A nice post on microeconomics…

When I returned to school, I thought I was all interested in macroeconomics. It was probably the ideological aspects of it that attracted me in hindsight. Lots of fuzzy data in macro, so you can add your own spices, cook it all up and take a stab at claiming your view is the right one. I skewed well over to the heterodox left-ish side of things (“naturally,” says nearly anyone who knows me).

Yet the more I learned about economics, the more this fascination wore off. Having to learn Mankiw’s principles, etc. (thankfully there are a number of writers out there trying to relieve the tedium of the 10 principles like this guy) just made me want to go to a place within economics where there was an endless stream of rather specific issues to wonder about and a burgeoning wave of pretty usable data to wade through in attempting to answer such questions. Thus: applied microeconomics, the path I am on now.

As I prepare for grad school application season this fall, my desire to focus on applied micro has made me more interested in rigorous public policy programs than straight econ grad programs, at least in large part because you can skip the macro! But also these programs tend to be pretty well loaded up with a bunch of people doing really interesting and relevant work.

Anyway, that is all just a long-winded wind up to sharing this nice piece by Frances Woolley over at Worthwhile Canadian Initiative. Two years ago I would have been scratching my head about some of the things in this post, but it really spoke to me, both the pros and the cons parts. I am, like FW, pretty optimistic about the ability of applied economics to give increasingly good and relevant advice to policymakers. The problem of people ignoring it persists, but the examples of Nudge and the “nudge units” and so forth that it and similar books has spawned makes one a bit more hopeful that as we become more resource constrained and challenged by population density and a number of other factors, more of the low hanging fruit may be picked as time goes on.

The post again.

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Things are getting real: Personal education update

Life has not been kind to my ability to blog. I am riffing this post out without bothering to check when the last time I wrote something was, but I am pretty certain it was >6 months ago or thereabouts.

Having a child definitely sharpens the mind with respect to allocation of time. It is my most scarce resource by far now. Primarily because much of it is given over willingly to my 4-month old daughter, but work, school and my wonderful wife are always there to spend the remainder on.

Of school, things have become much more clear during the last months. I chuckle when I think of what I imagined an undergrad degree in economics to consist of. I thought it would be an ultra-rigorous battery of courses that would leave one quite well versed on the ins and outs of non-specialized economic practice. In reality, this is probably more the case at some other institutions, but overall the UG degree is little more than a moldable jumping off point for a) grad school in Econ or policy, b) an MBA, c) some job with general analysis duties or other less-than-accountant-level demands d) maybe pursuing a law degree.

I am pretty far along on the grad school preparatory path. You can take the course 'Calculus for business' class and be done with mathematical requirements at UIC. Conversely, if you would like to attend a reasonably useful grad school, you would be well-advised to take Calc I, II, and III (multi variable calculus) and then at a minimum, Linear Algebra, Introduction to Advanced Mathematics and Real Analysis. I am doing this “minimum,” which, FWIW, will also get me a math minor. This I will accept as a little gold star for taking far, far more math than I ever envisioned I might in my life. Per below, it is also a little plus on the signaling front.

Another giant piece of the puzzle is crushing the quantitative portion of the GRE examination. Most grad school websites give lip service to the verbal portion, but judging from the deeply English-challenged student instructor pool at UIC and a more general finger in the wind, this is not terribly important. In fact, a professor well-placed to know about issues involving GRE scores and admissions told me a certain score (the equivalent of roughly a 95 in normal 100% scaling) would not likely be good enough to be considered for most competitive programs “but since you're American you might get by with that.” So there is apparently some elasticity of substitution with respect to the sections of the test. This could be looked at as a sop to underprepared US students but I think it is more fairly looked at as ALSO a sop to foreign students who perform often terribly on the verbal portion and must certainly be deeply compromised in the cultural savior fairer that is a hallmark of good economists (you have to know enough about the nuanced complexities of the world to notice the interesting things to research). The GRE is a weird sort of pure sorting mechanism in that the level of math is really nothing beyond a solid HS level math curriculum. It is as more about the ability to take a stressful test well than it is about the material, as most anyone who is applying to Econ PhD programs has taken math years and years beyond the level present on the test. It is an unfortunate mechanism for these who lack strength in high stakes test taking but might otherwise be apt future economists, but them's the breaks. Summer mission: learn how to ace the GRE quant section.

