Tuesday, March 28, 2006

Why Does Charles Murray Want a Universal Basic Income?

Henry and I (and here and here) tossed around the idea of a Universal Basic Income as a kind of pie in the sky idea. And yet here comes Charles Murray (yes, this Charles Murray) proposing...

Murray: We start with a country that is the richest country in the world, with most of its people having lots of money (compared to any historical standard), ample money to provide for their own retirements, medical care, and the rest of it. On top of this national wealth, we then add more than $1 trillion to help people provide for comfortable retirement and medical care, and so forth. And guess what? We still have millions of people without comfortable retirements, without adequate medical care. And only a government can spend that much money that ineffectually.

The alternative I suggest is give every adult American, age 21 and older, $10,000 a year. And let them run with it.

Borders: So $10,000 for every single American? As soon as you turn 21 you start getting this money?

Murray: That's right. And there are a couple of key points to be made here because some folks will be thinking of past attempts at negative income taxes which provided a floor under income and certain experimental programs. And this is different. This is not a floor. This is not a case of, "if you make less than $10,000 a year we will top up your income to $10,000." This is $10,000 period. And so if you're making $10,000 a year, your net is $20,000. If you're making $20,000 a year, your net is $30,000.

There are some complications down the road, but they aren't very important. I'll just mention them real quickly.

At $25,000 of earned income you start to pay a surtax on the grant, and that reaches a maximum of half the grant. So at $50,000 you only have a net of $5,000 from the grant. The reason for that is pretty simple--that you want to give upper income people something for all the money they're putting into taxes right now to provide for their own medical care and retirement, and they get that net of $5,000. And I argue it's a better deal than what they're getting now.

But the other main point is that the surtax doesn't kick in until $25,000 of earned income. So the negative work incentives are pretty small.

Borders: Do you know of any other countries that have tried anything like this? Or is this entirely new?

Murray: The idea is a direct descendant of Milton Friedman's proposal for negative income tax. George Stigler sometimes gets the credit for that. But George Stigler himself says it was suggested to him by Milton Friedman back in the early 1940's. So it's a direct descendent of that idea, considerably revised, but on a much bigger scale and doing much more. I'm not using this just to cure poverty. I'm using this money to take the place of Social Security and Medicare and Medicaid and all the rest of those kinds of things.

Borders: I take it that your system, to get the $10,000 per year, we would have essentially to abolish all other entitlements and transfers.

Murray: That's absolutely essential. It's not on top of an existing system of payments; it is instead of.

Odd, no? The convergence of the egalitarian left and the libertarian right? Though the motivation here is mainly to reduce government waste, rather than to actually help people. But, hey, you take what you can get.

Monday, March 27, 2006

Information asymmetries in insurance markets are good!

I'm not really qualified to comment on the relative position of this paper on the sense/nonsense line, but it has an odd intuitive plausibility that I don't understand at all.
The main contribution is to show that eliminating informational asymmetries by imposing information sharing is detrimental, a result that apparently contradicts previous contributions on the efficiency effects of categorical discrimination under asymmetric information (e.g., Crocker and Snow 1986). One facet of the present result is that allowing asymmetries of information to develop through time decreases the efficiency of competition ex post, thereby enlarging the set of viable long-term contracts in the ex ante competition game, thus increasing welfare. Another facet is insurees' enhanced commitment: in the case in which information is not transmitted to prospective insurers, individuals obtain a partial commitment power not to switch insurers ex post in case of good news. This credible commitment device allows them to extract a higher level of long-term insurance from ex ante competition, and notably insurance against the "risk" of having no accident and being reclassified as a good type. Thus allowing asymmetries of information to develop alleviates the problem of the provision of long-term insurance. This normative result puts forward a clear argument in favor of deregulation, even though (and even because) it would produce asymmetric information in insurance markets.

Furthermore, a secondary result of the analysis is that preventing the transmission (across insurers) of information about insurees' past contract choices—or, more realistically, making sure that insurers do not make ex post offers contingent on ex ante contract choice—results in a strict welfare improvement, through menus of contracts. This is true, although information about ex ante contract choices is worthless in this ex ante symmetric information situation. The fact that menus of contracts can strictly improve on single contracts in a symmetric information environment is a new result.

