Category: Economics

Guns, Bees, Terrorists and the Flu

About 3000 died in the 9/11 attacks. In the flu season that followed, about 30,000 Americans died – which made for a very typical flu season. And in the 14 years since 9/11, very few Americans have been harmed by domestic terrorism – while the flu has killed about 500,000.

Even in the worst of cases, the threat to life posed by terrorism is one or two orders of magnitude smaller than the threat posed by the flu. In its effort to fight terrorism, the US has invaded two (or three) countries, spent trillions, and killed far more people in the process than terrorism ever has. Meanwhile, unfailingly, the flu kills ten times 9/11 every season – with no speeches, no outrage, and no troops sent to foreign shores.

Watching the local news, there’s never a shortage of stuff to be freaked out about. Aspiring to be freaked-out rationally, Americans should be scared by the flu. By comparison, terrorism never amounts to very much, and the cure has proved to be far worse than the disease.

Unfortunately, we cant apply the same approach to diminish the threat posed by gun-violence. That’s because, unlike terrorism, guns actually kill a huge number of Americans – about 30,000 per year, very similar to the flu. About 1.25% of all US deaths each year are attributable to guns and the flu respectively. Terrorism: not so scary. Guns and the flu: scary.

So as we construct our narrative for what happened recently in San Bernardino, the key fact isnt that the perpetrators were Muslims. Muslims comprise 1% of the US population, but are responsible for just 0.6% of the mass shootings in the US in 2015 (2 out of 353) – making Muslims 40% less likely to commit mass shootings than everyone else in the US. You’re way more likely to be shot by a Christian.

That the attack in San Bernardino was an act of terrorism also isnt terribly crucial. This year, twice as many Americans will die of bee stings as they will from domestic acts of terrorism. Four to eight times as many will die from peanut allergies. Ordering these threats from largest to smallest: peanuts, bees and terrorists are really not all that scary.

The story out of San Bernardino is that yet another American went nuts, availed himself of his nation’s cheap and plentiful gun supply, and shot a whole lot of people. This story has played out so many times in recent US history that we hardly need to recite the litany of Columbine, Charleston, Sandy Hook, Colorado, Oregon, etc.

The US does not have a problem with domestic Muslim violence. Nor does it have very much of a problem with domestic terrorism. America has a gigantic problem with guns.

More next week….

 

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VW Buggin’ Out

News of Volkswagen’s fraudulent evasion of EPA and EU regulations is astonishing. Emerging facts show that VW sold 11 million cars and trucks that were secretly designed to run clean only when they were being emissions-tested, but to run dirty otherwise. The difference between clean and dirty performance is enormous. Under dirty operation, VW diesels emit up to forty times more nitrogen oxides (NOx) than they do under clean operation. NOx is known to cause respiratory problems – sickening and killing many thousands of people each year.

The consequences that VW now faces are no less staggering. In the US alone, where fewer than 5% of the relevant vehicles were sold, potential EPA fines exceed $18 billion. Individual states might also sue, and about 25 class-action suits on behalf of consumers have already been initiated. Criminal prosecution is also a possibility.

VW officials have admitted to covertly incorporating a “defeat device” in some of its diesel engines. According to EPA regulations,

(§86.1803-01) Defeat device means an auxiliary emission control device (AECD) that reduces the effectiveness of the emission control system under conditions which may reasonably be expected to be encountered in normal vehicle operation and use….

VW isnt the first automaker to get caught trying to sneak one past EPA. In the 1990s, Ford, GM, and several truck manufacturers paid fines for employing similar cheats, to misrepresent vehicle emissions for the benefit of EPA, while enabling those vehicles to have far better fuel economy than they could have otherwise attained.

And thus we come to our point. Lots of waste comes out of a car’s tailpipe, and present technology allows us to make tradeoffs between different kinds. In many cities – Los Angeles, Phoenix, Houston, London, Paris and Beijing, for example, where air pollution is a problem – we prefer to minimize the release of NOx. But we pay a price with diminished fuel economy, releasing significantly more carbon dioxide (CO2) per mile driven. While NOx directly harms human health, CO2 contributes to global warming. And there are many parts of the world that arent given to air pollution, where it would be preferable to allow cars to achieve better fuel economy, releasing more NOx, but less CO2.

