The Unbroken Window

This is from California’s absurd plans for high speed rail:

In the face of the state’s perpetual budget crisis, some Californians are beginning to regret their votes in favor of the $9.9 billion high-speed rail bond last year. Even though proponents of the train have now admitted the bond was only a down payment on the actual cost to build the system, the numbers that were projected are changing—and all in the wrong direction.

The business plan released by the train’s advocates last month show the dramatic differences in what the voters were told and what reality is. For example, the price of a ticket from San Francisco to Los Angeles is now projected at $105, up from the previous $55 estimate.  That new number changed the ridership predictions: now 41 million annual riders by 2035, down from last year’s prediction of 55 million passengers by 2030. The cost for building the train system has also grown.  The proponents had been thinking $33.6 billion (2008 dollars) but have revised upward to $42.6 billion.  Recently, the Obama administration announced $2.25 billion in funding for the project. Proponents said federal money would be used to close the gap between the voter-approved bond and the ultimate cost, but
this is a drop in the bucket and still will not work.

Do not expect a true LA to SF high speed rail line for less than $75 billion and the ridership numbers are still absurd, as discussed here.  By the way, Southwest’s advanced fair from LAX to SFO is $114 right now.  If you are willing to go Burbank to Oakland, the fair is $90.

That’s from Warren Meyer.

Is this what Barney Frank had in mind in 2003?

When Charles E. Haldeman Jr. became Freddie Mac’s chief executive officer in August, the ailing housing-finance giant had already consumed $51 billion of government money to stay afloat. It’s likely to need even more.Freddie’s federal overseers nevertheless have instructed Mr. Haldeman to focus on something that isn’t likely to make the bleak balance sheet look any better: carrying out the Obama administration plan to allow defaulted borrowers to hang onto their homes.

Pathetic. Only $111 billion and counting.

On Dec. 24, Treasury said there would be no limit to the taxpayer money it was willing to deploy over the next three years to keep the two companies afloat, doing away with the previous limit of $200 billion per company. So far, the government has handed the two companies a total of about $111 billion.

More of that cowboy free-market capitalism gone crazy I guess. And how about respect for the democratic process and the rule of law? Who needs that when we have hope!

By using Fannie and Freddie for such initiatives, the White House doesn’t have to go to Congress for funding. The Treasury and White House can simply issue instructions to Fannie and Freddie via their federal regulator, the Federal Housing Finance Agency, or FHFA.

If you take the classical Keynesian interpretation of the role of government in the economy and compare it to what a “true” Keynesian ought to advocate for based upon a careful reading of Keynes’ work, you might find yourself a little confused.

The classic Keynesian argument is that the government can play an important role in stimulating the economy in times of slack demand, for whatever reason the slack in demand happens. Thus, when the economy enters a recessionary period there is a reason for government to reduce taxes, increase spending or both as a way to get the economy back onto its long run steady state rate of growth path. While I do not subscribe to this theory, let’s just accept it. However, the classic Keynesian argument then is for a temporary increase in government spending. When economic activity recovers in fact the extra spending should be eliminated.

As a corollary, if the economic is in a stage of “excessive” expansion (again assuming that the all knowing people in DC know that it is expansion and excessive) the same Keynesian argument that supports government spending increases to heat up an economy, should also call for government spending decreases as a way to get the economy down to a steady state rate of growth. In other words, if the point of government management of the economy is to smooth economy fluctuations and minimize dislocations – then Keynesian economics ought to apply on both sides of the business cycle.

OK, now you are laughing because you know that only one half of this argument is used in practice. When the economy is entering or is in a recessionary period, the Keynesians all seem to crawl out from under their rocks to advocate for all manner of government stimulus spending – despite the serious arguments of opponents claiming that these will do no good – or even if they would theoretically do good, that the timing would be too late, or the spending too abused by the political process so as to negate any possible benefits we could have gotten from the stimulus. To heck with that – we end up pursuing ineffective Keynesian stimulus every time we are in a recession. But how come these guys (and gals) don’t scream from the rooftops when GDP is growing at over 3% per year and when unemployment is at 5% that the government needs to dramatically scale down the scope of its activities in order to prevent the economy from overheating? In fact, the arguments should also run the same way – in order to prevent the worst crash since 1929, the government should stop spending money – otherwise, the irrational market will over-invest and over-invest until we have no choice but to crash. The answer is obvious – one way to put a halt on activity in boom times is to raise taxes and increase regulation – something the government might have a small interest in promoting. But note however that these tax and regulatory increases would also have to be temporary. If you want to advocate for soaking the rich plans and giving more power to the FDA and the Consumer Product Safety Administration in order to cool down the market, then it follows that these tax increases and regulatory authorities ought to be withdrawn as the downturn comes again. By now, you are choking on your food laughing that I even suggest this is a possibility.

