Wednesday, July 31, 2013

Should US Doctors Practice In Africa?

Oftentimes newly minted MDs will go to third world countries to practice where the need for medicine is most dire. But is this really a sensible way to help the suffering?

In the US, doctors can earn several hundred thousand a year just a few years out of their residency. In Africa they probably make little or nothing. So the question is whether doctors can help more people with their money than with their labor.

Undoubtedly there is need in Africa for oncologists, cardiologists, and other specialists, but the low-hanging fruit are the people who lack access to basic things like food, clean water, mosquito nets, vaccinations, etc. Of the people who do need urgent medical care, most of them probably suffer from the same ailments: aids, cholera, malnutrition, dysentery, etc. A dedicated nurse in Africa has much more experience diagnosing and treating these things than does your average graduate from Johns Hopkins.

Presumably Africa has less restrictive laws on who can practice medicine, and the cost to educate and train a medical worker in Africa is much lower. Their knowledge of local languages and customs will likely make them much better nurses and doctors for the region, too. Do we really need our doctors overseas giving routine vaccinations to people who are inclined not to trust them? Wouldn't it make more sense to finance an army of African doctors and nurses?

Rather than go to Africa after medical school and residency, our best and brightest should try to make as much money as they can in the US. If they are really such angels (and I hope they are), they will use their earning potential here to help the neediest abroad. If you're willing to work for nothing in Africa, why not make a half million a year here and send $400k to Africa to train nurses, fund hospitals, supply aid, etc?

In Africa, your labor is worth less and your money is worth than it is in the US. So this is a great opportunity for arbitrage: work here, send your money there. Giving Africans your labor instead of your money just doesn't make sense.

Thursday, June 13, 2013

More than Metadata? A Review of the Technology

The President said the NSA just collects metadata about our phone and email correspondences, but that doesn't comport with Snowden's claim that he could read private emails and phone conversations. What are the facts?
The other day when I first checked, the Wikipedia page on the NSA's new Utah Data Center said it's supposed to have a data capacity of 5 exabytes. Now it says "on the scale of yottabytes." NPR reported the other day that it's 5 zettabytes. In reality I think all that is just inference based on the size of the center and the 65 megawatts of power it is supposed to draw.
Whether it's exabytes, zettabytes, or yottabytes, it seems like way more data storage than necessary for just metadata, which for a single call or email might only be a few dozen bytes.
This is conspicuous because you wouldn't build data capacity for future use; you would surf Moore's Law and add capacity as it becomes needed. I think the data center corroborates Snowden's claim that the NSA collects content, not just metadata.
If that's the case, then does the UDC scan for keywords and phrases that might trigger an investigation, or does it merely compress and archive until there's a search warrant?
And are they collecting location data from our phones, too?
Facial recognition technology is already pretty well developed. More cutting edge research involves face detection that can interpret your mood and even work as a lie detector. The camera on the upcoming Xbox One is supposedly going to be able to measure your pulse! When this technology is more fully developed, will the NSA be using it to analyze security footage?
I don't know whether these things are legally feasible, but they're certainly technologically feasible - if not now, then in a few years. With gigantic multi-billion dollar data facilities, it's hard to imagine the NSA not putting them to use.
If terrorists suspect the government is doing these things, I expect they will adjust their behavior accordingly. So I don't see a big downside to the government being more transparent about this stuff. 
Ultimately I think the tradeoff between privacy and security should not be made in secret, but should be open to our input. This is such a difficult issue because we don't really know the scope of the threat to our safety. If the threat is another Boston Bombing, then I don't see a huge need for such invasive security. But just as technology enhances the government's ability to spy, it correspondingly enhances the power of terrorists. I'm not scared of pipebombs and machine guns; I'm scared of bio-terrorism and the like.
So how do we strike the right balance? I have no idea. My own suspicion is that the NSA will tend to exaggerate the threat and expand its own capabilities. Maybe the best we can do is preserve a strong legal check on the state's surveillance power and hope that the good outweighs the bad.
Regarding Snowden, a lot of people say he is self-aggrandizing, but I wonder whether these people watched the interview or read a transcript. In print, his words do seem dramatic, but in his interview he struck me as a very reasonable, intelligent, thoughtful guy. I like him!

Monday, May 27, 2013

100 Years of Actors' Equity

“One of the things about Actors’ Equity that we hold dear to our hearts is that there is no problem that cannot be solved with a committee. It is probably carved over our entrance." 
- Nick Wyman, current president of Actors' Equity
So yesterday was Actors' Equity's 100th birthday. Happy Birthday AEA! If you don't know, "Equity" is the union for stage actors. A lot of my friends are proud and well-deserving Equity card-holders, so I don't mean to ruffle any feathers with this post. The nice thing about identifying as "libertarian" is that most people regard you as kind of cartoonishly naive and harmless, so you can have friends at all ends of the political spectrum. So if you disagree with me, rather than get offended please feel free to regard this as just the inconsequential rambling of someone with a lot of wacky opinions. With that said...

It seems to me that the problem with all of the talent unions is that they help some of their members at the expense of everyone else. It's true that the unions prop up the wages of those members who can get work, but as a consequence theaters pay less to other actors. Is it better that Actor A receive $5000 for a role rather than Actors A-E receive $1000 each? And suppose there is another $1000 in union dues, fees, and other administrative costs that goes into hiring Actor A. That is $1000 that should be going to actors but is instead being wasted in order to secure a privileged position for Actor A. So all other things being equal, you get an artificial allocation of the $5000 budget to one actor instead of several, and any administrative costs associated with the union are a deadweight loss. That is all other things being equal.