Thursday, March 23, 2006

Consumer Driven Health Care

The New York Times had an op-ed a couple days ago by one Peter Salgo. It starts out as an attack on how terrible it is that patients are being treated as consumers in health care. Yet his remedy is....wait for it....that patients behave more like consumers.
Evaluate what it is you expect from your doctor, then ask for it. If you are unhappy with your doctor, fire him. If you cannot get more than a seven-minute face-to-face encounter with your doctor, he needs fewer patients. The true power in the health care economy rests not with the doctors and certainly not with the backroom business staff. It rests with you. If you insist on being treated with care and respect, you will be. And the system will improve as a result.

Tuesday, March 21, 2006

From The More You Know The Less They Know Files

Slate has an article about the Western Sahara and the plight of the Sahrawi people. The amazing thing, especially given that the author Carne Ross is an advisor to the Sahrawi government in exile, is that the history is just plain wrong. You expect bias, but factual error? Ross (Ms.? Mrs.? Mr.?) writes
In 1975, Morocco invaded the former Spanish colony of the Western Sahara. A long and inconclusive guerrilla war followed. The Polisario Front, which represents the people of the Western Sahara known as the Sahrawis, was supported by Algeria. Morocco was supported by France, the United States, and other major powers.
This neglects several things.
  • If you want to talk about countries invading, you'd probably want to mention that Mauritania "invaded" Western Sahara at the same time;
  • Invasion is actually the wrong word: Spain had control of Western Sahara until 1975 and granted control of the northern tw0-thirds to Morocco and the southern third to Mauritania;
  • The Polisario Front was supported by Morocco as well, until Morocco had a claim on the territory;
  • And why the interest in Western Sahara? Because Western Sahara is rich in minerals.
  • And why was Morocco granted some control, and not Algeria? Because Morocco was willing to grant Spain control of the mineral wealth, but Algeria was not. Proving one lesson: if you cut a country out of the mineral wealth, it will sponsor counter-insurgents that destroy your ability to control the territory.
This also leaves out any detail of Mauritania's sad involvement in Western Sahara. It fought with the Polisario Front from 1975 to 1978 (during which the Polisario front attacked the capital city a couple times). The cost of the war weakened the government sufficiently that there was a coup in 1978, and then that coup leader reduced involvement in Western Sahra, and then in 1979 there was another coup, and then a few months later the leader of that coup died in a helicopter crash. And Mauritania finally recognized the Sahrawi government in 1984 (as do about 60 countries around the world).

This in no way undermines the moral outrage that you ought to feel about Western Sahara. If anything, it ought to increase it. The Sahrawi should have self-determination. And it's only because of Spain's interest in the mineral wealth that they don't. And the article isn't even as detailed about the ills that Morocco has visited upon Western Sahara as it ought to be. The most important is moving Moroccans into Western Sahara so that it is majority Moroccan and building a massive security wall, changing the facts on the ground, as they say (sound like somewhere else we know?)

Monday, March 20, 2006

Who knew?


Speaking of cities: There are a lot of people in China and it turns out that a lot of them live in close proximity to each other, but not just in Beijing and Shanghai. China has ninety cities with populations of over one million. From New Economist we learn about Chongqing, a city of about ten million. Here is a tall building. Here is a street. Here is a plaza. From the Guardian article:
A dapper, twinkly-eyed 68-year-old, Yin is one of the nation's great industrial pioneers, the 21st-century Chinese equivalent to Titus Salt, Josiah Wedgwood or the Cadbury brothers. [...] His creed is one of benevolent self-interest. "China is too poor. We need high-speed growth. The rich need to increase the income of the poor," he says. "If we improve the living standards of peasants, then they can buy our motorcycles and cars." Within five years, he aims to more than double his workforce to 20,000. Next to the factory, bulldozers are already churning up fields for another one.

Thursday, March 16, 2006

Glaeser is a beast.

Via Stephen J. Dubner I very much enjoyed reading this NYT Magazine profile of Harvard economist Edward Glaeser. His research takes something that may not seem interesting at first (the history and development of cities) and makes it absolutely fascinating:
In 2000, Glaeser took a sabbatical from Harvard and began to spend a few days a week in Philadelphia working with Joseph Gyourko, a real-estate economist at the Wharton School of the University of Pennsylvania. Glaeser had already been thinking about the relationship between housing and urban poverty when one day he and Gyourko began to discuss why cities like Philadelphia and Detroit — places with poor future prospects, both economists believed — weren't doing even worse in terms of population. Why didn't everyone leave, Gyourko wondered, and go to a place like Charlotte, N.C., that had a fast-growing economy? This question addresses a puzzle of urban economics. Cities (think of Las Vegas or Phoenix) can grow at a very fast rate, exploding overnight with businesses and residents. Some can increase in population by 50 or even 60 percent in a decade. But cities lose their residents very slowly and almost never at a pace of more than 10 percent in a decade. What's more, when cities grow, they expand significantly in population, but housing prices tend to rise slowly; even as Las Vegas grew by leaps and bounds in the 1990's, for instance, the average home there cost well under $200,000. When cities decline, however, the trends get flipped around. Population diminishes slowly, but housing prices tend to drop markedly.