The GRE is also one component of the signaling part of grad school admissions. There are large, busy forums discussing Econ grad admissions and much of what is discussed is how to look like a good candidate. My current semester features some calculations based on such considerations. I eschewed taking a course on the history of economic thought that I have been waiting for the university to offer for the last three semesters in favor of a course on Game Theory. I thought that would look much more compelling on a transcript in the end, not only because of its content, but also because of the pure signal of “STAT 473,” a monikor that denotes a “grad-level” course. 400s and 500s good, 300s….meh. The course has turned out to be really good and engaging, but my primary reason for taking it was to send the right signal. There is much overlap of course between some of these signals and engaging learning opportunities, such as the research work I have been doing and the next research gig I am about to start, but forget to consider the signaling value at your peril. Letters of recommendation, publishing credits, etc. etc. all are critical in the marginal battle to get noticed in a sea of candidates, many of whom are tossing a Hail Mary pass with their applications in the first place. Hence the need for such crude first order sorting mechanisms as the GRE.

The trick for me as a pretty fully adult person who should be (is?) in the prime earning years of my life will be to:

1) Be accepted into a reasonably well-funded program so I can have a baseline income that will keep me afloat with a kid, mortgage, etc. to think about.

2) Figure out how to manage a functional transition with respect to my role in my business that works for myself and my partner and my employees.

3) Have that program be in Chicago or a very short list of other locations that revolve around a combination of family support structure, cost of living and job market considerations.

4) Get into a program that is a good fit with my academic interests.

No big deal, right?…

Speaking of academic interests, I have also undergone an unlikely (to me at least) transition in academic interests. I was pulled into the field by my hobby-ish interest in macro and I groaned about my Principals of Microeconomics course (which was admittedly pretty meh… “taught” by a disinterested masters graduate as an online community college course). Whether it was going on to a school with a strong applied micro focus (and with only one macro prof on faculty who lectures in a pretty dry way), or the really engaging and enjoyable Intermediate Micro course I had (with the best student instructor I have had by far), or maybe it was just the way things worked out… But the result of whatever is that my focus has entirely shifted to things micro. Particularly, I am really compelled to work in education policy, a Gordian knot of epic proportions, but one that a) matters profoundly for the future of the US and b) one where a good idea or an important finding might actually turn into some direct policy results. My upcoming research work is as a research assistant for our dept. head doing a study on educational issues in the CPS and I am really over the moon about this. The signaling value is there of course, but I am fortunate to have it converge completely with what I would be most interested in working on (and it pays a little bit to boot).

Anyway, that's a ramble. More sometime?….

 

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Obama’s War on the Constitution…

I have been having a number of pretty depressing but spirited debates about the fact that Obama is assassinating people around the Middle East in numbers that might actually make George Bush blush including U.S. citizens.

I keep feeling like I’M the crazy one for being too “hung up” on things like the Bill of Rights or equivocating about assassinating thousands of people on questionable or even no evidence with robot planes.

Then I found this interview. It made me feel a little better. Please, please, please read it.

John Cusack interviews John Turley about Obama’s War on the Constitution

Finally, someone who posits that it shouldn’t be the responsibility of people who support the rule of law and international norms about war crimes and some VERY basic respect for national sovereignty and the Bill of Rights and so forth to justify themselves. It should VERY MUCH be up to those who would equivocate about these most basic things that help to keep in place a very hazy, half-assed line between a nominal democracy like the U.S. and nations that we have condemned throughout our history (even while funding and covertly supporting them a number of times).

“But the Supreme Court” and all that. I know, I know. I’m kind of tired of talking about this with people, so I thought I would just make a little clearinghouse of information and let people get as informed if they care to be. Please feel free to leave any reasonably thoughtful comments. I welcome discourse. Links below:

The “leaked” NY Times story that started the recent hullabaloo about drone strikes and the “kill list.”

(about “leaked”)

Deaths in Afghanistan

More deaths in Afghanistan

Deaths elsewhere

Why there aren’t any “civilian casualties” (hint: it’s by definition)

Killing a U.S. citizen without trial (but just look at him! Trials are only for good U.S, citizens.)

Killing his 16-year old son (…look at him. What a terrorist.)