In reality, the total budget allocated to actors is probably much less in the union situation than it would be otherwise. Imagine Actor A and Actor Z are both top-notch union talent, and the union minimum is $5000. That means it would cost $10,000 to cast both in one production. Now suppose the total budget for actors is $8000. With that budget, the producer will only spend $5000 hiring either Actor A or Actor Z. If not for the union constraint, the producer might have hired both at $4000 each, raising the total amount spent on actors by 60%. So that's one way union minimums can lower total spending on actors. Another way is simply that by limiting how producers can allocate their budgets, you decrease their return on investment which in turn can decrease their budget for actors. So actors unions are great for those union actors who land the gigs, but they probably reduce the total amount paid to actors overall. Furthermore, they even harm their members by making it harder for those actors to find work. An actor may be able to maximize their income by working five shows a year at wages between one and four thousand per show, but instead their entire income depends on landing one scarce $5000 gig. And they can't even do a play for fun.

By now I know people are screaming at me that without talent unions the producers would keep all the profits and not spend any more on talent. Well, there are a few problems with that argument. First, actors are actually not very interchangeable. Anyone who has ever been involved in casting knows how difficult it is to find the right person for the role. Casting directors hold auditions earlier and earlier in an attempt to have first dibs on the best talent. Think of actors not as factory workers, but as software engineers being courted by Google and Apple. The way to raise their wages is to bid them up through competition, so what you want is more successful theaters. Third, most theater producers don't actually make much profit if they make any at all. Competition with other theaters forces them to pay more for the best actors, more for the best crew, more for the best marketing, etc. Nor can they just raise ticket prices, because ticket prices are presumably set to maximize revenue already. Raising prices typically means fewer people buying tickets and less revenue overall. If you can raise more money by raising your prices, then you weren't charging enough to begin with. But if you don't believe that on theoretical grounds, then test it empirically and call a theater producer and ask them how much profit they raked in last season. They'll laugh at you.

I recognize there are probably some sob stories from the 1930's about actors being mistreated, and I'm sure a lot of those are legitimate. But oftentimes the situation is something as simple as the fact that nobody, I mean nobody had any idea that Gilligan's Island would still be playing on TV forty years later when they negotiated their contracts, yet we treat stories about those actors as if they were evidence of widespread exploitation. Of course you need basic worker protections, and there's nothing wrong with people belonging to a support organization where they can seek professional advice and advocacy in cases of abuse. But that's not the AEA, and the theater industry today in no way resembles the Woody Guthrie-type world we like to imagine. Fortunately the AEA is tempered by the fact that most theaters are small, nimble, independent operations that strongly incentivize actors not to go union. In the film and TV industry, on the other hand, SAG/AFTRA and the major studios are in such collusion that actors don't really have a choice but to join.

So that's my wacky crazy quasi-libertarian take on Actors Equity.

Saturday, May 18, 2013

Hospital Billing Run Amok

Fascinating article on hospital billing run amok in New Jersey:http://www.nytimes.com/2013/05/17/business/bayonne-medical-center-has-highest-us-billing-rates.html?hp&_r=1&pagewanted=all&

So what is out of whack here? A market guy like me reads this and wonders how such a scheme is possible. Ahhh, bingo: "Under New Jersey law, patients treated in a hospital emergency room outside their provider’s network have to pay out of pocket only what they would have paid if the hospital was in the network."

Yup, a law like that'll break a market right quick. When a boneheaded law makes the customer indifferent to whether they seek care in-network or out-of-network, hospitals have no incentive to negotiate before the fact with insurers. Don't blame the hospitals, and don't blame the market system. Blame the New Jersey legislature.

Tuesday, May 14, 2013

College and Stocks

I mentioned to someone that I'm thinking about applying to grad school, and he advised me to "recognize that the opportunity cost of the time and money getting another degree is huge." Ah, but opportunity cost is not the time and money invested in college; it's the opportunity foregone by attending college instead of something else. So in order to know the opportunity cost, you have to know what is the opportunity.

By that measure, it occurred to me that college is actually pretty cheap right now. The absolute cost of going back to school is primarily made up of two big things: 1. tuition and fees and 2. opportunity costs. I don't count housing and living expenses because those exist whether or not I'm in school.

Tuition and fees are certainly very high. But what about opportunity costs? What opportunities will I be passing up by going back to school? At a time of 7.7% unemployment, depressed wages, and dismal economic growth, those opportunity costs are much lower than at times of full employment and booming growth. So while tuition costs may be rising, the absolute cost of going back to school may not be so huge after all. ;)

To apply the same line of thinking to stocks: Two useful measures for determining the value proposition of stocks are the price-earnings ratio and the equity-risk premium. According to the price-earnings ratio, stocks are fairly expensive right now relative to the historical mean. But equity-risk premium considers the "opportunity cost" of buying stocks instead of buying government bonds. Since the yield on treasury bonds is pretty much nil, the opportunity cost for buying stocks instead of bonds is very low (meaning the premium investors receive for buying stocks instead of bonds is very high). So by that measure, stocks are cheap.

