13 April 2012

the Fed and government independence

The Fed is an insurance coop among large banks. It is arguably anti-competitive towards smaller and newer banks, but does generate increased lending among member banks via risk abatement. Member banks ascribe to certain behaviors, and should they fail while acting in accordance to Fed terms, have access to cheap loans to recapitalize (bailed out). Whether this agreement's benefits (increased lending), outweigh the costs of decreased basic competition today is an open question.

If the benefits outweigh the costs, which i believe they do slightly, a new type of competition could be free to emerge. coalitions of fed non-members could unite, and build a competitive bank insurance program (that is, if the government didn't endorse the fed) and issue their own currency just like the article points out that Ron Paul said Wal-mart is capable of.

Therefore, where the clear trouble arises is with the government involvement in the agreement. It has been at least somewhat beneficial to the banks and the government for the government to get involved. The government endorses the agreement rather than bring anti-trust suites to bear on it, and this prevents competition from insurance coalitions of non member banks. But the government also gets access to Fed low-interest emergency lending, and gets a big say in Fed activity (chairman appointments, and banking regulations).

A final note on the quotation "the Fed stopped the the financial panic from becoming a global depression." This line embodies so much popular sentiment about the Fed.  Sure, it helped, but remember it's imperfect stimulation attempts prior in the decade are what is mostly responsible for the panic in the first place! The article does point this out at the end.

In conclusion, the idea of a banking coop is not evil.  The coop being in bed with the government is. That relationship with the government is what explicitly prevents competition between fed-like bodies, and competitions in currencies. This is a personal position, and is similar, but slightly different than that of Congressman Paul.

06 April 2012

health care tactful improvements

I concede the healthcare market is definitely subject to asymmetric information which leads to self selection bias (more appropriately called adverse selection) where a disproportionate share of unhealthy seek health insurance and therefore insurers must expend a lot of resources to conduct costly screening thereby raising the cost for all to get insurance and leading to inefficiently low allocations of health insurance.

The solution of mandating all to get insurance can decrease the per capita insurance screening expenditures, but by itself is not efficiency improving. Some people may have individually chosen not to get insurance even at the lower prices induced by the mandate, and so to be truly efficiency improving the policy should include compensation for being forced to take an a policy they didn't want. But, how should the government identify and compensate those individuals. Even the insurance companies that screen for as a profession couldn't cheaply identify those who didn't really need insurance. this is an infringement on liberty for those individuals.

Alternatively, there are non-governmental solutions to asymmetric information market failures (just like Coasian bargaining can be to externalities). Here's the idea. The solution is for both parties to contribute toward improved/additional screening and toward improvements and R&D in screening (medical assessment) technologies. if you are someone who wants insurance and isn't trying to currently mask risky conditions you should be willing to contribute toward this, as should the insurance provider if they see you are willing to.

To me the biggest existing problem in the current insurance market is the monopsony power of the health insurance provider. they have a strong lobby and have earned a political exemption from anti-trust legislation. removing that will increase competition and increase amount of people who can get coverage.

In conclusion, there is currently a market failure, but the mandate is not the most minimally intervening way to do this. A more choice preserving solution that is still redistributive would be to give poor money for healthcare, but require it to go towards the costly healthcare screening via a voucher type stipulation. This new money flowing toward screening should improve screening and generate innovation in that industry thereby could possibly eventually diminish the information asymmetry.

25 January 2012

first thoughts about google privacy policy

Just read through the privacy issues. Not really that bad. Gives me a better experience. Gives them valuable information about me. Ideally I would like to be compensated for that synergistic value they now get. Would certainly be better if you got to choose if you wanted the new policy or the old one (if you could opt out).

One-Note in the classroom

One note is great for students because it accepts all different file formats (excel tables and formulas, word, pdfs, powerpoints, even websites …) all into one notebook file. One note organization is great because the notebook file is organized just like a notebook (notebook with sections, sections can have many pages; I use one section per class and include my notes and homework and slides as different pages in that section, granted you could do something similar on a shared drive with folders). One note is great for students with tablets because you can write directly onto the pages unlike excel word or powerpoint. They can take notes ontop of your notes, highlight, … One note is great because of its syncing capability. The creator can store the notebook on a shared drive (or even the internet at Microsoft sky drive) and any student/person who opens it once and it will stay synced. When students make changes (such as highlight your stuff) that doesn’t effect the master version uploaded by the creator. But, when the creator makes changes it syncs with the shared version and on the students notebooks. You can store future quizzes and tests in the notebook but password protect the sections (just right click the section). In my mind, one-note is the best thing (and maybe only thing) Microsoft has going right. There is no good competitor product to it. (how it works; a notebook is a collection of many sections which is a collection of many page files, and one table of contents file that carries the organization of the notebook).

28 April 2010

finance bill discussion

many people are adamantly espousing the need for greater financial regulation as included in the finance bill in order to prevent systemic meltdowns such as the one we are just trying to crawl out of.

i am not perfectly current on the specifics of the bill, as i believe there have been some concessions from the Democrats to the Republicans within the last hours to garner sufficient support to pass the bill in the Senate.

overall, i hear the cries for greater government oversight in the industry as only a half thought out solution.
everyone agrees there were bad investments that hurt a lot of people, but controlling every investment is a very costly, difficult, and not an assured way to prevent pandemics such as the recession of 2008.

a cooler solution is to stop the source (which may even stop itself) and definitely curtail the amplification mechanism that made the situation so severe.

i may have told this story before, but i'll tell it again because it's this simple. investment banks insure corporations cheaply by providing them hedge funds. they take a company's stock, and return a customized (like a trimmed hedge) fund that will pay the company back a smoother stream of profits than the original stock. cheap insurance, a hedge against a company's specific risk.

with so many companies (including home loan banks and even more standard insurance companies like AIG) now so well insured, there was moral hazard; these companies took riskier business practices than usual. Washington Mutual would lend to people they normally wouldn't. Why not, they were insured against losses?

not only were there some bad investments made by the moral hazard of cheap insurance, but they were made en masse because of a depressed fed interest rate that allowed the banks to borrow cheaply and leverage (amplify)these bad investments ~100x what they normally would have.

to me, there's a simpler and more desirable solution.

