Thanks, but no thanks, for the fish

Invasion of Privacy

2010-01-12T09:49:00.000-08:00

I theorized something the other night, and while I don’t have any hard data to back it up (at least not right now), I imagine anecdotal evidence should be enough for now. I started thinking about the cost of health care, and in particular, the cost of curing diseases, and how those costs are distributed.

Let’s step back for a moment though and look at the whole health care picture. The big debate right now is whether health care should be a private or public good. Should health care be like a book or a car? Or like fire and police protection? A lot of the debate right now has been about cost, and how to keep costs down, and how it’s going to affect the consumer. My own feelings on government rely on the fact that the decision to make a good public vs. private is not about efficiency or cost.

The postal service could be much more efficient and cheaper for the majority of Americans if it was privatized. The reality of it is though, that if that were the case, many areas of the country would no longer get service, or would pay significantly more for it. This is a value judgment: Do you feel that rural areas should get different treatment than urban postal users? (Arguably, this example is archaic, who uses paper mail anymore?)

With health care it’s not as much a concern about geography, although it does play a role, as much as wealth in general. The problem, therefore, with the current debate is partially an issue of timing. Costs are higher than ever, unemployment is rising, and another over-priced and bloated private market just collapsed on itself. So the focus should not be on cost, but it is inherently unavoidable, particularly at a time like this.

The cost of health care, particularly cures and treatments, is through Research and Development. R&D itself is such an odd concept, relatively new in history and decided perverse. Diseases are not cured out of altruism, but out of desire for profit. While not diving into conspiracy theorism, financial incentives to the researchers themselves do lend itself to continuing research without finding an actual cure.

Why don’t we have cures for the biggest diseases? We have historically obscene amounts of capital and technology that dwarfs what we had just 20 years ago, so why are we still having Breast Cancer walks? It’s the incentives that drive the research, and why this capital may not actually be helping much at all.

The private market’s big problem (in both research and hospital facilities/new technology) is, ironically, competition. With the facilities issue, it has been often presented that there are unused state of the art MRI machines left lying around due to the duplication of services that the private market has created. The same thing can occur in private market research, with the synergy created through collaboration being lost as the best minds get plucked away by different companies.

The reason that these researchers and the companies that employ them don’t collaborate is because of the patent system. The power of a monopoly over patented drugs, treatment, and technology more than offsets any kind of risk/reward analysis that would occur if the private market collaborated more. I would have reason to suspect that the degree of bargaining power wasn’t so large if we hadn’t had to go and make monopoly power illegal all over the place.

But if we make the research public, the motivation of profit likely would slow work. There is little positive reinforcement for a non-profit or government researcher to complete the work, and the negative reinforcement the private sector can wield through the threat of firings and quarterly reports is just not held to the same standard.

Personally, I feel that the private market would not suffer from removing patent laws for the health industry. The market segment is clearly large enough to support more than one producer, so collaboration, and the division of research costs, would likely happen more often, since competitors could copy your work right out the door anyways. The threat of competition on price is not necessarily an issue. Many people request no generics for the prescriptions. Other markets have proven that you can market both generic and name-brands of a good under different labels, effective (and legal) price discrimination.

Lastly, the idea that the producers wouldn’t make enough profit to cover their costs is ridiculous. Maybe the current companies can’t do it for cost, but the market on most uncured diseases (especially those with treatments that keep their patients alive, keeps an artificially high demand in the short run once a cure is discovered) is large enough that someone, somewhere, will be able to do the research cheaper, or more efficiently.

A Rational Dispute

2009-04-20T18:00:00.001-07:00

This is an open letter to Robert DeYoung of the Wall Street Journal in response to his article "Congress Takes Aim at Payday Loans"

The data for Washington that I reference comes from this report.

Mr. DeYoung,

Your recent article in the Wall Street Journal reminds me why I draw lines between the rational economist and the moral individual within myself.

You argue that players in this particular market are making informed decisions. However, you say that 80% of borrowers do not have the funds necessary to meet their expenses, necessitating the loan. I do not believe that desperation makes for a rational consumer choice, no matter how well informed it is. You play the statistical rhetoric card again by stating that 90% of borrowers were either “very or somewhat satisfied with the transaction”. What does somewhat satisfied mean to you? Avoiding foreclosure and scraping by to the next month could be much more satisfying then defaulting on a mortgage, but that does not make that decision good or rational.

You believe that the free market system lowers prices, and as an economist I cannot disagree about the price effects of a price cap on any good. However, the debilitating effect of the current effective interest rates on loans leads to long-term insolvency amongst the borrowers. If, as you say, the borrowers benefit from being able to make their expenses in the current period, then how likely are they to meet these expenses the next period?