In other words, one way to make something a good deal is to trash the alternative.

Saturday, May 11, 2013

Artist Criticizes the NEA

In this video I discuss why I think the National Endowment for the Arts is probably a bad idea, even though I personally benefited from a nice NEA funded grant.

Sunday, May 5, 2013

A Health Insurance Mandate that Would Work?


Aside from constitutional questions, it seems to me that the big problem with a mandate to buy health insurance is that if you're going to mandate it you presumably have to set minimal standards of coverage and you've got to make sure it's affordable. It's the regulation, not the mandate, that breaks the market.
So here's an idea: we mandate health insurance, but we don't define health insurance. The tax penalty for not buying anything is very high, but if you want to buy some $1 fake policy that offers no real protection, you are free to do that. There would still be free-riders, same as there is now, but people would have to actively enter the market and purchase a worthless policy if they want to be uninsured. The assumption is that by changing health insurance from opt-in to opt-out, we would preserve the voluntary nature of the system but fewer people would choose to free-ride. That would be an improvement, right?

Monday, April 29, 2013

Is the SEC headed for collapse?

A little over a year ago, Congress passed the Jumpstart Our Business Startups (JOBS) Act, a bipartisan effort to boost employment by helping startups gain access to capital. The most talked-about provision in the Act is Title III: Crowdfunding, which was a real coup for entrepreneurs who want to be able to sell shares in their startups through crowdfunding platforms online. Although it made headlines, the reality is that Title III is rendered pretty useless by the details of the law. The much more promising provision is Title II: Access to Capital for Job Creators. It is also the part that could destroy the Securities and Exchange Commission.

Before I get to why the SEC's days are numbered, a pop quiz: Which of the following scenarios are illegal?
  1. A popular deli has a placard on the counter that reads: "We are looking for investors to help us expand! Inquire with management for details."
  2. A local TV commercial advertises a chance to buy shares in a renovated movie theater that plays classic films.
  3. You meet a couple of software coders at a bar who tell you that they are looking for investors to help fund the next Facebook.
If you answered "all of the above," you are correct. Generally speaking, it is a federal crime to advertise unregistered securities to strangers unless you already know that they are "accredited investors."

The reason Title II of the JOBS Act is so revolutionary is that it is intended to lift this advertising ban. Sales will still be restricted to accredited investors, but issuers will be able to solicit those investors openly instead of relying on networks that favor the well-connected. If the law is enacted as intended, advertisements like those I described will become commonplace.

Admittedly, that is a big if. Until the SEC finalizes the rules (it is nearly a year overdue already), nothing is certain. For instance, the SEC may place such strict limitations on the advertising that it will be useless to entrepreneurs. The SEC can still save itself! But if advertising is truly permitted, I do not see how the situation will be tenable. 

Consider that every advertised offer will come with the following proviso: "Accredited Investors only." What is an "accredited investor"? Most people have never heard the term. Chances are it is unfamiliar to you, too. Simply put, an accredited investor is someone who has a million dollars (not including their home) or makes over $200,000 per year. 

Imagine their reaction when people see ads like those described above and discover that they are not eligible to invest, even if they can easily afford it. It is against the law, they learn, because investing in private securities is too dangerous for regular people. Do you think they will find that policy acceptable? Or do you think they will demand the same rights enjoyed by the top one-percent? As far as I can tell, that possibility hasn't even crossed the mind of anyone at the SEC.

The status quo works because only the insiders know about it. The advertising ban preserves its own secret. Once the ban is lifted and people learn the truth about the accredited investor exemption, you can't put that cat back in the bag. I don't think people will stand for it. It will be exemption for all or exemption for none.

So which will it be? Exemption for none would be beyond catastrophic. The whole system of private capital is built on the accredited investor framework. But exemption for all would be the end of the SEC, as there would no longer be a distinction between public and private securities.

In my next post I will discuss what I think we should do if that happens.

Saturday, April 13, 2013

Arizona Film Tax Credit: Yes or No?

Should Arizona adopt a film tax credit in order to spur a movie industry in the Valley of the Sun? No. Let me explain why.

Think "Subsidy"

The proposed refundable tax credit would work as follows: production companies that spend at least $250,000 producing entertainment in Arizona would receive a 20% "rebate" on their state tax returns. The "refundable" part means that if the tax credit exceeds the liability, then the state pays the difference in cash (see SB1242 section 43-1075 E).

The term "rebate" implies that investors are are merely getting back the tax revenue they paid on the production, but that is not the case (nor would it be any better, but that's for another post). The term "tax credit" is lipstick on a pig. The more appropriate term, "subsidy," invokes the usual conservative skepticism, and with good reason.

Think "Product"

Most arguments for the tax credit are based on the idea of fostering a fledgling industry. Make our film industry attractive to outside investors, the logic goes, and that will bring outside money into the state. Sounds good, right?

The proposition is less attractive when we substitute the term "fledgling industry" with the term "product," which is equally accurate. Why is exporting production services any different from exporting airplanes or microchips or anything else? We are right to be prejudiced against subsidizing specific products.

A Net Loser

The key to thinking about this issue is to understand that subsidies do not materialize out of thin air. They are transferred from one party to another, and therefore a subsidy to one is always a tax to another. Of course a subsidy to one industry can help drive up exports in that industry, but the correlative tax will drive down exports in those industries that bear the burden. The question is whether the situation is a net gain or a net loss.