There’s plenty more if you can stand to poke around. Assassination is the new torture. This is the guy that “progressives” are going to pull the lever for. Hopefully everyone can get right with that. I suspect it will be all too easy. I’m gonna sit this one out myself.
P.S. Coming soon… Drones in U.S. airspace. Signed by Obama.

(photo credit)

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Rent and rent – the twain shall meet

Source: http://commons.wikimedia.org/wiki/File:For-rent-sign.jpg

There is rent and then there are “rents.” Everyone is familiar with rent that one pays to a landlord, residential or commercial. The field of economics defines “rent” as money that accrues to someone who controls some scarce economic resource and is able to charge a premium over the cost of production merely due to this control. Examples include guilds and trade unions, which can often limit the supply of practitioners of a craft and entities that control the pricing of resources constituting natural monopolies / oligopolies such as OPEC. In our current deregulated world large banks, trading firms and so forth are spectacular rentiers with respect to charging a premium for access to capital*.

In a linguistic irony, private equity firms and other financial rent seekers are actually beginning to enter the normal “rent” business. The sharks are beginning to circle around the wholesale foreclosure auction business And rent-controlled apartment buildings with an eye towards exercising enough market power to influence residential rents and shifting as many operating costs as legally permissible to residents. In New York, private equity is buying up thousands of rent-controlled apartments and attempting to force current residents to leave through legal and other means, as this is the only way such investments will show the type of return these “investors” are seeking.

In many ways, this is the next logical step (by today’s crony capitalist logic at least) for moneyed players in the housing market. Already, well capitalized property developers, realtors with access to large lines of credit are often the only parties able to make the cash purchases required to buy up foreclosed properties. Such parties are typically able to be well compensated for their intermediary role by doing the minimum required work to make retail lenders comfortable lending to homebuyers under standard mortgage requirements. In some cases, these middlemen can raise the price of a home by tens of thousands of dollars above the cost of the work done in just weeks (in some cases, no work is done, the buyer simply has a sweetheart deal with realtors, keeping even the selling bank in the dark). A recent story on WBEZ sheds some light on this phenomenon.

So now the big fish want in on the rental market. Home ownership has plunged, existing rental inventories are relatively tight. A well capitalized equity fund can buy up scores of properties at a time with near zero interest on the capital and banks are all too happy to do one transaction for hundreds of properties.

The whole scoop is here in a recent post at Naked Capitalism.

This same process (pushing the frontiers of rent-seeking) is playing out in for-profit education. Some doctors too are already wincing at the potential implications of cost-cutting mandates on individual medical practice with predictions that eventually only large hospital chains and insurance companies may be able to afford to deal with the slim margins that primary care providers may be facing shortly.

The common thread in all of this is that much (most?) of the “allocation of capital” these days—which is, after all, the raison d’être of the finance sector—is doing nothing to improve productivity, fund new economic activity or to contribute to a dynamic economy. In all these cases it is simply being used by a well-connected financial elite to capture existing revenue streams that feature a distressed seller and/or a captive consumer. These acquisitions are then squeezed for every penny they are worth and then some. Time will tell how far this trend will go. But with the current lack of political will to take on the rentier class, it may go very far indeed.

Another recent NC post discusses the irony that much of the money used by private equity firms is public pension, state and sovereign investment funds. So it is often the retirement money of average citizens being used to fleece them today.

* (with retail banks, even depositors access to their own funds are charged a rent in the case of ATM machines, which typically carry fees orders of magnitudes higher than the cost of operating the machines and vary by as much as 200% or more between different machines.

 

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Economists having a field day with healthcare…*

I have had a bee in my bonnet since last year about something on a Freakonomics podcast and I will now finally vent about it.

I enjoy the Freakonomics podcast in spite of its often flouted market bias. I think Stephen Dubner manages to talk with some good people and to usefully explore a lot of compelling subjects. Somewhat in the other hand, Steven Leavitt strikes me a someone who has certainly learned to “think like an economist” as our principles textbooks always admonish us to do. I would consider that as much of a handicap as a skill, but anyway, in a nutshell, I tend to enjoy this show in spite of my misgivings about the backstory and some of the content. It is thought provoking. But one thing that really deeply offended me as a listener was this ultra shoddy, intellectually insulting analogy made by Leavitt last year apropos of discussing health care and the ACA (from this podcast):