Glaeser and Gyourko determined that the durable nature of housing itself explains this phenomenon. People can flee, but houses can take a century or more to finally fall to pieces. "These places still exist," Glaeser says of Detroit and St. Louis, "because the housing is permanent. And if you want to understand why they're poor, it's actually also in part because the housing is permanent." For Glaeser, this is the story not only of these two places but also of Buffalo, Baltimore, Cleveland, Philadelphia and Pittsburgh — the powerhouse cities of America in 1950 that consistently and inexorably lost population over the next 50 years. It is not just that there were poor people and the jobs left and the poor people were stuck there. "Thousands of poor come to Detroit each year and live in places that are cheaper than any other place to live in part because they've got durable housing still around," Glaeser says. The net population of Detroit usually decreases each year, in other words, but the city still attracts plenty of people drawn by its extreme affordability. As Gyourko points out, in the year 2000 the median house price in Philadelphia was $59,700; in Detroit, it was $63,600. Those prices are well below the actual construction costs of the homes. "To build them new, it would cost at least $80,000," Gyourko says, "so there's no builder who would build those today. And as long as those houses remain, the people remain."
Also his view on New Orleans:
Late last year, Glaeser wrote a controversial article that made a case against rebuilding New Orleans. He has since become an intellectual leader to a tiny, unsentimental, let's-not-rebuild-the-city faction. "There's some small core of the city that should be there," he says, "but the city itself has been in decline for 50 years and in relative decline for 150 years relative to the U.S. population as a whole. It's not a great spot to have a city; it's incredibly expensive to build the infrastructure to keep it there. You can't possibly argue that New Orleans has been doing a good job of taking care of its poor residents, either economically or socially. And surely some of the residents are better off by being given checks and being allowed to move elsewhere."

Wednesday, March 15, 2006

Oh the joys of continuity

Kevan Choset posts one of the better problems from analysis: given a continuous surface, like the earth, show that there are opposite points (antipodal points) with identical temperatures (the best solution in comments is this one).

While you can treat it as a surface, I don't actually have the math to do so. Taking an arbitrary circumference, like the equator, will accomplish the same thing and be much clearer (and will also show that there uncountably many such pairs of antipodal points with identical temperature).

You have a circle with continuous temperature. Temperature is bounded (finite), so you will have a maximum and a minimum. Now create a function of the difference in temperature at opposite points on the circle. Because this new function is simply the composition of a continuous bounded function (one that assigned temperature to points on the circle) it will also be continuous and bounded. You have a continuous bounded function giving the differences in temperature values at antipodal points on some circumference of the earth.

Right about now we'd like to invoke the intermediate value theorem and say, aha, the function will be zero at some point. Yet this requires knowing that the distance function is positive somewhere and negative somewhere else. To do this note that there was a minimum value on the circumference. Then the difference from a point opposite it on the circle will be positive (or negative). Similarly, we have a maximum. So the difference from a point opposite on the circle will be negative (or positive). Hence we have a positive and negative value in our distance function.

By the intermediate value theorem, because this a continuous function that has a positive value somewhere and a negative value somewhere else, it must take on the value 0 somewhere in between. At this point, then, we have our antipodal points with identical temperatures.

Because this was for an arbitrary circumference, we've shown that on any circumference around the earth (or even just a part of the earth) there are antipodal points with identical temperature.

Tuesday, March 14, 2006

I want this badly.

Paul Krugman once wrote:
When I was young and naive, I used to imagine that my career as an economist could eventually branch out into one as a general social scientist. And I still love to read and think about the broader questions - a book like Jared Diamond's Guns, Germs, and Steel can keep me happy as a clam for weeks. But the clarity and power of economic analysis can spoil you: once you have a taste of what it means to have a really insightful model, you tend to be inhibited about looser speculations.