In the case of the film tax credit, the gains to that product will be acutely large and apparent, whereas the dispersed increase in taxes on everyone else will be spread thinly throughout the economy and hard to measure directly. Yet we can be confident that the overall losses will be greater than the gains.

We can be confident in that assessment for the same reason that the subsidy is needed in the first place: the product cannot compete without it. The Arizona film industry does not enjoy a comparative advantage that can justify its existence in the marketplace. Consider that there is a cost to produce a good or service and a price that it will fetch in the market. If the price is higher than the cost, you call the difference "profit." If the price is lower, you call the difference "loss." A 20% subsidy implies that the market price for the product is 80% of the cost. Every dollar's worth of input that our film industry supplies fetches only eighty cents. A 20% loss, in other words.

In fact, 20% is an understatement. The film tax credit requires that only a portion of the total production budget be spent on Arizona goods and services. I don't know the details off-hand, but suppose only half of the qualified production expenditures actually go to Arizonans. In that case the effective subsidy is actually 40%! Having put together a film budget myself and looked carefully at state film tax credits in the past, I am confident that a production could spend less than half of its total budget in a state and still qualify for the full credit.

So if the subsidy is actually a loss, who loses? In order to fund the subsidy, we must tax the profits of other exports. We can't tax unprofitable exports because those don't pay taxes, so we know that we are transferring money from exports that yield a net profit to an export that yields a net loss. Even though we will never be able to measure the impact of a film tax credit on the rest of the economy because the effects are spread so thinly, we can be certain that the flow of resources from productive areas to unproductive areas is a net loser for the state economy.

The Externality Game

Advocates of the Arizona film tax credit argue that boosting our film industry will provide collateral benefits to the state. Most of these are pretty easy to brush aside:
  • It will provide training. Why do we want to subsidize training in a field that needs a subsidy to exist?
  • It will provide jobs. And cost jobs elsewhere. The effect on employment will be the same as the effect on the economy overall: a net loser.
  • Film crews spend money. So do tourists, yet we tax hotels and resorts rather than subsidize them.
  • A film industry is good for our state image. The requirement of any marketing budget is that it generates more money than it costs. How much additional business do you expect Arizona to receive because people see our skyline in the back of the next action movie?
I'm sure people can come up with many more nice things to say about having a film industry, but we need to be careful when talking about externalities. Every industry has both positive and negative externalities, and most are hard to quantify. A transfer from one industry to another will increase some externalities and decrease others. Why should our film industry have an advantage over colleges, startups, hotels, high tech, or anything else? If a product is profitable, the externalities are icing on the cake. Advocates try to justify subsidies by adding up all the positive externalities, and somehow the math always reaches the conclusions they want. The key insight to have is that when our elected officials play the externality game, we lose.

Free Things that Will Make a Difference

The film tax credit is a bad idea, but that doesn't mean there is nothing we can do to support the film industry in Arizona. Aside from keeping the state a low-tax, low-regulation environment that is attractive for all businesses, there are a couple of other ideas we should consider.

As someone who put an insane amount of effort into planning a movie production that ultimately fell through, I know firsthand some of the roadblocks that producers face. In my opinion, the most galling are 1. the laws that make it nearly impossible to raise money from investors, and 2. the unions.

These problems are way too complicated to go into in detail here, so I'll just give the prescriptions I would suggest. Right now we are waiting on the SEC to write new rules regarding how entrepreneurs (including film producers) can acquire investors for their projects. If you want to know a little more about that, I wrote about it here. Overall these changes should be a good thing, but it is quite possible the SEC will bungle it. If they do, then Arizona can give itself a huge competitive advantage by revising the rules on "general solicitation" with respect to Reg D Rule 504 securities offerings. We do not have California's investor networks, so in order to compete we need to relax the rules allowing filmmakers to connect with potential investors.

The second thing we could do is find a way to undermine the unions that have a monopoly on talent. The SAG Ultra Low Budget Agreement is a wolf in sheep's clothing that deceives naive independent filmmakers into casting SAG talent only to discover later that they can never turn a profit under the terms of the contract. If at all possible, the State should forbid the union from punishing Arizona actors who go "financial core" in order to perform in non-union films.

Another angle to press would be to try to achieve through legislative means a "99 seat rule" like the one that exists in Los Angeles. In LA, small theaters are able to cast union actors in plays without the ordinary union constraints. The stage actors union (AEA) is essentially joined at the hip with SAG/AFTRA and they largely contain the same pool of actors, so anything that improves the situation for stage actors will also benefit the film industry. By making Arizona a less restrictive place for professional actors to do alternative theater and independent film without fear of reprisal from the unions, we will help develop the talent that will ultimately bring larger productions. 

In my view, these changes would be a larger comparative advantage than a tax credit, and they would cost us nothing - except perhaps the ire of the talent unions. Assuming the ideas I propose are legally doable, why not scrap the subsidy and do the free things that will make a difference?

Wednesday, April 10, 2013

Paretian, Libertarian, or Utilitarian?