Despite the, sometimes true, conception that these loans are used to pay irregular expenses, the opposite is the norm. While some borrowers do in fact need to pay for a sudden medical expense, many routinely take these loans to pay for routine expenses such as rent and car payments. According to a 2004 report from the Department of Financial Institutions in Washington, more than 50% of borrowers on payday loans took 6 or more payday loans out in a single year. 21% of those borrowers in turn borrowed 12 or more times a year. Looking at these numbers further, approximately 4.6% of the population of Washington took part in these loans, which would mean 2.3% of the population could be defined as chronic borrowers under a conservative definition of “chronic”.

At this rate of chronic borrowing, one loan is used to pay another. This is a well recognized practice with the use of credit cards, but with an even more crippling interest rate. You argue that the free market lowers prices, but how can anyone consider an APR of 391%, to use your numbers, when credit card rates of 20% force people into bankruptcy?

You assume that borrowers are rational, and I am forced to disagree. American culture encourages ignorance of risk, antithetically opposed to the idea of rational decision making in borrowing. If there were any clearer indication that we, as a culture, were incapable of rationally determining how and when to take on debt, the mortgage crisis would have been avoided, or at least dampened. I believe that the risks of a price control are of little consequence compared to protecting the working poor from their own desperately satisfied positions.

A Legacy of Great Intention

2009-03-28T10:13:00.000-07:00

I’ve been working on my research into minimum wage policy for a while now, and I’m having a painful time getting the research to confirm my beliefs.

I am a firm believer in the minimum wage. There are three basic ways, in my opinion, which optimal wages can be earned by the average worker. One is to simply negotiate the optimal wage upon hiring. Second, is to negotiate optimal wages through unions. Lastly, minimum wage can (but I don’t think does) enforce optimal wages at the bottom rungs.

I argue that all three of these strategies are effective only at different tiers of skill.

At the higher skill levels, experienced executives and/or intellectuals, the wages can be effectively negotiated through pure competition. Each individual can bring unique and distinct advantages to a firm and can use those advantages to gain bargaining power.

At average skill levels, wages can be frequently negotiated in aggregate. This can be done either formally in unions, or informally through the rise and fall of labor supply in a field. Accountants don’t need to be unionized; they have a specific skill set and regulatory requirements that require a barrier to entry. The market has to provide a minimum level of wages in order to convince workers to obtain the necessary skill set.

At the lowest skill levels, however, there is no minimum skill set. When a job can be performed by a trained monkey, you have to be able to perform the job cheaper than a trained monkey. Or push for legislation preventing trained monkeys from doing your work. Luckily the food industry has issues with the flinging of poop.

Everybody’s aware of the latter one. Most accurately computers and technology replace a lot of low skill labor. There’s a large argument against out-sourcing using this same theory, but a lot of out-sourced labor can and does include skilled as well as unskilled labor.

So if the firm can’t outsource, can’t get a computer to do the job, and can’t hire trained monkeys, why can’t a worker demand a higher wage?

Simply, you are indistinguishable from the other fifty applications. You want $9/hour? Ok, that guy will take $7. That guy behind him? He’ll take $5. And that guy sitting in the back shivering? He and his family haven’t eaten for two weeks. He’ll work for $1 for the entire day, just so he can buy a loaf of bread to split with his kids.

It’s not too hard to imagine what a firm trying to maximize profits will do. But one loaf of bread for an entire family to split throughout a day is inhuman, so we provide a minimum wage, what was intended to be a “living wage”.

So say we make the minimum wage $9/hour. Which guy do you hire? The one desperately trying to save his family? The spoiled kid who wants $5 so he can go drinking with his friends on the weekend? The guy who wants $7 because he’s just doing it to kill time after his 6-figure accounting job?

At the same wage, the firm will take the best applicant, which is likely the last of those. The poor man’s family will continue to starve.

So what do we do?

Of passing interest

2009-01-30T17:03:00.001-08:00

Whether or not we’re sick of fighting government stimulus spending, or we’re finally on board to the idea that government spending helps economies, it seems the outcry against government hyper-spending has been more or less eliminated. Everybody’s jumping on the O-boat, for better or worse, and hoping that the “change we believe in” will pull us out of this mess.

It worked for Tinkerbell and it worked for Dorothy, so why wouldn’t clicking our heels together or clapping while believing really hard get us out of this mess?

The sad part is, it probably is our way out. We’ve already dropped a house (or many); we’re just one gold-paved road away from happiness.

I’d like to come back to that metaphor, but first let’s get back to my point. The big discussion now is no longer whether or not to spend the money, but how.

The big two camps these days are job creation, much like the New Deal, or more tax rebates, much like last year.