Of course, we do not see the Keynesians argue this way. If American voters and the economists that promote Keynesian policies were seriously wedded to the true Keynesian view – then there would be a long period of time that they would have to support dramatic reductions in the size and scope of government. After all, the typical recession lasts well less than 2 years, and the typical expansion lasts well more than 5 years. So, the reason for all of this actual Keynesian policy prescription has nothing to do with economics and everything to do with expanding the role of the state – and the influence of those economists that can be relied upon to come to the rescue whenever and wherever there might be a crisis on the way. If the Keynesians were serious, they would advocate for the production of a robot that runs an automatic stabilization program to run counter-cyclical fiscal policy. But of course, we know that know statist is ever willing to give up on the enormous discretion to control over 50% of the economy.

If the Keynesians were true to their doctrine, I might even sign up for it given that I am not sanguine at all at the prospects of ever moving seriously in the direction of smaller government and more freedom any time during my lifetime.

When I started at the U of R a couple of years ago, I was offered the opportunity to enroll in a group health insurance program. The University obviously uses Excellus (it is based here in Rochester). My choice of plans had nothing to do with differences in services covered, doctors in the plans, etc. The only choice was whether I wanted to enroll in a high-premium and low out-of-pocket plan or a low premium high out-of-pocket plan. I chose the latter thinking that even a small semblance of a market would leave me better off than if I had first dollar coverage for every medical expenditure.

I did not have the option of purchasing different insurance policies through different companies – since employers only offer insurance through one provider. And because the government has regulated the life out of the insurance industry, there was not a chance of me purchasing any type of non-employer coverage that met our family’s needs (largely because they are mostly high-premium first dollar coverage for all manner of things I had no interest in getting covered for). So I bought into the U of R plan. Now, our school contributes a fantastic portion of the premiums on my behalf. Our family pays only $20.18 in out-of-pocket premiums each month while the school kicks in something like $225 each month on my behalf. I then save $200 per month in a health savings account (tax advantaged) in order to pay medical expenses that happen during the year. This pretty much means I have all of the money for my deductibles covered – if I use less medicine in a particular year, I can keep the difference and invest it. This may be used for future health care expenses, or can be leveraged for other uses if exceptional circumstances arise. After we run through our deductible, we pay 20% copays for the next $x thousand of expenses, and then get full insurance for all expenses beyond the threshold. This means generally that our family pays dollar for dollar out of pocket for most medical expenses we incur each year, but we also are protected in the event of a large adverse health situation striking our family.

But those cost savings only materialize when you can actually shop for your medical care. And as I’ve said before, the notion that we can shop for medical care is an absolute joke. The only shopping you really can do these days is to decide whether to see a doctor or not. More on that in a future post. Rather, I wanted to show everyone exactly how the system here works.

We rushed our (then one year old) son to the pediatric ER here at Strong Memorial Hospital (it is a terrific operation by the way) when he was having breathing issues. We must have got to the ER around dinner time on March 13, 2009. We was given some nebulizer medicine to help him breathe for about 6 hours, while every 90 minutes or so an ER doctor would spend roughly 15 seconds looking after him. We took up a shared ER bed (perhaps one of 40 on the floor) during this time. Around midnight, the doctor didn’t like that his breathing was still not improving and recommended admitting him for the night. At this point we asked whether this was really necessary, and we never were given a straight answer (our sense was that they did not believe he needed to be admitted, but were being overly cautious). We ended up getting admitted (but before we did, I asked what it would cost and they told me they would not be able to tell me) and then released after 12 more hours the next day, March 14th. So we spent about 18 hours in the hospital. During that time, our son was given 8 or so albuterol treatments, a single chest x-ray, and tested, and we saw professional staff for a total of 15 minutes.