I haven't been able to find a straight answer to this question: does the concept of a Pareto improvement by definition ignore competitive harms? My guess is that yes, it must, because otherwise I don't see how you could get a Pareto improvement in a situation where there is competition and scarcity. Think about it: a "Pareto improvement" is a situation in which at least two parties gain and no third party is made worse off. But suppose A has money and needs a car, and both B and C have cars to sell. If A buys a car from B, both A and B are better off, but arguably C is worse off because their opportunity to sell to A is gone. You might say that B did competitive harm to C by offering a better car at a better price. Does it therefore fail the test of being a Pareto improvement?

Because pretty much every transaction will have the feature described above, I assume that Pareto improvements ignore competitive harm. If I'm correct, then being run out of business by competition does not constitute a harm as far as Pareto improvements are concerned.

Regardless whether I'm right about the precise definition of a Pareto improvement (maybe third party effects aren't factored into the Pareto improvement analysis at all), I think it's only useful if we think about it that way. So what does make a third party worse off? Well, if money is taken from A and given to B, then A loses and we don't have a Pareto improvement. Therefore if we wanted to run a system that produces Pareto improvements, uncompensated transfers would be ruled out. Furthermore, we may safely assume that parties only agree to transactions in which they gain, so we would want to permit voluntary transactions and prohibit coerced ones. Of course, if a party enters into a voluntary transaction based on false information, that may not produce a Pareto improvement either, so we would want to outlaw fraud, too. And finally, we might also want to outlaw certain kinds of voluntary behavior that still leaves third parties worse off, such as cartels and monopolies. With those few prohibitions in place, all transactions are likely to be Pareto improvements and the situation looks remarkably similar to the standard Libertarian universe.

It seems to me that a strict Paretian is very similar to a strict Libertarian. But I can see at least one difference. For a strict Libertarian, the prohibition against force and fraud is a moral imperative, whereas for the Paretian it is more like an imperfect screening mechanism. Suppose A and B don't want to trade with each other even though they would both gain from the transaction. They are just being irrational. The strict Libertarian would never force the transaction, whereas the strict Paretian might force A and B to trade in order to get the Pareto improvement. For the Paretian, the prohibition against force need not be absolute. We might call a Paretian a "consequentialist libertarian," as opposed to the more hardcore "deontological libertarian."

Now where does Utilitarianism fit in? If you accept that a rapid series of Pareto improvements is likely to produce more utility than anything else, then there will be a lot of overlap between Paretians and Utilitarians. The difference, I believe, has to do with figuring out whether it is ever appropriate to permit or even force transactions that do make a third party worse off. In such a situation the gains may exceed the losses even if it is not a Pareto improvement.

A simple example of this would be the transfer I described above in which you take money from A, who is rich, and give it to B, who is poor. A is made worse off, but B may gain more utility from the money because money has diminishing marginal utility. That is, a thousand dollars means less to a millionaire than it does to a homeless person.

As another example, suppose A has a piece of land that he is not developing. B could make that land highly productive by putting a farm on it, but A irrationally refuses to sell it to B. In this instance, the Utilitarian might exercise eminent domain and simply take the land from A and give it to B to develop. Again, it's not a Pareto improvement because A is worse off, but it does increase total utility. 

To review: Libertarians, Paretians, and Utilitarians will all use standard prohibitions against force, fraud, and conspiracy as their starting point. Libertarians will seek Pareto improvements whenever they can be achieved voluntarily, but they will stop short of coercion even if that means accepting a Pareto inferior outcome. Paretians, on the other hand, will coerce transactions in order to achieve a Pareto improvement, but they will not force transfers that leave one party worse off. Utilitarians will seek Pareto improvements whenever possible, but they will also force transactions that are not Pareto improvements in order to maximize utility.

Which one is best? Well, that depends on what you value most. The Libertarian values liberty highest, whereas the Utilitarian values utility highest. To the Libertarian, it is never morally permissible to violate another's individual autonomy no matter how much utility is at stake. The obvious problem with that position is a hypothetical like the following: Suppose you have fifty people dying of thirst and one stubborn person with a well who is unwilling to share. Should we not coerce the person with the well to save the lives of the other fifty?

The Utilitarian, on the other hand, believes that liberty should be considered only in terms of its utility. But how do you measure the utility of liberty? Strict Utilitarianism has the impossible task of measuring the unmeasurable. Furthermore, how does the Utilitarian deal with moral quandaries like the following: Suppose a dying, penniless virgin rapes a prostitute. If the rape provides the dying, penniless virgin more utility than it costs the prostitute, is it therefore permissible?

In reality, the examples of the man with the well and the penniless rapist illustrate that real people are not absolute Libertarians or Utilitarians. I think even strict Libertarians will allow that there are categorical situations where force is admissible, and even strict Utilitarians will allow that there are categorical situations where interpersonal comparisons of utility do not apply. In the well situation we are all Utilitarians, and in the rape situation we are all Libertarians. Those hypotheticals help us stake out the parameters of the philosophies.

What about the Paretian? Well, the Paretian is a kind of made-up figure, because nobody really regards the Pareto improvement as an end in itself. Rather, we like Pareto improvements because they produce a lot of utility by making all parties better off and none worse off. However, as demonstrated before, Pareto improvements neither guarantee liberty nor maximize utility. The values are liberty and utility.

Strict Libertarians makes no attempt to measure the utility of liberty, and therefore their position is relatively straightforward and clear. To them, individual liberty is simply a moral absolute above and beyond utility.