I have to at least put some defense in for the tax rebates. A lot of people argue that they didn’t work last year, that we kept getting worse. In it’s defense, we can’t know if it worked yet, it’s just too soon. But we won’t know until it’s too late.

The argument for the tax rebates is really simple; with the money in your own hands, you would be able to stimulate the economy in your own way. They argue that the majority of people will spend the rebate instantly. Most importantly, they feel that consumer confidence would improve if government didn’t decide what to do with their money for them.

I’d like to believe this is a ‘good’ option, really. I just don’t believe with consumer confidence where it is, that most of us will spend that money. I’m 95% positive it’s going to go to savings for myself, which goes against all precedent in my adult life.

To boost the economy, we need a golden road, we need to get people less depressed over their broken house and hopping and skipping down this road. The tax rebates, in less dramatic times, could certainly flatten the effects of a recession, but not today.

To quote Barbara Ehrenreich, “Money, it has been observed, sticks to the rich but just slides off the poor, which makes them the lynchpin of stimulus”. I’m not poor. But I would love $600; it would go a good way towards buying my house and doing what I can to take advantage of this situation.

Hell, that makes me sound like a lot of the not-so-poor people out there, huh? I’m still spending though. I run through my paycheck and stimulate my economy. Let’s face it, the mega-rich are still spending too, if marginally less.

The poor, and the unemployed in particular, are the ones whose spending has been hit the hardest. They just aren’t doing it. Giving them jobs will give them confidence that they can eat again, and maybe even buy a cd or a book, or even a nice dinner out.

$600 is a laptop for your child, a couple of plane tickets to get away from it all. It’s a couple of nice dresses and maybe some shoes. It would be nice.

But it’s not the difference between paying rent and being evicted. It’s not the difference between buying food and begging for it. It’s the more humanitarian option at a minimum, and at best, the correct answer.

Moderations, Depressions, and what makes them so Great (or not)

2009-01-22T20:04:00.000-08:00

I spent a semester being told that we are in a “Great Moderation”, which I guess can be seen as the anti-thesis of the Great Depression. Unlike the polar opposite, which would of course be characterized by some sort of ‘Great Prosperity’, the Great Moderation is seen to be a smoothing of the business cycle. In other words, our booms were smaller, and so were our recessions. It was an era of steady growth overall, and America’s top economists generally believed that this was part of the wonderful and excellent work they had done at preventing crises.

If you don’t see where the irony in this, please leave now.

Anyways, a number of economists, including Ben Bernanke himself, at least acknowledged other possibilities. These possibilities included that business decision makers themselves were just making better choices. I find this one a little hard to swallow after growing up in the Enron era, but I’m sure a number of firms were making splendidly sane and moral choices.

But then, of course, there was the acknowledgement that it could just be a big Great Coincidence. But who would want to admit that? In all defense of their actions, most people would be quick to believe the decisions they were making were right and the cause of such great economic times. Seriously, they all seemed like great ideas at the time. Many of them still do seem like great ideas.

Paul Krugman, who seems to have some sort of accreditation, has some interesting things to say about the Great Moderation. I’m here to say, after studying the thing for several months, hearing a dissenting opinion was like the song of a lark.

I was so shocked when I first read what he wrote, that I misinterpreted him as saying that the Great Moderation never occurred. Thankfully, I did him justice and re-read the accusatory passages and found myself in error. No, he says, the Great Moderation occurred, but it was almost certainly happenstance that brought it about. He spends his book, Depression Era Economics, analyzing the last 20-30 years of recessions, busts, and depressions from some of our closest trading partners.

Mexico, Argentina, Japan, even Thailand is not spared. He shows us that we all silently ignored warning signs. He does admit that it was not only a joint effort by out greatest thinkers, but at the time it was difficult to see with all of the perceived success at the time.

He contends that all of these countries were making what seemed like sound decisions by sound economists with sound learning. If my repetition draws a sense of sarcasm, good.

After numerous financial collapses, and even our own infamous Dot-Com bubble being burst rather spectacularly, he contends that we should have seen all the warning signs after we walked our way in to one more fantastic bubble.

Now we’ve followed all the conventional wisdom since. Inject money in to the system, a couple summer-time checks spread out across the country and talks of more. Reducing the Federal Funds Rate, which now rests comfortably at it’s lowest conceivable value; unless and until the government decides to pay people to borrow money. I don’t think we’re that corrupt yet.

But still our malaise drags on, slowly but surely. Consumer confidence remains low, investment shrinks, firms have begun mass layoffs, hiring and salary freezes, and slashing of benefits to roll up their sleeves.

If Ben Bernanke and the others were right, if we did truly have the kind of marked improvement in economic policy, are we not preventing us from slipping further into recession, and possibly even a depression?

