Clearing out the queue

Having been preoccupied the last few months, I’ve accumulated quite a pile of links that I never got around to writing anything about. Rather than forget about them entirely, I want to try to at least write a little bit about them.

Five questions for Hal Varian: This is an abridged transcript of a podcast interview with Hal Varian, author of a classic economics math text and currently Google’s chief economist.

A Brief History of the Corporation: I haven’t fully digested this but I’ve gotten interested in the history of firm organization and this seems to do a good job. It can be easy to forget that the corporation had to be invented; as such, it could be that in the future, other modes of organizing economic activity may be more productive.

The General Social Complexity Factor: Discusses one of my favorite maps, the Inglehart-Welzel cultural map of the world, its relation to population history, and more generally argues for the use of more quantitative methods in history, which I am absolutely down with.

Mini-Trumps are coming up all over Europe: A short interview with Francis Fukuyama, along the lines of a previous article I wrote about here.

How Starcraft Tournament Unlocks Future of AI: I think developments in AI with gaming are underreported and suggest the potential for huge advances. The biggest example here is of course AlphaGo, the most recent iteration of which was able to completely learn and master the games of Go and Chess merely by playing against itself for a period of a few hours. Mastery of Starcraft would represent another level of abstract reasoning.

The Disney-Fox merger: I have a philosophical tension I need to resolve: on the one hand, I think the current intellectual property regime is very poorly used, and I’m very skeptical of the usefulness of patents. In particular, I think extended copyright timeframes for artistic creations like music, stories, and characters, is unnecessary and probably harmful for long term creativity. On the other hand, the very driving force behind the eternal extension of copyright, Disney, which is accused of possessing monopoly power with its impending acquisition of Fox, has been putting out really high quality stuff of late. In 2016 alone, Disney released Moana, Zootopia, and a live action Jungle Book remake, all of which are very high quality. Disney has mostly let its acquired studios like Pixar, Marvel Studios, and Lucasfilm do their own thing and release generally high quality films. Anyone with a toddler and a Netflix account knows that there is a lot of plain crap out there when it comes to children’s entertainment. So this doesn’t appear to be a simple smash and grab corporate maneuver, with a large company buying out smaller competitors and draining them of their lifeforce in search of greater profits; I suspect that in a world of easy access to entertainment, quality matters much more than it used to, and it could be that bigger studios are in a better position to deliver that.

Related to that is this blogpost on the message of Moana, which I found a rather striking inversion of the usual hero’s journey story; the post also features the idea of Tyler Cowen. Can we just pause to think how great it is that we have a giant corporation producing commercial content featuring messages of diversity, understanding, and non-complacency?

18 Signs You’re Reading a Bad Criticism of Economics: This is older but still highly relevant, particularly number 6: “Uses the word ‘neoliberal’ for any reason.”

I’m not sure how to summarize ‘Imagine All the Virtues‘ other than to say it’s a discussion of the need for practical ethics and morality in society, contra idealized versions; featuring a guest appearance of the classic Star Trek: TNG episode “Darmok”.

I thought these colorized math equations were really neat and helpful. I’ve always been able to do math without much problem, but as I’ve gotten deeper into economics I’ve wanted to get a stronger intuition into how lots of these equations work.

And along those lines, I recently discovered this playlist of videos on Linear Algebra, and it’s no exaggeration to say this has been more helpful to me than any math class I have ever taken. If I ever have to teach linear algebra, you can bet these videos will be assigned.


What’s going on with cryptocurrencies?

As the price of Bitcoin and other digital currencies have skyrocketed over the past year, many have wondered just what is going on? Why is demand for cryptocurrencies so high? Indeed, the return to investment in many cryptocurrencies is high enough that the chipmaker AMD has seen its stock price almost double over the past year because coin ‘miners’ are buying chips en masse to create massive complexes of servers doing nothing but ‘mining’ coins! (Story here.)

Economist John Cochrane argues that what is driving the price of these currencies is a combo of their ‘convenience yield’ and ‘speculative’ yield. Why would anybody hold a currency that is far above its ‘real’ value? Well, Bitcoin is good for holding for short terms when performing transactions you don’t want monitored. But with a limited supply of Bitcoins (or Etherium, or whatever), the price gets driven up via basic supply and demand. Add to that the desire to make a quick buck in the face of ever rising prices, and the behavior of these prices makes sense; it doesn’t require any sort of strange irrational herding of investors. (As Walter E. Williams is fond of saying, any theory that relies on human stupidity isn’t a very good theory at all.)


The Republican Tax Plan

There’s been quite a bit of hyperbole, at least in the areas of the Internet I typically find myself in, regarding the Republican tax plan, that end up conflating a two separate issues: the substance, and the process.