We contacted the hospital in the Fall of 2009 asking why we have not seen a bill yet and we never got an answer. I came home from work today to finally get “An Explanation of Benefits Statement” in the mail from Excellus. Note that this is still not the bill, but a statement showing me what the insurance company covered (not much, as I expected – that was the point of my plan) and what the hospital is billing me. Without too much comment, here is what the hospital is billing me for my time in the ER:

• Room & Board (which I asked for pricing on, and was not in favor of purchasing) $935
• Pharmacy $58.40
• Laboratory $435.00 ( we did NOT have any blood work done, so I am still puzzled as to what this cost represents. Could it be that all ER patients are billed a proportion of hospital capital costs, but they are “hidden” in fees like this? I wouldn’t doubt it.)
• XRAY $126.00
• Outpatient $1216.00
• Pharmacy $11.28

For a total of $2,781.68 for an ER trip for a breathing incident where we spent no more than 18 hours in the hospital. There was no invasive surgery, no fancy medicine, no complicated procedures, just the cost of the space we took up for that time (which I understand is valuable). At no point during the visit was I encouraged to think about any of this, nor was I encouraged to consider not having the XRAY, the admission and some of the albuterol treatments done (we do them at home for him, manually, rather than connected to a simple electric pump).

No doubt the price we were charged is different than the kids’ families who were in the ER with us. Even if it takes a bad experience for a customer to learn his lesson in a normal market, he has a way to reduce future costs and bad experiences through choices. What choices do I have the next time our son is rushed to the ER (and with breathing issues, this is not a trivial possibility)? And how would everyone’s near and dear “health care reform now!” do a thing about this mess of a situation?

And by the way, what sort of a free market enterprise takes a year before sending its customers an invoice? And on that invoice, how many firms get away with not laying out what services were rendered? How will raising taxes on the “rich” and mandating that my brother get health insurance do a darn thing about what I describe above?

Fred McChesney illustrates another special privilege granted to the few at the expense of the many. Not only do public employees get paid wages higher than their private counterparts (uncompetitively), not only are many public employees producing things of little value, or things that could be produced more efficiently and effectively by private interests, but their votes are also paid for by offering pretty attractive retirement plans:

Except for one group, that is: retired government employees. Yes, the value of their retirement accounts has fallen, in some cases more than the drop in the accounts of the rest of the country (because of poor investments made by their account managers). But their losses are not irretrievable. After all, they worked for the government—the same government that paid into their retirement accounts by taxing the rest of us. If the government taxed us once, can’t it tax us again to replenish government-employee retirement accounts? Yes, it can, and it’s doing exactly that.

…

Nevertheless, politicians claim that you and I should be taxed to maintain or restore the retirement benefits of others whose retirement accounts have fallen in value. Think about that. My retirement accounts have certainly fallen in value in the past two years. I bet yours have also. So, if we’re not state or local government employees, where do we go to get back the money we have lost? Nowhere. Who has an “obligation” to replenish those lost accounts? Nobody.

…

It is one thing to tax private citizens for fire and police protection from which they benefit. It is quite another thing to tax the current generation to pay those who provided those services to the prior generation. When the value of my retirement accounts declined, I did not look to my children to reverse my losses. Nor, probably, would they have done so had I asked them to. But government doesn’t ask. It has the guns; it just takes.

It would be hard to argue with a straight face that public employees deserve such lavish retirement packages as a “compensating differential” for working in the public sector. Given how famously stable and easy it is to work in many jobs in the public sector, you would expect the compensating differential to be negative. This is more larceny, plain and simple.

I highly recommend one of Arnold Kling’s latest books, Unchecked and Unbalanced. It is a short, highly readable and lucid presentation of the structural problems with government in a wealthy, large and dispersed modern society. The central thesis is that there is a divergence between knowledge (which is largely decentralized and virtually impossible to aggregate) and power (which is increasingly centralized because both scale of government activities and the scope of government activities has increased) which undermines the good functioning of representative institutions. It’s too bad the book has not been widely applauded or read – and certainly lamentable that I am not familiar with works like this coming out of Political Science. The book is full of interesting data and recommendations for making government more accountable to the citizens it claims to represent.