The Utilitarian faces a much more difficult problem. In theory, an omniscient Utilitarian can know every individual's utility function and therefore they will use force only when necessary to maximize utility. But nobody is omniscient, so how do you manage that in the real world?

The strength of the Paretian position is that it provides a highly pragmatic, workable approach that mitigates the excesses of both strict Libertarianism and strict Utilitarianism. The Paretian says that you can force A and B into a transaction if and only if they both benefit from it. How does that translate into the real world? Essentially, it is the eminent domain clause in the Constitution: "nor shall private property be taken for public use, without just compensation." Without that provision, a single holdout could block the building of, say, a railroad by refusing to sell their parcel of land. Eminent domain says that you can force the Pareto improvement as long as you provide "just compensation" so that everyone is better off and nobody is worse off.

But what about transfers that increase overall utility even while making some parties worse off? Here again we have the problem that there is no such thing as an omniscient Utilitarian. The danger of Utilitarianism is that when you try to make ad hoc utility comparisons you might get it wrong and decrease rather than increase utility. The nice thing about the Pareto improvement constraint is that Pareto improvements are always positive sum. In fact, when you can't get a Pareto improvement and must force the transaction, that is a good sign that the transaction is likely to be negative sum.

Remember the example I gave of the Utilitarian taking fallow land from A and giving it to B who will put a farm on it? The question that arises is: why not give it to C, who would put an oil derrick on it? Or D, who would put a mall on it? How do we know which will raise utility the most?

If we let B, C, and D bid for the land, we may be reasonably certain that the highest bidder will be the one who can make the land most productive and thus maximize utility. In that case we will take the land from A and auction it off to B, C, and D. But what if A comes back and puts in the winning bid? What if the land is worth more to A because of its natural beauty than it is to B, C, or D? In that case, we maximize utility by selling it back to A. But then why did we take it from A in the first place? This problem never would have occurred if we had been required to provide just compensation to A before holding the auction. The transaction was bound to be negative sum from the start. Therefore the Pareto improvement constraint - in this case, enforced by the just compensation requirement - would have prevented the imperfect Utilitarian from making a costly mistake.

The issue with the land may seem unique, but it is actually the same problem we face with any redistribution scheme. We may think that A has too much money and B, C, and D have too little, so we want to confiscate A's money without compensation and redistribute it to B, C, and D. But how should we distribute it to the others in a way that maximizes utility? In reality, A's money is not like fallow land; A is already redistributing that money by lending it to a bank (which lends it to B), putting it in the stock market (which finances C), or buying things (which pays D's salary). Allocation by this method is likely to be far more efficient than if we just redistribute it at random. So again, the Utilitarian impulse to confiscate and redistribute turns out to be extremely haphazard, and the strict Paretian's simple rules are a prudent constraint for the imperfect Utilitarian.

If "Pareto Improvement" is the name of your game, you will ensure that all transactions are positive sum. If you run it perfectly, nobody can harm anyone else through force, fraud, or conspiracy. Because most people tend to act in their own self interest, you won't often have to force people to take deals from which they benefit because they will do those voluntarily. But sometimes you will have to exercise eminent domain and make people take a deal they do not want to take. By adhering to the Pareoto improvement principle, you may give up some positive-sum transactions, but you are much more likely to avoid deadweight losses that are more commonly the result of forced transactions.

If you think all that sounds abstract and unrelated to real life, try really digesting the ideas for a few days and then start applying them to different situations to see how they hold up. I think you'll find that a good Paretian rule of thumb will lead you to the right conclusion most of the time. Of course a strictly Paretian scheme might seem to leave out people who cannot participate in positive sum games, such as children, people with severe mental or physical disabilities, etc. Well, the simple answer to that is that there is nothing in the rules against force, fraud, or conspiracy that prohibit charity. People have the bad habit of grossly underestimating the amount of private charity in the world. But assuming charity is insufficient, the Paretian framework accommodates forced transfers whereby all parties benefit and none are made worse off. "Public goods" generally qualify as just compensation, and it seems reasonable to me that some measure of a social safety net may be construed as a public good as well. That is a dangerous game, though, and if you don't rule out transfers categorically it is difficult to tell where exactly to draw the line, so you really want voluntary charity rather than forced transfers to handle redistribution whenever possible.

Generally speaking, I think progressives tend to be Utilitarians with a bad habit of trying to make ad hoc utility judgments and screwing it up. If we have a little more humility about our own abilities as social engineers, we should appreciate that we will get a lot more utility from a strict Paretian approach than if we give ourselves too much discretion when it comes to using coercion. If we aim to increase the rapidity and volume of Pareto improvements, we are sure to do well. We should all be more Paretian.

When I started writing this I sure didn't expect it to go this long, but I guess I got a lot of thoughts out that were in my head.

Saturday, April 6, 2013

Causes of Autism

April 2nd was World Autism Awareness Day. If you're ever feeling down on humanity, just talk to a service provider for people with intellectual disabilities and your faith in the goodness of people will be restored.

On the issue of autism, are we right to be kind of freaked out by what seems to be a steady increase? Some possible contributing factors are easy to identify, like the fact that people are having children later in life. Certainly the biggest factor is just an increase in diagnosis due to improved detection at the margin of the spectrum. And there's something I heard called the "sexy nerd theory," which basically posits that as left-brained people pair up their offspring are at greater risk. But my understanding is that even when you adjust for the known factors, that still doesn't seem to account for the full increase; there seems to be an unknown factor. That's why people look at vaccines, pesticides, household toxins, and other environmental factors. You don't want to freak out about stuff without evidence, particularly in the case of vaccines which you really don't want to discourage. But I really wish we could figure out what's up. This kind of fundamental research is where you really do want more federal spending. Anyway, thought of the day.