EPA has always taken a one-size-fits-all approach to automobile emissions, which is reasonable, given that cars are mobile. A car sold in Florida, which has good air quality, can readily find itself in California or New York. But today, used in conjunction with a GPS sensor, VW’s engine software could be husbanded for a good purpose. Depending on a vehicle’s location and the time of year, an engine could alternatively tune itself to achieve the highest possible fuel economy – releasing the least possible CO2 in areas where NOx pollution is not a health hazard – but then tune down to minimize NOx release in localities where air quality is problematic, accepting poorer fuel economy as a tradeoff.

We arent excusing VW for its considerable wrongdoing. Rather, we’d take this occasion to consider the options that modern engine technology affords us, in light of our competing environmental objectives.

 

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Sick Pay Pays II

Last week we discussed how the problem of “adverse selection” works to undermine insurance markets, including the market for paid sick leave and unemployment insurance. We noted that the cure is to make insurance mandatory for all – as President Obama did recently, by making paid sick leave mandatory for employees of federal contractors. In developed countries, many forms of insurance are mandatory: disability, unemployment, old age, auto, and health are among the most common.

But even universal insurance faces the “moral hazard” problem. That’s the fact that people, for good and bad, behave differently when they have insurance. Old age insurance (like social security) may diminish your incentive to save for retirement. Auto insurance may facilitate riskier driving. Unemployment insurance may make you less deferential to your boss. And indeed, all else being equal, people with paid sick leave should be expected to miss work more often than people without it.

But the key insight about moral hazard, is that we are still better off with insurance than without it. In other words, while it imposes a cost, that cost is almost invariably exceeded by the benefits. For example, it’s been suggested that unemployment insurance and social security have the combined effect of allowing people to take riskier decisions on where to work – giving a hi-tech start-up a chance, for example, instead of playing it safe with an established firm. In the aggregate, such risk-taking may be a significant boost to a modern economy dependent upon constant innovation.

Auto insurance makes transportation risks more manageable, letting people commute to their job of choice; while also facilitating distribution networks, giving consumers more options. Health insurance correlates with better health, and can reduce costs when people make use of preventive care before a problem gets out of hand and lands them in the ER.

There is no free lunch. Paid sick leave, ultimately, is paid for by employees, reducing their wage compensation, leaving total compensation (including benefits) unchanged. The same is true for paid maternity leave, unemployment insurance and even social security. While an employer nominally pays out for those items, direct employee compensation is reduced by the same amount.

Taken together, benefits like paid sick leave confer a further benefit: they seem to make employment more desirable, such that more people offer themselves on the labor markets. This is seen in higher labor-force participation rates in the working-age population of countries that have liberal labor standards; and in relatively low labor-force participation rates in the US.

Most people want benefits with employment – including caps on hours, unemployment insurance, paid holiday and vacation time, and paid sick and maternity leave. But the market has no route from this equilibrium (their absence) to another equilibrium (their ubiquity), without help from legislation.

The point is not that a central planner knows better than individuals at the point of contract. Rather, we must recognize that there are obstacles that prevent market participants from coming to terms. Well-tailored labor regulations can ameliorate these obstacles, to let the market work its magic.

 

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Sick Pay Pays

On Labor Day, President Obama issued an executive order mandating that federal contractors offer paid sick leave to their employees. Such mandates serve as a back-door means of improving labor standards, albeit for a relatively small number of workers.

Most countries make paid sick leave mandatory for full-time employees. The US is alone among developed countries is not doing so. Outside of a few American cities and states that legally require paid sick leave, most Americans are at the mercy of their employer.

One can fairly ask why we shouldnt simply leave it to the markets. If paid sick leave is really so desirable, one can argue, laborers will ask for it, and employers will offer it. But the problem is that paid sick leave – like paid maternity leave – is a lot like insurance, and beset by the same problems. Chief among them is that insureds typically have better information on their own circumstances than might a would-be insurer. And so when someone asks for insurance, an insurer can reasonably infer that that person – for reasons that may be undetectable – is more likely to be a bad risk than someone taken at random.

That simple fact naturally leads to a feedback loop, whereby insurance gets pricier, making the people who are willing to pay that price even worse risks; which in turn makes insurance pricier still, and so on and so on until the market fails – with many people who want insurance, and firms who would provide it, unable to come to terms.