In any case, Kling presents one measure of the increased power of the state – and that is looking at spending per legislator. He uses his home county in Maryland to illustrate, and so I thought I would look up similar data for my home county here in New York. The 2010 budget for Monroe County, NY was approved at $913.9 million. There are 29 county legislators here in Monroe County (thankfully, most of them work full-time elsewhere). Dividing the budget by the number of legislators shows that each legislator averages allocating $31.5 million of spending, every year.

In capitalized terms, assuming a 3% risk-free interest rate, that is the equivalent to each legislator controlling an asset valued at one billion dollars. Kling talks about why this might or might not be a fair assessment, but however you look at it, this is a vast amount of money for individuals to control. There is a mix of lawyers, small businessmen and others on the legislature. Keep in mind that there are only 793 billionaires in the entire world. And a relatively moderate spending county legislature in depressed Western New York has 29 people that have as much wealth at their disposal as the 793 richest people in the entire world.

At least the county council has a mix of representation on it – I used to live in Massachusetts where the highest ranking elected member of the opposition party was something like a county Sheriff. Keep this in mind the next time you hear someone groaning about inequality and the power of corporate interests in the United States.

It manages to find a few pennies under the couch for this.

Yep, and these clowns can responsibly run school systems, health care systems, welfare systems, etc. I want my money back.

Yesterday, we explored why it might not make sense to be too tough on crimes – the reason being is that raising the penalty on petty crimes at the same time effectively lowers the penalty on more violent crimes. This seems to be an unattractive and inescapable constraint in law enforcement. At some point, the marginal cost of committing a violent act must fall to zero in societies that impose the death penalty.

For those criminals committed to an act – if the penalty for committing that act is capital punishment, then any further violent act is essentially costless to commit. So, for a committed murderer, mass murder is only one small step away. Or for that same committed murderer, first torturing your victim and murdering them is no more costly to you than murdering them in a more “humane” way. This might raise two uncomfortable questions for you. First, what can we do as a society to deter such heinous acts, if we must inevitably run into this zero marginal cost problem?

That is not an idle question for law enforcement either. It has implications on the benefits side as well. One reason CEO pay has gotten so high is that it creates huge incentives for people below the CEO to work more productively in order to obtain the brass ring of becoming a CEO. That is great and I suspect it works pretty well. But once we accomplish that, where is the additional incentive going to come from once you become the CEO? The marginal benefit of good performance may not be as high or continuing to increase (I believe Arnold Kling raised this point in his book Unchecked and Unbalanced, but I actually forget when I first came across it). Now, I am no expert on contracting, but it appears that there may be a way to mitigate this problem on the benefits side. But the consequence of this decreasing marginal benefit is that the incentives for a CEO to continue to do great work are not as high as they were in trying to encourage him to become CEO in the first place (I will remain agnostic about whether the next 100 million is enough of an incentive to keep a guy working hard who already amassed $400 million or more).

The second and more intriguing issue for me is why we actually do not see much more mass murder and horrific violence than we already do? After all, there are fairly large numbers of violent people out there, and the marginal cost of committing those extra acts of violence are low. So either there is some other cost of moving from murder to mass murder that we are overlooking, or that the marginal benefits of moving from murder to mass murder are not sufficiently large.

I don’t know … but this question allows for an interesting empirical test to examine just how intense these incentives are. What one might do is to look at rates of really violent crime and mass murder in jurisdictions that have implemented the death penalty for murder versus the rates of really violent crime and mass murder in jurisdictions that have not implemented the death penalty for murder. The hypothesis would be that mass murder and other extremely violent incidents should be more likely in places where the death penalty is currently in force.

Of course, there is a huge problem with my idea. What is it? Well, in places that do not have the death penalty for “regular” murder, I suspect that there is no death penalty whatsoever. So, the crime of committing one murder or 10 murders or more is punished only by life in prison – in other words, the marginal cost of mass murder will not be higher in the jurisdiction without the death penalty if there is no difference in penalties for murder or worse. Empirically, there might be a way to deal with this, and there might be legal differences in the prosecution of criminals in each jurisdiction that might allow us to overcome this problem, but I have not thought about it much. I just throw it out there for consumption and as an idea for someone in need of an interesting economics paper topic.