Process complaints are totally legitimate and if this is the way bills are crafted and passed going forward, we will be in real trouble as a country. As many have noted, it’s almost as if the GOP took all of their complaints about the ACA process and used them as a guidebook for how to pass a bill. The rush to pass something was driven totally by political concerns. What’s most perplexing to me is why they didn’t take some off the shelf tax plan from a conservative think tank and pass that, instead of hastily assembling a barely coherent, at times handwritten, plan. Part of the reason the ACA was able to pass after only a year of process was that much of it was already written; that’s what think tanks are for.

In terms of substance of the bill: we don’t yet know how exactly it will all shake out, so it’s a bit premature to say. My sense from reading economists I generally trust is that the bill isn’t great, but it’s not going to destroy the economy either. Here too two issues are conflated: the deficit the bill runs, and what the bill does with that deficit.

Many on the left were highlighting the deficit as the major problem with the plan, which just seems like motivated reasoning to me. Right now we are still in a very low interest rate environment, so debt service is low. Deficits in and of themselves are not bad; they simply reflect a shifting of consumption across time; borrow to spend today, and pay back tomorrow. If the economy is growing at a rate higher than the interest rate, you can run deficits with little fear; that’s about where we’re at now.

The real problem lay in how the deficits are used: Josh Barro has a rundown of the plan, and Tyler Cowen lays out his broader thoughts here, and I want to expand on a couple things in that piece. Tyler writes that the GOP and Trumpist agendas are related in that they are focused on investment – the GOP domestically, and Trumpists internationally. The idea goes that America needs a big boost to investment to stimulate growth. It certainly could be true in some situations that growth would result from greater capital investment, but is that the situation we’re in?

So I used FRED to put together a few graphs of foreign direct investment in the US. Here’s just the inflow per year in millions of dollars; you can see a seeming jump to a higher level of investment since about 2015. (Also note the mid 90s inflows thanks to the tech boom.)

fredgraph (2)

The pattern is seen more clearly seen here, in the percent change from a year ago of the total stock of FDI in the US. Each data point is per quarter.pctchange

And the log of the total stock of FDI:loglevel

So overall, we can see that FDI has actually been quite large already in the last couple years, especially compared to the post- tech boom era. This boom began in about 2015 (and so has nothing to do with Trumpist policy), and may have even ended as the last couple quarters of data suggest.

So while there could be something to the argument that we need to boost FDI, it’s obvious that it has already been at elevated levels compared to the historic norm; this is to say nothing of the actual efficacy of a 20% corporate tax in drawing in new investment (and hence more American economic growth). You’d have to imagine that there is a fairly large pool of global capital that is currently not being invested in the largest economy in the world because of the too high tax rate (despite an effective rate closer to global average). I’m rather skeptical of that.

Additionally, Trumpist efforts to reduce the trade deficit will have an opposite effect on foreign investment. After all, when a country runs a trade deficit, that means other countries are instead of purchasing US goods and services either 1) holding our currency or 2) using it to buy American financial products, which is investment! So actually, these two agendas may be running at cross purposes.

More on Housing Regulation

Tyler Cowen links to a piece in Dissent that criticizes the growing movement of anti-NIMBYism. The piece is specifically critical of Hsieh and Moretti’s research, which I previously wrote about here. While it generally attempts to be serious, my alarm bells go off anytime someone deploys the phrase ‘neoliberal agenda’.

The Dissent author’s chief argument here, beyond some nitpicking that’s not really that important, is this: markets do not provide enough affordable housing because it doesn’t get the rate of return that other investments do, therefore government must subsidize the creation of low rent housing.

Of course, this argument could be true under certain conditions…such as an excessive regulatory burden on land use development! If only a few new housing units can be added, of course developers will build to get the highest return, which will be more expensive housing. But even then, the new, expensive housing of today is tomorrow’s older cheaper housing; and when new units are built, yesterday’s housing becomes a little less desirable and a little cheaper, all else constant.

But of course, that’s not what this author, or others on the left critical of the anti-NIMBY movement, have in mind. Really it’s a baffling argument; imagine applying this logic to other areas of the economy:

Markets do not provide enough affordable coffee because it doesn’t get the return that artisinal coffee does, therefore the government must subsidize the creation of cheap coffee.

Markets do not provide enough affordable jackets because capital can get a higher return investing in Uggs, therefore the government must require jacketmakers to sell some jackets at a loss making price.

