Tyler Cowen's Blog, page 395

Assorted links

1. There is no great stagnation (mechanism design), and Andrew Sullivan on TGS and video about jet packs.

2. .

3. Adam Phillips on frustration.

4. John van Reenen, and the books that inspired him.  And his on-line course materials.

5. Business Ethics Journal Review, modeled in part on Econ Journal Watch.

6. Bitcoin-denominated securities.

French Artist Gives Caddisfly Larvae Gold & Jewels to Build Their Protective Cases

I say the division of labor is limited by the extent of the market:

Generally, the protective silk cases the caddisfly larvae build are decorated with gravel, sand, snail shells, twigs or other common debris but French artist Hubert Duprat gave them shinier materials. He introduced beads, pearls, turquoise, and 18-karat gold pieces into their environment and let them construct tiny gilded sculptures. Duprat has been collaborating with the larvae since the 1980s.

One link is here, via the excellent Mark Thorson, with further images and video, another link is here, more pictures and an interview with the artist.

The two questions I am asked most often (low-skilled jobs and future inflation)

The first is what kinds of jobs will be available for low-skilled Americans in the decades to come.  I’ll be writing more on that.

The second is whether inflation is due to kick up in some kind of big storm, either in the next few years or when the major bills start coming due ten or so years from now.

Probably not.  Let’s consider a few factors:

1. The future budget situation will consist, most of all, of largely of unfunded Medicare liabilities, which to whatever extent they are met must be met in real terms.  Inflation will not make that problem go away.

2. The flow of debt is large, relative to the current stock (yes, I fully agree that is a scary thought in its own right).  That means the federal government won’t gain much, and would probably lose, by trying to inflate away the value of the stock of debt.  Furthermore a lot of the current debt is quite short-term.

3. Seigniorage revenue simply isn’t a big deal these days.

4. Everything we were taught about the monetary base is wrong in a world with interest on reserves (IOR).  A large base can sit there forever.  The price level is not proportional to the base, changes in the base, etc.  It just isn’t.  The broader aggregates, such as M2, haven’t grown so rapidly.

5. If needed, the Fed could soak up lots of the monetary base by selling assets from its portfolio.  I don’t have some utopian vision of the Fed doing this remarkably well (hard to say, this is not Fed-bashing either), but of course the Fed can make mistakes in many ways and I would not focus exclusively on that way, which is in any case part of a broader program of expectations management.

6. Every market price we can possibly look at it is forecasting low to moderate inflation.  The price of gold, by the way, seems these days to be a hedge against catastrophic risk not a hedge against inflation per se.

Please do not get me wrong, it is entirely possible that inflation will go up.  Things could change.  And even if the current deck of cards is played out, I do in fact think inflation will go up somewhat, perhaps more than markets are expecting (for one thing, I am more of a pessimist on supply bottlenecks than are many observers).  That said, I do not see any ticking inflationary time bomb.  Neither market evidence nor economic theory support such a conclusion.

David Cutler and Nikhil Sahni on the health care cost curve

Technological change has also been a key driver of spending increases for some time. From pharmaceuticals to imaging to cardiac procedures, markets have been saturated with new and expensive services and products in recent decades. But the adoption of new technology seems to have slowed. Major parts of imaging growth are down, some cardiac procedures are being performed less frequently as studies show they are overused, and the number of new molecular entities approved by the Food and Drug Administration has not kept up with research and development spending.

To be sure, there are many new drugs and imaging devices on the market, especially in fields like oncology. But sales of these new technologies have been more disappointing than robust. The therapeutic prostate cancer vaccine Provenge was not the hit it was expected to be; Zaltrap, a therapy for some cancers and macular degeneration, had to halve its price because it was losing out to Avastin.

Efficiency efforts are finally taking hold in the health care community. Recent news reports about delivery system changes in large health care organizations, declining rates of hospital-acquired infections, and new emphasis on reducing readmissions are indicative of changes going on across the country. These efforts have been facilitated by the ACA and state efforts to limit Medicaid, total health care spending, or both (as in Arkansas, Massachusetts, and Oregon).

The first part is “the great stagnation to the rescue,” the second part is good news, and in the third part the reference to Massachusetts is some kind of Straussian satire.  The article itself is here, and contains further analysis.

The initial pointer is from @JustinWolfers.

Napoleon Chagnon and his *Noble Savages*

I started reading Napoleon Chagnon’s Noble Savages: My Life Among Two Dangerous Tribes — the Yanomamo and the Anthropologists.  The first fifty pages are excellent fun and well-constructed, though I cannot speak to the details of his claims about the frequency of conflict or the motivation of conflict by sexual competition for women.  At some point, however, I realized I don’t want to read an entire book on either tribe, at least not at this moment.  I am not suggesting that the book gets worse, but my interest did ebb.

I do not have a view about the controversies surrounding Chagnon, and ultimately that is what should decide the merits of this work.  Here is Dreger’s systematic defense of Chagnon.  Here is a survey of the Chagnon disputes.  I wonder if he has ended up with less credibility from having the first name “Napoleon”?

Assorted links

1. Thomas Hubbard on Armen Alchian.

2. How to get a multiplier of 35.

3. The minimum wage in Canada, and did somebody kill Canadian literature?

4. Vem Aí A Troika, new Portuguese card game.  And Meg Greene on the forthcoming Italian election.  Via Christopher Koons, here is some factor price equalization being applied to France.

5. Tales of 3-D printing; “It took 45 minutes and it was kind of crappy, but I was encouraged,” Mr. Drumm said.

6. Japanese advertising markets in everything, and superhero markets in everything (at a children’s hospital).

Intrade Traffic Plummets

From the FT

The number of people using Intrade has plummeted since a US government crackdown late last year…At its peak, Intrade counted 112,000 users. At midday on Wednesday, the site said there were 509 – and 498 were guests.