Friday, March 1, 2013

Hardcore vs Softcore Libertarianism


Here is an an interesting article on libertarianism in Silicon Valley by Peter Thiel's partner at the Founders Fund, Bruce Gibney: Silicon Valley's Libertarian Problem

The author starts out by clarifying that by "libertarian" he is referring to "the purist strain most prominently embodied by Rep. Ron Paul and family, embraced by an increasing number of entrepreneurs and VCs."

In criticizing the libertarian impulse among venture capitalists, he raises a couple of issues where pure libertarianism seems to fall short:

  1. What about the government's role in creating the internet? 
  2. What about the government's role in net neutrality?

He's right on both accounts, but his problem is he doesn't step outside the "purist strain" of libertarianism and recognize that most libertarian thinkers aren't purists. So what is the classical liberal, "softcore" libertarian response to both of those issues? Pretty simple:

  1. As a rule of thumb, government investment in fundamental research is beneficial up until the point of proof of concept, after which point it should step out of the way and let competitive enterprise within the patent system take over. 
  2. The net neutrality issue is essentially a common carrier type of situation and needs to be regulated as such.

Wednesday, February 20, 2013

Liberal Economists on the Minimum Wage


Predictably inept discussion on Diane Rehm this morning. Lots of platitudes about raising the minimum wage. Let's see what the great Nobel Prize winning economic heavyweights of the Left had to say on the minimum wage before they became partisan warriors:

Joe Stiglitz his book Economics: "If government attempts to raise the minimum wage higher than the equilibrium wage, the demand for workers will be reduced and the supply increased. There will be an excess supply of labor. Of course, those who are lucky enough to get a job will be better off at the higher wage than at the market equilibrium wage; but there are others, who might have been employed at the lower market equilibrium wage, who cannot find employment and are worse off....
In addition, a higher minimum wage does not seem a particularly useful way to help the poor.... Thus, the minimum wage is not a good way of trying to deal with problems of poverty."

Paul Krugman in his review of the book Living Wage in 1998: "...the authors argue at length that because only a fraction of the work force in the firms affected by living wage proposals will be affected, total costs will be increased by only 1 or 2 percent--and that as a result, not only will there be no significant reduction in employment, but the extra cost will be absorbed out of profits rather than passed on in higher prices. This latter claim is wishful thinking of the first order: Since when do we think that cost increases are not passed on to customers if they are small enough? And the idea that employment "of the affected workers" will not suffer because the affected wages are only a small part of costs is a non sequitur at best. Imagine that a new local law required supermarkets to sell milk at, say, 25 cents a gallon. The loss in revenue would be only a small fraction of each supermarket's total sales--but do you really think that milk would be just as available as before?"

Krugman's quote was AFTER the research by Card and Krueger, by the way, which he called "rather iffy."

I really want to win some converts on this issue. In reality, even $0.00 is too high of a minimum wage, because it precludes certain kinds of valuable apprenticeships. Minimum wages are bad.

Sunday, February 17, 2013

The Minimum Wage and Unpaid Internships


In the section on the minimum wage in his famous Principles of Economics textbook, Greg Mankiw writes: "Some teenagers are willing to work as "interns" for no pay at all. Because internships pay nothing, however, the minimum wage does not apply to them. If it did, these jobs might not exist."
Actually, that's not quite right. The law does not provide a special exemption for unpaid internships. Rather, the Department of Labor provides  six criteria for determining whether an unpaid internship is exempt from the minimum wage:
  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
The DOL goes on to say: "In general, the more an internship program is structured around a classroom or academic experience as opposed to the employer’s actual operations, the more likely the internship will be viewed as an extension of the individual’s educational experience (this often occurs where a college or university exercises oversight over the internship program and provides educational credit)."
Consequently, college students often have more job opportunities than college graduates. At Disney, for instance, there are fantastic internships available to college students, but their entry-level jobs for non-students are very menial. When people debate the merits of minimum wage laws, they often ignore this important part of the story.
While I'm at it, I've found that a good way to make the economic case against minimum wage laws is to talk about a "maximum wage." There is a presumably a maximum wage that is some amount less than the productivity an employee provides. So if hiring someone will increase revenue by $10/hr, then the maximum you will spend on that person is $9.99 / hr, including training and other costs. If the legal minimum wage is above an unskilled worker's actual maximum wage, that worker will be barred from entering the labor market. The reason the empirical evidence on this stuff is so mixed, I believe, is that companies do not go firing all their employees in response to minimum wage hikes, so you do get a temporary transfer of wealth from employers and consumers to employees.  But that's only temporary. Equilibrium will be restored as raises are deferred and productivity is increased; meanwhile companies simply will not hire new workers whose skills don't justify the higher wage.
Paul Krugman promises to make an economic defense of the minimum wage, and I look forward to seeing what he has to say. I wonder if he will address the college internship issue at all.