LEVITT: Well, my friends in the Obama Administration aren’t going to be very happy with me, but I really, I don’t think it solved any of the important problems that we’re facing with healthcare. So virtually every economist will tell you that there were two things you needed to do to healthcare reform to materially improve the situation. The first was to break the link between the provision of healthcare and employment. And that is just an archaic element of our healthcare system, which really makes no sense. And yet because of tax subsidies, it’s the way most people get their healthcare — through their employer. It shouldn’t be. There’s no good economic justification for it. And yet, if anything, I think this healthcare reform bill actually strengthened that link. … [Healthcare] is virtually the only part of the economy where I can go out and get any service I want—cancer treatment, open heart surgery, have a wart removed, whatever it is—and I pay $3 for it or $5 for it or nothing, even if it costs $50,000 or $100,000. I mean, imagine if you had the same situation with automobiles. Where I could show up at the car dealership and I could say, ‘I want the Mercedes for free.’ Well, people say, ‘You can’t have the Mercedes for free. You have to pay $50,000 for it.’ You say, ‘Why not, I have an inalienable right to free healthcare. Right? Why don’t I have an inalienable right to a free Mercedes?’ (my bold…)

Maybe you have to “think like an economist” and I just don’t have it down yet, but this analogy is absurd. Someone might want a wart removed, but NO ONE WANTS OPEN HEART SURGERY! NO ONE! It is hard to see anything beyond ideological bullshit in venturing such an analogy (I guess brainwashing is feasible, but I give Leavitt credit as an intelligent person). Many studies have been done showing that access to healthcare can increase use of healthcare. But no studies can show convincingly that this increase is driven by the elective use of healthcare by the patient and NOT by problems of physician agency and supply side issues (translation: your doctor has incentives to over treat you either financial, legal, customary or any combination of the three). Here is a study from UIC Professor Robert Kaestner, hot off the presses and featured in a blog post on Freakonomics no less (funded by the AEI too), which shows just this sort of result. In fact, this paper shows that even people with insurance in the form of a health reimbursement account (HRA) that ONLY PAYS for outpatient doctor visits and DOES NOT pay for inpatient services ended up consuming more of these inpatient services (surgeries and other procedures requiring a hospital stay). Why would they do such a crazy thing!? It’s not even free or nearly free, the condition which Leavitt attributes overuse of healthcare to. It is very simply occurring because some expert called a doctor says “you need this” and virtually all sane patients say “okay.” Many of them go broke taking this advice.

To follow the ridiculous analogy to it’s reductio ad absurdum, if we lived in a world where your doctor told you that you needed a Mercedes or you would drop dead within a year, you would probably not think twice about getting a Mercedes with your health insurance (at least those like Leavitt and other academic economists who have insurance coverage through a well-endowed private university, or even Medicare, would).

Apropos of that seemingly absurd hybrid analogy, I bring you this NYT article to the effect that the justice dept is investigating the Hospital Corporation of America for systematically performing heart procedures on patients who did not need them. Surely HCA would be a darling of any free-market economist, the very type of organization Leavitt would applaud as bringing a market structure to the provision of health care. And bring it they did. Sounds like quite a few old people didn’t even want their “Mercedes,” but the HCA insisted.

To finish the rant, though I like the podcast and even enjoy listening to Leavitt in spite of utterances such as this, listen with caution (to everyone, for that matter). Like the old nugget of wisdom “when all you have us a hammer, everything looks like a nail,” when all you have is a U of C PhD, everything in the world looks like a market auction waiting to happen. Other things make the world go round too though.

* The title of this post is a reference to this Freakonomics podcast, in which Steven Leavitt waxes hopeful about how great the health care system could be if economists could “have a field day” with it. I shudder to think…

 

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Unintended consequences – NYC soda ban edition

Background on the proposed ban here.

Had a discussion with the missus about this one. She is, along with Spike Lee, Eric Schlosser, Jamie Oliver and others, in favor.

This article from the libertarian site Reason makes a case on personal freedom grounds (naturally). But that isn’t my issue either. However, the libertarian case does come into play.

What I think is the real problem is that really poorly thought-through proscriptions like this do nothing about obesity. What they do instead is to make a formidable coalition of foes to future regulations based around public health concerns.

Here are a few things I would have had to ask in discussions cooking up this regulation (some of these may have answers, but they are definitely not in the headline articles):

1) What about restaurants that offer free refills? Must they stop people from refilling?

2) What about convenience stores that sell two-liter bottles right alongside formerly large cups? Those are still presumably allowed.