The vanishing traffic raises questions about the predictive value of a market feted by journalists and academics as a pioneering gauge of public opinion.

The government failed to protect the public from CDOs plumped up with bad mortgages or from swindlers like Bernie Madoff but don’t worry when it comes to the markets that Arrow, Schelling, Smith, Hanson, Wolfers et al. said have “great potential for improving social welfare” the government has got it covered. Call me cynical but I suspect Intrade would have been better treated had it been a project of Goldman Sachs.

Solve for the equilibrium

Most people assume a degree in the arts is no guarantee of riches. Now there is evidence that such graduates also rack up the most student-loan debt.

A Wall Street Journal analysis of new Department of Education data shows that median debt loads at schools specializing in art, music and design average $21,576, which works out to a loan payment of about $248 a month. That is a heavy burden, considering that salaries for graduates of such schools with five or fewer years’ experience cluster around $40,000, according to PayScale.com.

The story is here.  And here is some sad news in particular:

New York’s Manhattan School of Music had the second-highest median debt load, at $47,000. Graduates with up to five years’ experience earn an average of $42,700, according to PayScale.

Which school is number one?:

Among the 4,000 colleges and universities in the federal database, the Creative Center in Omaha, Neb., a for-profit school that offers a three-year bachelor’s in fine arts, had the highest average debt load, at $52,035. Median pay for graduates of the school with five or fewer years’ experience is $31,400, according to PayScale.com.

I say that’s a school in future financial trouble.

Aviation, Liability Law, and Moral Hazard

By 1994 the threat of lawsuits had driven the general aviation industry into the ground. Cessna and Beech ceased production in the 1990s and the other major player, Piper, went bankrupt. The problem was caused by liability law and the long-tail. Cessna, Beech, and Piper had been producing planes since 1927, 1932, and 1927, respectively, and airplanes last a long time. Thousands of aircraft built in the 1930s and 1940s are actively flown today and the average age of the general aviation fleet (small non-commercial aircraft) is more than 24 years. Liability law also grew stronger in the 1980s and 1990s so aircraft manufacturers found themselves being sued for aircraft that they had produced decades earlier. Essentially, the manufacturers found that they could be sued for any aircraft that they had ever produced.

In 1994, however, Congress passed GARA, the General Aviation Revitalization Act. GARA said that small airplane manufacturers could not be held liable for accidents involving aircraft more than 18 years old. When it was passed a huge stock of potential liability claims were lifted from the manufacturers and the industry was indeed revitalized. GARA also provided an interesting test of moral hazard theory. Usually, when liability is moved from producers to consumers, both the producers and the consumers adjust; the product changes and so does behavior, so it is difficult to parse out the affect of moral hazard alone. In the case of GARA, however, liability was lifted from the manufacturers on planes that they had produced decades earlier and no longer controlled so we can isolate the influence of the liability change on the consumers of aircraft.

My latest paper (with Eric Helland) just appeared in the JLE. We use the exemption at age 18 to estimate the impact of tort liability on accidents as well as on a wide variety of behaviors and safety investments by pilots and owners. Our estimates show that the end of manufacturers’ liability for aircraft was associated with a significant (on the order of 13.6 percent) reduction in the probability of an accident. The evidence suggests that modest decreases in the amount and nature of flying were largely responsible. After GARA, for example, aircraft owners and pilots retired older aircraft, took fewer night flights, and invested more in a variety of safety procedures and precautions, such as wearing seat belts and filing flight plans. Minor and major accidents not involving mechanical failure—those more likely to be under the control of the pilot—declined notably.

GARA thus appears to be a win-win because it revitalized the industry and increased safety. The latter came, in a sense, at the expense of the pilots and owners who now bore a greater liability burden but they were the least cost avoiders of accidents. Moreover, the pilots and owners of small aircraft were big supporters of GARA thus suggesting strongly that prior to GARA liability law for aircraft had been inefficient and destructive.

Economic agents ponder the collapse of the pooling equilibrium

Robert Pear reports:

 “The new health care law created powerful incentives for smaller employers to self-insure,” said Deborah J. Chollet, a senior fellow at Mathematica Policy Research who has been studying the insurance industry for more than 25 years. “This trend could destabilize small-group insurance markets and erode protections provided by the Affordable Care Act.”

It is not clear how many companies have already self-insured in response to the law or are planning to do so. Federal and state officials do not keep comprehensive statistics on the practice.

Self-insurance was already growing before Mr. Obama signed the law in 2010, making it difficult to know whether the law is responsible for any recent changes. A study by the nonpartisan Employee Benefit Research Institute found that about 59 percent of private sector workers with health coverage were in self-insured plans in 2011, up from 41 percent in 1998.

And:

 Large employers with hundreds or thousands of employees have historically been much more likely to insure themselves because they have cash to pay most claims directly.

Now, employee benefit consultants are promoting self-insurance for employers with as few as 10 or 20 employees.

And from the FT:

The penalty for not providing coverage is $2,000 per worker. According to the Kaiser Family Foundation, a non-partisan policy group, the average annual cost to employers of insurance is $4,664 for a single worker and $11,429 for a family.

(Do note that the worker will find the job less attractive without health insurance., so this may not translate into a net gain for the employer.)

Here is an update on the 50% premium that can be charged to smokers, assuming the repeal movement for that feature does not succeed.

And now let me stress that you should not expect salvation from the (stand-alone) private sector.  DNA sequencing seems to be making real progress, which will make private solutions harder to sustain, a problem which Alex pioneered the analysis of.

Addendum: Here is a good Christensen, Flier, and Vijayaraghavan Op-Ed on ACOs and their problems.