Or a another example: I remember reading someone argue awhile back, during one of the news cycles about the increases in pharma drug prices, that this was prime evidence of the failure of the market. Look, the argument went, this crucial lifesaving drug produced by a private firm, that actually only costs a few cents to manufacture, has had its price increased by hundreds of dollars! The free market is killing us!

But it’s not! The pharmaceutical market is under heavy government regulation that makes it very difficult for new firms to enter. If the pharmaceutical market were truly open and competitive, it would be trivial for a new firm to step in and start manufacturing that drug at its ‘true’ cost. That’s simply not possible under current FDA regulations; that isn’t to say such regulations are ‘bad’ (there’s an argument for quality control, for example) but to imagine they don’t have any costs or side effects is flawed reasoning.

The housing market is rife with such regulations, and to imagine that this has no effect on the nature of the housing supply is just crazy. Even something as seemingly banal as minimum room size has a distortionary effect: surely there are some people who would, at some price, prefer a 60 square foot room to sleeping on the street; but they will be forever priced out of the market because regulation forbids building a habitable room that small.

Maybe what this gets at, and this is something on the left that often bothers me, is this idea that there is a minimum standard of whatever that everybody is entitled to. For instance, everybody should have, at least, a room of a certain size with private bath and kitchen. Everybody deserves a phone with at least 8 GB of RAM, because it’s just a better experience! But of course, some people don’t want all of that, and would rather have had something else with the resources that were wasted. If it’s part of the neoliberal agenda to better align people’s wants with what is available to them, then sign me up. I would rather have more people living in ‘poor quality’ housing in a city with better job opportunities than living in higher quality housing in a place with less desirable jobs.


Quantum Ethics

Just came across this brilliant post via a comment thread at SlateStarCodex: The Copenhagen Interpretation of Ethics.

The gist:

The Copenhagen Interpretation of Ethics says that when you observe or interact with a problem in any way, you can be blamed for it. At the very least, you are to blame for not doing more. Even if you don’t make the problem worse, even if you make it slightly better, the ethical burden of the problem falls on you as soon as you observe it. In particular, if you interact with a problem and benefit from it, you are a complete monster. I don’t subscribe to this school of thought, but it seems pretty popular.

This is dead on right, and once you know to look for it, you see it everywhere.

The problem (with health care) is the prices

So says Sarah Kliff in a piece up at Vox that does a good job of reminding us that the fundamental problem with the American health care system is that health care services are very expensive and pricing is incredibly opaque.

It’s important to understand the basic contours of the health insurance system to be able to make a judgement on just how much bullshit is in any politician’s health care plan. So let’s take a quick, 10,000 foot view of the health care system.

Health care transactions have three parties: the consumer, the provider, and the insurance company. The provider prescribes services to the consumer, who then purchases them. Mediating this transaction is the insurance provider, who pays (or doesn’t) some portion of the cost based on arcane criteria.

It’s probably better to think of health insurance less as insurance than as cost sharing. With that in mind, we can imagine all of the people with health insurance being divided into several cost sharing pools, each with slightly different agreements as to what costs will actually be shared. The largest pools are run by the government: Medicare, and 51 state Medicaid pools. Then there are the private insurance pools within each state. Most people are entered into a pool via their employer provided insurance plan, with the ACA markets intended to cover the rest.

To a first approximation, the average cost of health insurance to a person in a given pool is a function of the price of health care, quantity consumed by people in the pool, and number of people in the pool.


The ACA was primarily aimed at extending insurance coverage to the approximately 20% of Americans who were without health insurance. Why were 20% of Americans without coverage? People fell into one of two camps: 1) They didn’t want health insurance, because their expected benefit was less than their expected cost; if you were young and healthy, insurance was going to cost more than you would get out of it. 2) They wanted health insurance, but couldn’t afford it because their expected costs to the insurer exceeded what they could pay. So the end goal was to get that C down to a point where people category 2 people could afford insurance.

Again, to first approximation, what the ACA did with the marketplaces was increase that n. By making a pool larger, average costs could be driven down for any one person. However, there is a complication. Increasing n will also increase Q some amount; quantity of health care consumed is a function of the number of people in the pool, i.e. Q=f(n). So you need to add in more people who will consume less health care, people whose costs are lower than average. Cost sharing only works if some people incur less costs than others. That’s why the individual mandate to purchase health insurance was necessary to get those category 1 people from above into the pools. Inevitably, you had to make some people worse off to make others better off. In essence, it’s just simple redistribution. Average costs go down, but the per unit price of health care is unaffected.

If you take prices as given, then, the optimal solution to reducing average cost would be to have the biggest pool possible; it really doesn’t make sense to have hundreds of smaller, regionally based pools, especially when there are fixed costs to running an insurance pool (administration, billing, etc). That’s the idea behind single payer; put everybody into one big pool and call it a day. But the insurance lobby is large, and that would put a lot of people out of jobs, so the ACA kept the private insurance system.