This dynamic was famously observed in the market for used cars, in a piece entitled “The Market for Lemons,” which won for its author, George Akerlof, the Nobel Prize for economics. People are suspicious about used cars because some defects are readily known to the seller, but are exceedingly difficult for a buyer to ascertain. Because of the buyer’s perception of risk, his offer price drops. As a consequence, sellers of good used cars cant get fair compensation, making them less likely to bring them to market. This dynamic feeds on itself until the market contains only the worst used cars.

You can readily envision the same problem occurring in the market for unemployment insurance, if it werent mandatory. A worker asking for such insurance at the time of hire would flag himself as a bad risk – one who is likely to be let go. He might be passed over for a position simply for asking! Consequentially, we should expect unemployment insurance to get more and more expensive; and as it does, only the most at-risk employees would be willing to pay for it – and so on and so on, as the market fails.

This same problem befalls virtually every form of insurance – including disability, old age, and health. The cure is to make insurance mandatory, so that people cant “self-select” into or out of insurance. Insurers are then better able to estimate the risks, because they can look at the population as a whole.

Once you solve the “adverse-selection” problem (also known as the “asymmetrical information” problem), you run into the next big issue in insurance markets: moral hazard, which we’ll take up when the Field Guide returns next week.

 

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The Case for Public Television

The US dominates the world’s market for electronic entertainment. As far as global reach, revenue and influence, no nation has the equivalent of Hollywood. But while US companies like HBO, Showtime and Disney tower over their foreign analogs, the same cannot be said for the humble Corporation for Public Broadcasting (CPB), which is dwarfed by its British counterpart, BBC. Last year, CPB got $450 million from the US government; meanwhile BBC got $6.5 billion from the UK. BBC News’ operating budget of $560 million by itself matches PBS’ total budget, for everything.

Mitt Romney made a splash in a presidential debate when he said that he would eliminate funding for public television in the US altogether – as part of a larger effort to reduce the deficit. But as some observed at the time, CPB’s $450 million is only about one one-thousandth of the annual US budget deficit. Anyone serious about reigning in deficits would not focus on a line-item whose elimination would leave the deficit 99.9% intact – so why was Romney singling out Big Bird?

It wasnt ever about deficits – if conservatives had a real concern about those, they wouldnt use every economic boom and bust as an occasion to slash taxes on the super rich. Intrinsic to the conservative religion is the belief that markets are the answer to our every need – and that government provision of goods and services is an evil to be eradicated. The problem with conservative dogma is that economists have documented many markets that fail to do what we need them to do: allow buyers to communicate wants, and sellers to answer them. One well-understood failure is in the market for “information goods.”

Producing good, reliable information is an increasingly unrewarding business. For decades, the most respected and cited news sources have been family-owned – including the New York Times, Wall Street Journal and Washington Post. Without shareholders to answer to, they could compromise on profits and improve the quality of the news, with a commitment to investigative journalism and overseas reporting – both especially expensive and unprofitable arms of the news business, but essential to an informed public.

In past years, American network news divisions were never expected to generate a profit, serving instead to elevate their network’s public profile. But decades of corporate management have eroded many once-fine institutions. Gone are network news programs and anchors with the stature of Cronkite, Jennings, Rather and Brokaw. In their place are interchangeable newsmodels, better known for their grooming than their insight or integrity. The Journal has been absorbed by the Murdoch empire. Cable news outlets prefer low-cost, high-return punditry to journalism – and devote hours to vacuous treatments of sports, business, weather, celebrity, and the photogenic disaster-du-jour.

In polls, Americans show their awareness of public television’s superior performance in the provision of news, consistently ranking PBS as their most trusted source, and by a wide margin. More broadly, Americans regard Public Television as the nation’s most trusted institution, public or private! And while PBS is perennially regarded as, far and away, the best source of children’s programming; few realize that PBS prime time audiences are enormous: 50% larger than HBO and 60% larger than CNN – while PBS operates on a budget that’s a scant fraction of either.

PBS today scrapes by on minimal government support, relying heavily on private donations. The problem with this system is the phenomenon of “free riding”: you donate to your local public television station, and your neighbor free rides, enjoying the benefit of your generosity for nothing. The aggregate effect of this behavior is the gross underfunding of a desirable service.

