurance insurance isn't long lived, I'll need to insure the risk my insurance insurance premiums rise and this rabbit hole goes on and on.  It's turtles all the way down.  This logic leads to the idea that insurance should be long lived.  Rather than buying an infinite number of insurance contracts, I can buy on contract that never expires.

What I can't figure out is this statement?
Now, the “adverse selection” phenomenon, that sick people are more likely to buy insurance, and healthy people forego it, is a big problem. But the insurance company charges the same rate, not because it can’t tell who is sick – a fundamental, technological, and intractable information asymmetry. The insurance company charges the same rate because law and regulation force it not to use all the information it has. If anything, we have the opposite information problem: insurers know too much.

This source of adverse selection is a legal and regulatory problem, not an information problem, and easily solved. If insurance were freely rated, nobody would be denied. Sick people would pay more, but “Health status” insurance shows how to solve that.
As best I can tell by following his links, health status insurance is the insurance insurance I just discussed.  So John's big idea is the asymmetric information isn't a big deal, the real problem is that insurance companies can't charge sick people higher premiums.  

Suppose that two parents have a kid that is covered on their insurance, until he's twenty-five.  Then he has to go to the market and buy his own insurance.  Now suppose when he's twenty-four, he gets cancer.  In John's world his premiums should skyrocket.  I think he would argue that the parents should buy "insurance insurance" for the kid.  The parents need to buy insurance against the kid's future high premiums, before he gets sick.  Obviously, they can't do that after he's diagnosed.  The "insurance insurance" would be too expensive.  They need to do it earlier.  Perhaps, when he is born.  Though what if we find he has complications?  Perhaps, when he's conceived?  But what if the parents have genetic predispositions to certain diseases?  The kid is more likely to become sick, thus the insurance on his future premiums must be higher.  Maybe they'd be high enough that the two parents wouldn't get married, because of the possible complications.  Oh no, two people who love each other can't get married.  What if the grandparents stepped in and helped out?  They could buy "insurance insurance insurance," they could hedge the risk that their son or daughter grew up wanting to marry someone who wasn't as genetically compatible.

Maybe this sounds convoluted, but I'm trying to get to the notion of complete markets.  Complete markets means that all risk that can be insured is insured.  Since we are risk averse, complete markets make us all better off.  If one of our houses burns down, we'll all chip in $100 bucks to get us back on your feet.  The Amish did it literally, but nowadays we do it through insurance companies.  The premium on home insurance is just the $100 bucks that goes to some unlucky person that just watched their home go up in flames.  

But in a truly complete market, ALL risk is insurable. I could insure against a risk, before I was ever born, before I ever had a medical history.  In a truly complete market, we insure all risks at "time zero," before we even exist.  I picture a random soul in heaven, just like all other souls.  One of the risks those souls want to insure against is sickness.  Maybe being born sick.  Maybe being sick later in life.  Basically, they don't know when it will or if it will happen, but there's some risk they'll get sick.  So they get with all the other souls and agree, we'll all put money aside, and whoever gets sick gets the money.  That's insurance.  My question is how much would each put in.  Well, it's obvious they'd all pay the same.  They are exactly alike in every way.  It's only fair.  

The point I'm trying to make is that in John's system, no matter how you slice it, there will be some choke point along the way.  What if we switched from our system to John's tomorrow?  A lot of healthy people would buy guaranteed renewable insurance, but a lot of sick people would be out of luck and face exorbitant premiums.  If we are in a system where everyone is paying a different price for insurance, then we can't possibly be at the complete markets case.  If we aren't at the complete markets case, either John's policy is suboptimal or there is some friction that prevents us from getting to the complete markets case.  So what is it?

The wrench that I haven't thrown in yet is incentives.  If I have guaranteed insurance before I am born, I'm much less incentivized to put effort into maintaining my health.  I may drink like a fish or eat too much.  I may smoke or do drugs.  Maybe I just won't sleep enough.  We make decisions that affect our health.  This is a "friction."  This is a reason that the complete markets case may not work (as if the having to buy insurance before your born wasn't enough).  Maybe this is the sort of important friction John has in mind, because for conditioning on pre-existing conditons he gives these examples in the podcast, "Fat people don't pay more than thin people; smokers don't pay more than non-smokers.  All sorts of things they don't condition on."  Russ corrects him that they can condition on smoking, which in my understanding isn't that big of a bump in premium.  I don't have a problem with insurance companies conditioning on smoking or charging a higher premium on people like me that eat and drink too much.  It's the all sorts of other things I don't want.  What about something simple like being female?  Women have to pay higher insurance premiums, because women have babies.  In a complete market, women would pay the same premium as everyone else.  They'd buy their insurance before they had a gender (or even parents) and pay the same price as everyone else.

Conditioning on effort is fine to the extent that an insurance company can do it.  But what they really want to do is condition on how sick we are.  People with cancer pay more, and I don't see John distancing from that.  I can't imagine by pre-existing condition he really means "big sweet tooth."

I thought I found a lot to like in the essay.  I think there are lots of regulations that make health care more expensive and that the health care market should be more competitive.  But I was really jarred by this statement, "Romney was pushed on what he was going to do, he said: Well, but of course we can't let insurance companies discriminate on pre-existing conditions. Well, once you've done that, you've swallowed the fly--the old lady that swallowed the fly...And once you do that, you've got most of the ACA."  He's really arguing that my disagreement is irreconcilable with his preferred health care solution.  Which makes sense, if my story is correct then charging everyone the same price and mandating everyone buy insurance sounds pretty close to the preferred solution.  Since in a truly compete market, we'd all pay the same health care premiums.  His preferred solution must be a market frictions story, but its a story I can't understand and he spends a good deal of the podcast and paper dismissing frictions in the health care market. If there is a well-formed second best model there, I'd love to know it.