The truth is that other social sciences are still waiting for their Adam Smiths. Someday they will find them; as Colin McEvedy wrote in his introduction to the Penguin Atlas of Ancient History, "History being a branch of the biological sciences, its ultimate expression must be mathematical." But for the meantime I guess that I am stuck with my day job.
Well, now we have Economic Origins of Dictatorship and Democracy by Daron Acemoglu and James A. Robinson. Tim Harford reviews it for FT:
With these four cases, Daron Acemoglu of the Massachusetts Institute of Technology and James Robinson of Harvard begin an ambitious attempt to explain the different paths that democracies and non-democracies can take when viewed in retrospect: steady progress as in Britain; oscillation in Argentina; stable, high-performance dictatorship in Singapore or the repressive apartheid regime. What they produce is an abstract model that will infuriate historians but deserves their attention.

[...]

Acemoglu and Robinson model the struggle for democracy as a piece of game theory - a strategic contest between a small number of players. Social classes are collapsed into individuals: the basic model is a two-player struggle between the “elite” player and the “citizens” player. The players are rational, foresighted, take each other’s responses into account and are motivated by economic interest rather than ideology.

Game theory is an ostentatiously spartan tool for analysing mass historical movements. Intra-group conflicts and distinctions between different types of democracy are swept aside.

Acemoglu and Robinson know they are simplifying aggressively: they often use the phrase “Occam’s Razor”, meaning that by shaving away superficial historical details, they will expose the underlying structure of the emergence of democracy. I think it’s worth suspending disbelief to see where the model goes - but historians and political scientists may be less patient with its reductionism.

[...]

Acemoglu and Robinson argue that for the elites as well as the FBI, the answer to this dilemma is to give up the kid. That is, the elites can irrevocably hand over some power to the masses by creating democratic institutions. By doing so they dissipate the threat of revolution and keep some power for themselves, too. The concession is more credible than offering a change in policy (such as bigger welfare payments or lower taxes) because policies are easily changed but democratic institutions are not easily disbanded. Because the concession is more credible, it is also more effective: by making such concessions the elites avoid revolution.
Also see Econoclasm's comments on the book (scroll down a bit.) I had some opportunity to see Acemoglu in action this summer at a number of applied micro seminars and he was brilliant. I expect that this book will be as well. Things like this are why I am getting into economics...

Warner write-up

Via Brad Delong, this entertaining Matt Bai write-up about Mark Warner:
That Warner has suddenly become a commodity, even among those who know little about him, was obvious at the Florida Democratic Party convention in December, where he swept into a party for the delegates, led by an escort of state police. "That's Governor Warner!" one woman said excitedly. "He's so good-looking!"

"He's got a huge head!" her companion observed, craning her neck to see over the crowd as Warner signed autographs. "He sort of looks like Schwarzenegger."

"I do think he has the best chance," I heard another delegate say knowingly. Warner's speech to the convention the next morning drew a more-than-perfunctory standing ovation.
A Mark Warner/Mitt Romney showdown in the 2008 general would please me very much.

Just wanted to mention...

Masa of Econoclasm writes:
Economists are good at finding WHAT the efficient outcome is. A good example is free trade. But economists are bad at finding HOW the efficient outcome can be achieved. That's why politicians often don't like the free trade policy, for example. In the process of implementing free trade, there will be those who lose from free trade. Politicans cannot ignore such people. Finding what the efficient policy is is like what scientists do in natural science. But finding how it is achieved in reality is a different job. In the case of natural science, engineers undertake such a job. What about social science?
A point that I have tried to make in the past.

Gay marriage and institutions

1. Matthew Yglesias writes:
In Stanley Kurtz's nightmare scenario once gay marriage is legal, then polygamous Mormon fundamentalists will get their rights, which in turn will lead to widespread adoption of polyamorous lifestyles leading, in turn, to massive "swinging" and the general breakdown of Western Civilization. That all seems odd to me. Aren't conservatives supposed to believe in human nature? Don't they think there's probably a reason most people don't live like that that's a little deeper entrenched than legal non-recognition of gay couples?
No. Conservatives believe in human nature, but they believe it is inherently bad; at least according to Thomas Sowell's Conflict of Visions. People are just naturally nasty, so we must have institutions in order to constrain them. Like markets and, ostensibly, marriage. The conservative argument FOR gay marriage is that society has excluded a significant portion of its members (gays) from an important institution (marriage). Extending that institution should be a good thing. Of course one need not accept the premise about human nature.