Centuries ago, societies figured this problem out, and found a solution: taxation. We dont sit around waiting for drivers to make donations to keep our roads under repair, or for fellow citizens to throw a few bucks to the police department to keep the streets safe. The creation and dissemination of quality information is no less valuable than roads and security, and no less prone to market failures. Public Television should be funded now more than ever, commensurate with the demonstrably high quality content it provides, and to make up for the increasingly dismal performance of corporate news outlets.

Public Television does a lot of good, for very little money. That’s the real reason conservatives hate it – and the same reason why they hate social security and medicare, and are terrified of the ACA – it works!

 

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Refs:

http://www.cpb.org/appropriation/history.html

http://www.pbs.org/about/news/archive/2013/pbs-most-trusted/

http://www.publicpolicypolling.com/main/2014/01/fox-news-once-again-most-and-least-trusted-name-in-news.html

http://www.usnews.com/news/blogs/data-mine/2014/01/30/pbs-is-americas-most-trusted-tv-news-source-or-maybe-its-fox-news

http://www.pbs.org/funding

http://www.pbs.org/about/financial-statements/

http://en.wikipedia.org/wiki/PBS

http://en.wikipedia.org/wiki/Corporation_for_Public_Broadcasting

http://en.wikipedia.org/wiki/BBC

http://en.wikipedia.org/wiki/BBC_News

http://en.wikipedia.org/wiki/Information_good

http://www.theblaze.com/stories/2012/10/04/pbs-hits-back-at-romney-does-not-understand-the-value-of-public-broadcasting/

http://www.thedailybeast.com/articles/2012/02/14/downton-abbey-and-how-pbs-got-cool.html

http://www.nytimes.com/2012/01/02/business/media/pbs-shifts-tactics-to-reach-wider-audience.html?pagewanted=all

 

 

 

 

 

Who’s Down with TPP

It aint your grandpa’s trade agreement. Though the proposed Trans-Pacific Partnership is attended by the usual chorus, featuring competing refrains of “International Trade Took My Job” versus “International Trade Got me a Better Job, plus some Sweet Deals at Walmart,” the controversial aspect of TPP isnt the opening of borders through the elimination of tariffs. It’s about strengthening the power of corporations over national governments, and limiting governments – democratic or otherwise – in their ability to regulate industry.

A relatively minor story just out of Congress serves as a good illustration. The House Agriculture Committee voted to repeal a US labeling law that requires meat to specify its country-of-origin. What’s interesting is why the committee moved to eliminate the law: not because they thought country-of-origin information was superfluous or irrelevant to consumers; but rather because the World Trade Organization decided that the labeling law discriminated against Canadian and Mexican firms. If the US fails to repeal the law, Mexico and Canada will be permitted to retaliate, and that will be costly.

Ignoring whether these labeling laws are actually good or bad for US consumers – we focus instead on the process. An international tribunal made a decision, and Congress is now likely to respond by changing US laws – not for the interests of their electorate (as if!), but without regard to their interests.

TPP goes even further. It would create new supra-national tribunals, in which firms could sue governments for their failure to respect TPP’s provisions. Prevailing firms could effectively collect their “lost profits” from taxpayers. And the tribunals would not be staffed by independent judges with lifetime appointments – but rather by corporate representatives on a rotating basis. Today you’re a plaintiff, tomorrow you’re a judge, and next week you’re a plaintiff again. Nice work if you can find it….

Tariffs have already been all-but eliminated across international borders by existing trade agreements. Modern-day trade agreements like TPP are much more concerned with dispute resolution processes and harmonization of national laws, to smooth things out for multinational corporations. That in itself isnt a bad thing. In past decades, the US pushed to make commercial laws uniform across the fifty states. The resulting Uniform Commercial Code has helped to facilitate interstate commerce.

But TPP would go even further, and may too much restrict the latitude of governments. For example, TPP takes aim at banking regulations. While we could all probably get on not knowing whether our pork chop hails from Texas or Manitoba, we should not be thrilled to see US banking reforms – passed in the wake of the 2008 financial crisis – undone.