UPDATE: Andy Nutting points me to this fascinating story.

The economic way of thinking demonstrates that it is marginal ðecisions that matter. Thus, students that learn about the economic way of thinking understand that it might not be a good idea to institute the death penalty for crimes like littering and petty theft, even if society really hates having litter and petty theft. Why is this?

Thinking at the margin allows us to look out for unintended consequences! The term margin is perhaps a bit confusing – but all we really mean by “marginal” thinking is to focus on what benefits and costs change when you make a decision – it is only those that matter.

While being tougher on those specific crimes may very well reduce the amount of litter and petty theft (it raises the cost of committing theft and littering), think about how this harsh penalty affects decisions at the margin. By increasing the penalties for being caught committing litter or petty theft, you have lowered the cost (i.e. lowered the  the marginal penalty) for armed robbery or for murdering someone who catches you in the act of littering! When a petty thief decides to commit the crime of armed robbery, he is not likely thinking about the penalty for armed robbery or murder, he is likely thinking about the extra penalty for being an armed robber conditional on him already being caught as a robber. Therefore when we attempt to get really serious about prosecuting and penalizing petty criminals, our efforts might backfire into creating a more violent society, since the cost of committing armed robbery and murder is now lower, at the margin.

Similarly, raising the penalty for littering to the death penalty will increase the incentives for litterers to shoot anyone that might possibly have seen them litter! If the penalty for murder is death and the penalty for litter is death, there is no additional cost for shooting someone, conditional on you littering. But there is a benefit! By shooting possible witnesses, you have reduced your chances of being found out.

Therefore, even though society hates litter and petty theft, instituting the death penalty for those actions might not be in their best interest. This way of thinking lends itself nicely to a whole host of interesting empirical tests, one of which I will discuss tomorrow.

Not really.

A student of mine forwarded this Yahoo finance piece to me:

Are you infuriated every time you open your cell phone bill? Livid when you buy a snack at the movies? These are some of the rawest deals around.

…

Movie Theater Popcorn — 900% Markup

A medium bag of popcorn costs just 60 cents to make but retails for $6, a whopping 900% markup. That’s enough to make “Avatar” fans turn blue.

Richard McKenzie, an economics professor at University of California-Irvine, says theater owners mark up the snack so much because they don’t make a profit elsewhere.

McKenzie, author of the 2008 book “Why Popcorn Costs So Much at the Movies: And Other Pricing Puzzles,” says that out of your $10 movie ticket, only a tiny percentage goes to the theater’s profits.

“Popcorn is what pays for a lot of stuff in the movie theater,” McKenzie says. “A lot of theater owners tell me, ‘I consider myself working in concessions, not movies.’”

My very quick response is this:

Take popcorn for example, if what you care about is popcorn, then you might argue that you are being “ripped off.” Of course, there are two caveats. First, how can people be ripped off if they can voluntarily choose to make such purchases? A more proper way of thinking of it is that consumers are forking over more of their surplus than they would prefer. For example, if I would pay at most $15 for popcorn, and I only have to pay $2, my “consumer surplus” is $13. If I have to pay $10 for popcorn, I am still happy to do it, but the net pleasure I get from that purchase is smaller – now only $5. Second, for most of us, the good we are consuming is not popcorn – but rather the “movie theater experience.” If you take Professor McKenzie’s analysis seriously, which I do, then the movie theater would have to charge much higher prices if it sold popcorn for less, or perhaps it would shut down altogether. The popcorn pricing strategy is a good way to creatively finance your operation.

Furthermore, there is no shortage of competition in the movie theater sector (or most of the ones they cite). Is it plausible that all theaters can agree to keep popcorn prices high just to rip us off? Not really. In fact, it would be impossible to maintain such a large cartel. And theaters are free to test out all kinds of pricing strategies. That we do not observe this tells you something about pricing. Finally, there are lots of easy and cheap substitutes for the movie theater experience, yet the popcorn price persists.

Looking at mark-ups tells us nothing about whether we are being ripped off.