Tuesday, January 15, 2013

Paul Krugman is an Asshole

I'm a regular reader of his blog, but man Paul Krugman is a dick. From this blog post:

Decisions, decisions. Refusing to expand Medicaid would impose huge suffering on lots of poor people, and kill some of them; for people like Jan Brewer, that’s a plus. But it would also hurt the profits of big health-industry corporations. What’s a conservative to do?

First of all, I think it says a lot about Krugman's worldview when he suggests that making poor people suffer and die would be a "plus" for Jan Brewer. I know it was a joke, I know he didn't mean it literally, but he throws out comments like that all the time.

Secondly, read the article he links to. It's about Jan Brewer deciding the state should expand its Medicaid program in order to receive funding from the Affordable Care Act. Slate takes the position that this is a big surprise, since Brewer - a conservative - opposed Obamacare and is therefore expected to reject its funding. Okay, but how does that support Krugman's paranoid assertion that conservatives are torn between hurting poor people and lining the pockets of Big Pharma?

Finally, why does Krugman link to such stupid articles? Here's how the Slate piece ends:

States with large uninsured populations will get a windfall from Medicaid expansion that will provide new clients for local health care providers, while increasing the disposable incomes of the formerly uninsured. Under the circumstances, it's remarkable that Brewer's decision is remarkable. And yet it is.

Here's the no-brainer problem with that analysis: you can oppose the tax without opposing the spending. Arizona is going to help fund Obamacare whether it likes it or not (the tax). Given that reality, we would be fools to turn down our share of what we paid for (the spending). If someone stole a hundred dollars from you, you might hate them but you'd still let them pay for your dinner.

I think the problem with Krugman - and the problem with Slate, for that matter - is that they assume the absolute worst about their opponents, and consequently they spend their time attacking straw men and sounding foolish.

Thursday, January 3, 2013

Taxes vs Benefits

I was having a facebook discussion yesterday that got me thinking about how we think about the benefits we receive from the federal government. The claim was that some states receive more in benefits than they pay in taxes. I googled that and sure enough found a chart that lists states according to how many dollars they receive in benefits vs how many they pay in taxes. For more than half of the states, that number is positive. That's got to be wrong.

What do we mean by benefit? Let's say that there are two types of benefits given by the federal government: 1. direct transfers in the form of subsidies, grants, supplemental aid, etc.; and 2. public goods like defense, the court system, foreign aid, all the government agencies, etc. Let's leave out Social Security and Medicare for now because they are mostly not financed from general revenues (although with Medicare it's getting close to fifty percent). 

So we have direct transfers and public goods. There's just no way that a majority of states receive more in direct transfers alone than they pay in federal taxes, so the chart must mean transfers + public goods when it talks about benefits. But how do you calculate how much benefit an individual state receives from something like defense? Well, maybe you say that each state receives 1/50 of the total benefit. In that case, those states that contribute the least will always receive more than they contribute. 

But what is the total benefit of defense, anyway? Do we just say that the benefit of defense is equal to the defense budget? What if the defense budget is funded with borrowed money? In that case, each state receives the benefit of defense, but it also incurs the liability of debt. How does it balance out then?

And suppose the federal government gives a state highway funds, but those funds are conditioned on the state modifying some of its internal laws. What are the costs of compliance? Do those costs factor in?

Regulations have associated costs. Suppose you have a federal regulation that delays the release of a product by one year. It's hard to quantify the cost exactly, but it would likely include one year of lost revenue, legal and administrative fees, and decreased market activity due to barriers to entry. So if a state contributes to the general revenues, and those revenues go to fund an agency that decreases the efficiency of a given market, are those costs factored in too?

Suppose all the regulations have the combined effect of decreasing the growth rate of GDP by 3% per year. If that's the case, doesn't the total cost increase exponentially over time?

And then what about crowding out? Dislocations and distortions? Government waste?

I don't know how you measure total government benefit, but I do know you cannot do it without also measuring the costs. Given that there is no consensus on how to quantify the costs, no measure of the benefit can be reliable. The idea that a majority of states receive a net benefit from the federal government sounds pretty crazy to anyone with market-oriented views on the economy. My guess is that if you consider the effect of federal expenditures on the growth function, over time the net benefit probably becomes very negative.

Wednesday, January 2, 2013

A Winning Coalition

Psst! Gay people! Come join the libertarian coalition! We welcomed you before the democrats did!

Psst! Religious people! Atheists and agnostics too. How does freedom sound? Come join us libertarians! We are all about toleration.

Psst! Mainstream economists! Oh, you guys are already here with us? Cool.

Psst! Environmentalists! How does a carbon tax sound to you? Yep, this is actually one area where we think government should be most aggressive.

Psst! Jaded humanitarians! Disappointed that all those progressive reforms didn't work? Maximizing social welfare is the name of our game. Just ask all the economists among us.

Psst! Intellectuals! Want to hang with the smartest people in the world? We have a disproportionate share of the top legal and economic minds on earth.

Psst! Open-minded pragmatists! Come hang out with us for a while and listen to the conversations. We're confident we will win you over.

Psst! Immigrants! Guess who has been advocating free trade and open borders since forever? [thumbs pointed at us] these guys!

Psst! Pacifists! Our mantra is make trade, not war.

Psst! Poor people! Our policies will make you richer!

Psst! Middle class and rich people! Our policies will make you richer too!

Now that we have built this amazing coalition, which political party wants to embrace our platform and get our votes?