Free trade is good – and freer is usually better. That the parties to a transaction may be based in different towns, states or countries isnt terribly important to the analysis. If everyone acts according to their individual interests, the net result is usually that everyone is better off. While things usually are that simple, circumstances arise when people, through their governments, should restrict trade to further a greater good.* And the problem with TPP is that it promises to run roughshod over democratic processes, by which individual nations tailor their laws according to their own values and their perception of the national interest.

 

Refs:

http://en.wikipedia.org/wiki/Trans-Pacific_Partnership

http://www.thenation.com/article/168627/nafta-steroids#

http://krugman.blogs.nytimes.com/2015/05/19/the-mis-selling-of-tpp/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body

http://www.washingtonpost.com/blogs/plum-line/wp/2015/04/30/battle-rages-over-key-obama-trade-policy/

http://www.bloomberg.com/politics/articles/2015-05-15/warren-claim-that-trade-bill-could-undermine-dodd-frank-is-right

http://news.yahoo.com/house-consider-repeal-meat-labeling-law-071204979–finance.html

http://www.azlyrics.com/lyrics/naughtybynature/opp.html

 

* For example, it doesnt much matter whether a factory releases carbon dioxide in Canton, Ohio or in Guangdong, China – the impact on global warming is the same. While people in one country might reasonably accept a dirtier local environment as a cost of having more local industrial jobs, their decision to not regulate carbon impacts people in all countries. And so it’s quite reasonable for other countries to limit trade with the polluting country, as a means of protecting their own environment.

Another example: Left to themselves, laborers tend to organize and demand better pay and working conditions. Therefore there is little pressing need for western countries to impose their own labor standards on the developing world. However some third world governments systematically harass and suppress labor movements in an effort to artificially maintain a competitive advantage. It is reasonable to respond with trade restrictions if only to ensure a level playing field, if not to promote human rights.

 

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The Welfare of Children

Welfare is, and has always been, about promoting the welfare of children – not adults. The name of the US’s first nationwide program – Aid to Families with Dependent Children – says it all. It wasnt a program for poor people generally, but for poor families with children. Its predecessor – numerous smaller programs run at the state and county level, collectively referred to as “Mother’s Pension Programs” – also had the wellbeing of children – not mothers – as its central purpose.

For the past forty years, the American debate on welfare has lost sight of what should be its organizing principle: improving the lives of impoverished children. America never got past Reagan’s preoccupation with the “welfare queen.” Even the welfare reform signed into law by Bill Clinton was crafted without respect to what should have been its overarching priority. For decades American policymakers have been asking the wrong questions about AFDC, and its successor, TANF (Temporary Aid to Needy Families), as well as numerous other welfare programs, such as Medicaid and Food Stamps (SNAP).

When scrutinizing welfare programs, Americans have become overly concerned with what economists refer to as “the moral hazard problem.” Like any form of insurance, social insurance is expected to impact behavior. Without car insurance, for example, you would drive more carefully. Without homeowners insurance, you might never use your fireplace. Lacking health insurance, you might never ski. In the absence of unemployment insurance, you might deal with your boss more deferentially. And indeed, without welfare, poor people with children might be more inclined to work, or to put in longer hours at work. These are all instances of “moral hazard” – of people behaving differently because they have insurance.

Despite the moral hazard problem, we are almost always far better off with insurance than without it. It is the folly of conservatives to be preoccupied with the work ethic of poor mothers, who might take welfare as an opportunity to stay home and look after their children. They consistently fail to ask the most important question: whether welfare improves the lives of children.

At last, sanity is being restored to the welfare debate. This week, the New York Times ran an op-ed penned by the Chairman of the White House Council of Economic Advisers. He discusses, approvingly, several new lines of research that supply an empirical basis for the notion that welfare does indeed benefit children. The best and latest scholarship shows that welfare helps children live longer, healthier lives, obtain more years of education, and earn more. Welfare has a positive impact on such diverse phenomena as low-birth weight, high school and college completion rates, teenage mortality, standardized test scores and crime.

All along, the objective of welfare wasnt to make things easier for parents, but to alleviate the harm that poverty inflicts on children. It is encouraging to see this very basic insight embraced by the president’s chief economic adviser, and to see the welfare debate move back toward its proper area of concern.

 

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the NYT op-ed: http://www.nytimes.com/2015/05/11/opinion/smart-social-programs.html?emc=edit_th_20150511&nl=todaysheadlines&nlid=32816889&_r=0