3) What about not-unhealthy drinks like unsweetened iced tea, sugar free drinks, etc.? Must stores not have any large cups or if they have large cups for healthier drinks, must they inspect the contents of each customer’s large cup?

4) What about people who come in with their own large cups? Is refilling these proscribed or just providing new ones in the store?

In a nutshell, this ban will not even deter a very mildly determined New Yorker from drinking a giant cup of soda. What it is doing though, is creating a new coalition of those with real libertarian leanings, those who love soda, virtually all store owners and a ton of others who just think the government is being a big pain in the ass with this. Levying a tax on suppliers of these types of products is arguably a much easier and more global way to do something like this and that is a big fight to pick. Advertising bans would be a less regular-person annoying way to go as well. Making things a hassle for regular folks out in the street is just really dumb policy.

The net result will surely be some functional patchwork of loopholes if the ban is implemented and, most importantly, a much more organized and experienced group of people ready to fight against better designed and more important public health-related regulation going forward. In fact, there is now a group, “Keep Food Legal” whose head wrote the Reason piece, ready to go for future attempts to regulate unhealthy foods and drinks.

And that, my friends, is not the type of activism this country needs more of.

 

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Today’s Supreme Court decision is a huge gift to economists.

Both of the big parts of the decision handed down today on the constitutionality of the Affordable Care Act provide the framework for two natural experiments of massive scale for economists (and other social scientists). Hopefully I may even be able to dip into this subject to some good effect by 2015.

The part in which the court ruled against the government says that the government may withhold the new funding it will provide to states as part of the large-scale expansion of Medicaid coverage (which amounts to about 90% of the cost increase for the first decade), but that it MAY NOT withhold previously provided Medicaid funding for states that refuse to participate in the expansion (the biggest feature of which is increasing Medicaid coverage to single adults earning up to 133% of the federal poverty level).

What this will do for economists is to provide a very discreet “off” to “on” state for economists, sociologists and others to observe what happens in a variety of US states when a major expansion of access to healthcare occurs. This has ramifications for those studying human capital models, well-being, health care costs and more. This is, of course, presuming that some or most (all?) of the states who sued over the act decline to expand their Medicaid program. A couple of interesting features in common among these states are the following:

1) Most of the states in the suit are among those with the highest levels of uninsured people. This should tend to magnify the observable differences between states with low levels of insurance coverage and those with approximately universal coverage after 2015.

2) Most of the states party to the suit are essentially (at least posturing at) refusing a decade of free-riding on the taxpayers of states who declined to join the suit. This is interesting because most of the states suing are net recipeints of federal tax money, in other words, they recieve more from the federal government in the form of highway funds, grants, Medicare funding, unemployment insurance support, and so forth, than the citizens of the state pay in income and other taxes.

Peruse these three maps to get a sense of the oddity of this situation. It seems likely that at least a few of the ideologues running these states may wake up to naked state-self-interest and cave but, presumably, at least a few will not.

Here is a link to a recent Planet Money podcast/story covering a smaller such experiment that points strongly to the conclusion that Medicaid coverage has positive benefits for the recipients with some evidence of spillover effects on society more generally.

The second major issue, that of the individual mandate and the penalty (aka tax) that made it pass muster for Chief Justice Roberts should provide some interesting data on the threshold of effective taxation in spurring alternative actions that have (apparently) ideological ramifications, among other things. In essence, it puts a price on ideology for some disgruntled citizens. This part of the legislation will also be a major proving ground between those who assert that rising healthcare costs are primarily due to adverse selection effects (i.e. people who have greater need for expensive medical care are the ones who avail themselves of insurance, while those who know they are quite healthy stay out of the market, creating an information assymetry in which insurers are undercharging on average for insurance, but leading to higher and higher premiums over time as they try to play catch up) and those asserting that insurance itself creates moral hazard problems (i.e. people who have insurance consume more health care than they need since they don’t see the costs of their decisions a la carte, they or their employers simply pay a fixed amount, notwithstanding copays). At any rate, this development should provide a much more clear example than the mixed results experienced so far in Massachusetts in terms of costs. (Massachusetts is already moving on new legislation to better align the incentives of health care providers with taxpayers, a move which may be echoed nationally as well.)

It should be interesting times. Hopefully it will also make life better for a lot of people.

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