To make this system work then, a series of subsidies was necessary, especially since the ACA also mandates that all plans must cover a minimum set of benefits (i.e. an insurer cannot offer a product worth less than this defined minimum). This would drive up prices again, so the other necessary pieces were 1) tax credits, so the cost of insurance to low income families is shared by the universe of taxpayers, and 2) cost sharing payments to insurance providers, where the government directly pays them if they stand to lose money on such plans (also paid for by the universe of taxpayers).

(As an aside, this means that Trump’s decision to end cost sharing payments to insurers merely shifts the locus of redistribution; since these companies will now just charge higher prices for their plans to be able to turn a profit, that means the money that would have been paid to insurers is now…paid to them via the tax credits to consumers.)

So again, if the main goal is to decrease the average cost of health care, putting everyone in one big pool would seem to be way simpler and more efficient, taking prices as given.

But should we take prices as given? Of course not. Let’s say prices are a function of quantity of health care consumed, market power of the provider, bargaining power of the insurer, and insurer overhead.


An increase in consumption will drive up price in the short run, so there’s the potential that increasing access to health care will end up increasing prices if people consume lots more. The key here is elasticity of supply; how much and how fast can the supply of medical services respond to increases in price? We’ll return to this later.

What is the market power of the provider? In many rural areas, there simply aren’t very many health care providers; maybe there is one hospital, which is a monopoly, and monopolies can charge above market rates. I think this is a key fact as to why the price of health care in the US is so much higher than every other developed country; we are a very large country, with lots of people living in not very dense areas, so there are lots of regional health care monopolies.

Then there is the bargaining power of the insurer. Larger insurers can demand lower per unit prices via volume. It’s the same principle as buying at Costco: in bulk, you can get a lower unit price. This can act to countervail monopoly power. A secondary idea behind the ACA was that the exchanges would force insurers to compete on price, and hence drive down health care costs. Part of that would come in the form of reducing overhead (more efficient insurers could charge less), and part would come from that increased bargaining power (from larger size from forcing people into the exchanges).


Even with the subsidies, in a lot of places insurers simply don’t find it worth their while to offer plans on the exchange. The mandate was not strong enough to get everyone into the exchanges, so mostly sicker people were buying the plans, meaning they cost too much. Other elements in the ACA actually encouraged the consolidation trend in health care services, meaning the market power of regional health care providers has continued to increase. Low enrollment in rural areas with monopoly health providers isn’t a recipe for profits for most of these insurers.

The ACA is not inherently doomed, but requires tweaks to get the right levels of cost sharing and subsidies in place. But again, you should ask yourself, why do it this way? And again, the simplest way to get average costs down would seem to be to put everyone into one big pool; if size leads to bargaining power, then one big pool will have the most bargaining power to negotiate lower prices.

Okay, so maybe that wasn’t so quick; who knew health care could be so complicated?

So what’s crazy to me is that almost nobody of prominence talks about any sort of plan to directly get prices down. Prices are the key, as the Vox piece highlights; if the cost of health care is cheap, then maybe we don’t have to worry about any of this crazy cost sharing business. Maybe the reason nobody talks about it is because nobody has any clue how to do it, but it seems that there are some rather obvious fixes, which I’ll get into next time.


Is SCOTUS a Court?

A strange question, perhaps; how could the Supreme Court not be a court? But this article argues just that. What the author means is, if we think of a court as a body that “resolves disputes in accord with some pre-established set of legal rules”, the modern Supreme Court doesn’t fit that definition; it’s something else.

Rather than the usual tired charges of ‘legislating from the bench’, complaints which boil down to ‘the court did something I don’t like’, this argument uses the very history of the court to provide evidence of the evolution of the role of SCOTUS from a regular court into a policy making body. It’s a quick read and excellent food for thought.

I have to take issue with the concluding thought, though: “The Court does not engage in the judicial task of resolving disputes in accord with some pre-existing set of legal rules; it engages in a somewhat different task of issuing legal pronouncements that other courts will then use to resolve disputes. There are other bodies within our political system that perform that task as well.  They are called legislatures.”

Obviously, the legislative branch of the United States does not perform that task well any longer, in particular the Senate. I believe the increasing stakes surrounding Supreme Court nominations are partly driven by this legislative dysfunction; since high stakes legislation is nearly impossible to pass, the increased power of the Court has become a substitute. My instinct is that this is a response to a power vacuum, rather than an usurpation, but others may have more informed interpretations.