Monday, March 06, 2006

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Thursday, March 02, 2006

Problems With Comparative Advantage

Remember way back when when Chuck Schumer and Paul Craig Roberts published an op-ed in the Times arguing that in our brave new world with mobile factors of production, Ricardian comparative advantage no longer determined trade flows? And s0 we couldn't be guaranteed of the welfare enhancing capabilities of trade? Now knowing a bit of trade theory, I can tell you that this is insightful only insofar as you've only ever seen intro. econ.. For, you see, the other two work-horse models of international trade both show that some people get screwed by international trade. It is only because of the simplicity of public discourse about economics -- due, perhaps, to economist's ideological conviction that free markets are best -- that this is both surprising and novel to most people.

Your basic international trade theory consists of three vaguely related but quite different models: Ricardian models, Heckscher-Ohlin models, and specific-factor models. Only in the Ricardian models with one factor of production is trade Pareto optimal and so makes everyone better off. This is because wages are determined exogenously by technology and so everyone gets paid the same regardless.* With trade, then, you allocate resources more efficiently and so produce more and so everyone is better off. Trade flows are determined by relative productivity of countries.

In Heckscher-Ohlin models of two factors (with two countries and two goods), both countries have the same technology and it is different relative amounts of the factors that determine trade flows. But here trade doesn't benefit everyone: the Stolper-Samuelson theorem states that in an H-O framework, the scarce factor of production is always made worse off by trade. This is because you will export the good that embodies more of the factor in which you are abundant. In moving from autarky to free trade you shift production towards that good and in so doing make the production of both goods have a higher proportion of the abundant factor, raising the returns to the abundant factor and, it turns out, absolutely lowering the returns to the scarce factor.**

In one version the specific-factors model, you have one factor that can't move between sectors in the economy (is specific) and one that can. The specific factor in the sector that produces the good that is imported is made absolutely worse off by trade. So if you have labor in pants and labor in cars, and capital that can move betweeen, if you import pants, then the labor in pants is made worse off. This is because each unit of labor in pants now has less capital to work with and so is less productive and so is paid less. Alternatively, both factors can be specific and then the one that is scarce will lose.

So in two of our three work-horse models, you have that the factor abundant in the production of (H-O), or specific to, the import-competing sector is harmed by free trade. It is very easy to see the parallel to present worries about free trade: suppose that the U.S. has two factors, skilled and unskilled labor, then in two models you'd find out that unskilled labor gets screwed by trade (because we're abundant in skilled labor and, presumably, skilled labor is more mobile than unskilled labor). Only in Ricardian models which assume that all labor is the same does everyone do well.

What to make of all this, though, depends. As Henry cautioned, results from theory are only useful insofar as you think that the model captures the aspect of fundamental importance in the world. It turns out that the Heckscher-Ohlin model does a terrible job of describing actual trade flows, and that Ricardian theory does a lot better (basically, productivity has more importance in determining trade flows than factor endowments). And empirical work has shown that you can't attribute much of the change in worker's wages to trade (which also says that you can't attribute much welfare gains to trade either); that is, it is the increasing importance of technology that has resulted in increased wage gaps between skilled and unskilled labor, and not trade. So, sure, know that there are theoretical arguments that say that free trade isn't quite as fantastic as economists will claim. But don't be so sure that this makes it the case that these are the models that are actually relevant.

Two additional fun facts: first, you can get more sophisticated versions of these models, like Krugman's*** specific factor model with monopolistic competition, where it can happen that everyone does benefit from trade (though, depending, the scarce specific factor might lose). Second, Jones**** puts together a Ricardian model in which if you have a footlose factor that can move between countries -- like, say, capital -- then trade flows are determined sometimes by comparative advantage and sometimes absolute advantage (returns to capital). This endorses the Schumer Roberts point that with footloose capital comparative advantage no longer rules. However, it's unclear what applicability this has to the plight of unskilled workers in the US today (though it might: I just haven't thought about the model enough).

*Though you'll often get hand wavy talk of adjustment costs and all that, but that doesn't obviate the basic point that everyone is better off.
**The why of this is slightly obscure and difficult to grasp. But it's true, trust me.
***Krugman, Paul 1981. 'Intra-industry specialization and the gains from trade', JPE 89: 959-973.
****Jones, Ronald 2000. Globalization and the Theory of Input Trade. MIT Press. (chapter 2)