For one, it seems, that the effect on consumer confidence is not as helpful as necessary. We’re not in a depression, but our economy is depressed. After years of dragging ourselves into personal debt, we’ve finally heard the wake up call and started saving, be it through legitimate saving or the reduction of our debt. Real property continues to decline, still suffering from the backlash of the credit crisis and hyper-inflated pricing. The economy is driven by spending, and a decrease in personal consumption spirals through the system

Secondly, it just seems to have run too deep. Confidence, in banks, in spending, in being able to keep a job, appears to be too low for a few hundred dollars in each person’s pockets to make much of a difference. Fiscal and monetary policy can only do so much, and for all the rhetoric of winning the hearts and minds of the people, it seems it’s time for government, at any and all levels, to turn those intentions inwards.

Economists, and their usage of fiscal and monetary policy do not appear to be capable alone of solving this problem. I firmly believe that the main cause of this was through other parts of government and through poor regulation, or lack thereof (besides, of course, our society as a whole failing to recognize the problem). One cannot go a day without hearing complaints about how $700 billion is being spent irresponsibly. If government is the problem, and they aren’t doing such a great job of fixing the mess, consumer confidence is not going to return.

The only thing stopping us now, though, is our confidence. To believe that things will get better, and to spend like we’re already there. Unless you feel that your mattress sounds like a great retirement plan to you.

Opinon on the Bailout

2008-10-14T07:54:00.000-07:00

I’ve been asked about my opinion on the economy a lot lately. While no one expects me to be an expert on the subject, as a first year grad student in economics, people definitely feel I should have an opinion on the matter.

It’s taken me a while to form my “professional” opinion on the matter. As a matter of morality, however, I think a lot of people have gotten what’s coming to them though.

To my understanding, here’s what happened. The banks, in what was not necessarily a bad innovation, began selling off the risks of delinquencies to other banks. As someone who has studied risk management in their career, I don’t see an inherent problem in this. What it looks like happened, though, was that they got a little over zealous. These papers were sold and re-sold to the point where they could barely be tied to the mortgage that backed it.

This wouldn’t be a problem except for 2 things.
A) The value of selling risk, in this market, has not been fully determined. This isn’t car insurance; it’s a completely different beast.
B) The foreclosures occurred at historical and/or predicted levels.

The media has tended to focus on A, but let’s take a moment to evaluate B.

With the risk dispersed (despite the probability of assuming another bank’s risk anyways), banks were willing and able to take on greater risk. The banks began lending to “sub-prime” borrowers. Bad credit. No money down. All of the above. Historical and predicted rates of foreclosure were based on a process that excluded these individuals. However, the culture of real estate had boomed. Prices were rising at astronomical levels. It’s ok if you couldn’t afford the loan, you could re-sell the home in less than a year for much more than you borrowed.

In the famous flowchart scheme of the Underpants Gnomes of South Park:
1. Buy House
2. Renovate House
3. ???
4. Profit!

The problem is, people didn’t realize #3 was “Make Payments”. As soon as the real estate market began to slow down, which at it’s rate was inevitable, those with unaffordable loans began to sit on the houses longer than expected. As such, the payments were no longer being paid, and boom. Foreclosure.

At the beginning of the decline, before a “crisis” was declared, I saw a man on the news complain about the declining market and how he could no longer pay for the 5 homes he had loans out on, and how he could no longer sell them.

This brings me to my opinion of the bailout.

Joe Taxpayer wanted a home (or five). Joe Taxpayer, like the other Joe Taxpayers in America, has a sense of entitlement. Thus, he takes out a loan, picturing the untold prosperity of the American Dream. This plan, as we all know now, blew up in his face.

This isn’t just about the banks lending to those who shouldn’t have gotten loans. This is also about ever taxpayer who decided to take that loan that was offered. This is about everyone who tuned in to their television sets to watch shows about flipping houses. What was once a late-night get-rich-quick infomercial was now accepted prime-time entertainment. And who doesn’t want to get rich quick?

We’re all responsible for fostering this culture, whether or not we borrowed, whether or not we could afford it.

The bailout, for all it’s quirks and imperfections, is a way to bandage a dying market. It is expensive, but the alternatives could, and likely would be, much worse. Yes, it’s very expensive. Even for the government, which wipes it’s ass with $100 bills, $700 billion is a lot of money.

But people who know a lot more than I do decided that $700 billion was less than the cost of doing nothing.

Yes, I’m still morally opposed to it. I feel that letting the economy tank and suffer for what happened is the quickest, yet most painful, way to get back on track.

But we’re all to blame. We all created this society, we all believed in it and no one spoke out against it. So when you think about what that $700 billion costs you personally, something to the tune of $2,300 by my estimate, remember that that’s the price of entitlement. It’s what happens when you get what you feel you deserve, rather than what you actually do.