1) don't bailout investment banks that failed to recognize the moral hazard imparted by the insurance they provided, nor the companies that were not discriminating in their investments in the companies engaging in moral hazard. it was a costly mistake, and the lessons will be learned naturally, and the actions not repeated.

2) the greater problem is the momentum this somewhat minor problem was able to achieve via leverage. "systemic risk," the ability for this one problem to putrify the whole economy, was possible because of an artificially depressed fed-set interest rate. The artificially low rates that allowed the borrowing en masse (leveraging) turned a reasonable mistake (under-estimating moral hazard from proliferation of investment banks' hedge funds) into a systemic pandemic. Without fed depressed interest rates, money wouldn't have been as cheap to borrow and invest, investors would have been more discriminating, and there wouldn't have been such rampant and leveraged mal-investment.

what's kind of crazy is that the investment banks that were greedy (made the risky loans) lost big and went under. the investment banks that were smart/conservative and didn't make the risky investments and shorted the market, even though they may be despicable individuals, are now the ones being used (because of their character) to persuade the public to invoke change in the industry: regulation over investment practice specifics.

the solution i propose herein is simpler than the current proposed legislation, attacks the source of the meltdown, is less costly to implement, doesn't hamstring players in the banking industry, and doesn't hamper the overall finance market. essentially, it would be more effective and preserve a greater set of choices (liberty) in finance.

26 February 2010

things getting a little crazy

my buddy pointed this link out to me
it discusses how Fannie is still in trouble, and needs a lot more bailout money.

here's what i think about this Fannie Mae request and if it were to awarded.

say what you want about healthcare, but at least there are some weak arguments for government intervention in that market.
but the arguments for government intervention in the money/credit market are even weaker and the government involvement in that market through fannie and the fed is much larger.
don't get me wrong, i'm not supporting any govt healthcare proposals, but the money market is much more of a concern.

get ready for some serious inflation.
and currency devaluation hurts savers the worst (the new money is not distributed proportionately, so their money is worth less). in reality, it is a real form of taxation (seignorage tax) on savers.
there are serious long term consequences of inflation on our real gdp per capita growth.
less savings means less investment which means less long run productivity.

definitely not the legacy we should be leaving our future generations.

make your tax sheltered investments, but this is not the time for padding your savings.
moral of the story, perfect time for some house remodeling (or any other consumption of commodities that will hold and/or appreciate commensurate with the inflation rates, cpi).

22 February 2010

health care debate, what's the deal?

i've been getting asked by many people, "what is the justification of government involvement in the health care market." this answer is very important when trying to craft the best possible health care policy.

those in favor of having the government get involved in the health care market cite 4justifications that make health care different from the auto care market, or the banana market, or most anything else and thus worthy of govt involvement.

1a) health care costs might be too high because the sick disproportionately apply for health care (adverse selection) and it is tough to comprehensively screen all applicants.

1b) the same asymmetric information is present in many markets. in health care, we have informed buyers (potential insurees who know their status) and uninformed sellers (insurers selling their insurance services that don't know whether your hiding a lurking condition).

used car markets have informed sellers, and uninformed buyers. not a big deal. this argument doesn't mandate government intervention. this asymmetric problem is often solved without the government by introducing a new market to inform the uninformed agent.
essentially what car max does, demonstrates car quality to uninformed buyer by guarantee, reputation, and third party validation.
insurance companies could just hire better competitive screening companies to resolve this cause of high costs better assess when folks just want insurance because they are gonna be sick.

2a) health care costs can also be high because once a person gets insurance, they engage in behavior they wouldn't otherwise (moral hazard). if you have good dental insurance, you'll be more prone to get that cosmetic operation you 'need.' if you have insurance, you'll be more prone to go for treatments at fancy facilities offering alluring (and expensive) perks.

2b) the only way the government can mitigate this cost is to place controls on persons' behaviors; ie dictate which hospital you go to, dictate how hospitals operate (disallow quality perks to all those on government insurance programs), or dictate how you live. if the government is paying for your health insurance, it will want you to go to the gym (use tax payer money to subsidize gyms) and not eat candy (tax candy). maybe this sounds nice, but if you are somebody who feels that you make pretty good decisions for yourself it doesn't sound that good. just sounds cleaner when people are responsible for themselves, and realize the costs and benefits of their own decisions.

my own analysis of health care data for a class showed that moral hazard is the real problem among those poor people on medicaid. the story behind the statistical phenomenon is that medicaid costs skyrocket because poor people with insurance check into the hospital too frequently controlling for factors. why not, it's warm and you get a meal. this is hard to deal with. can't really turn folks away. maybe increasing house calls is an option of decreasing the overhead costs of too frequent check-ins.

moral hazard and adverse selection are real problems for any kind of insurance. makes you almost not want to have any insurance. but catastrophes are always possible, and you don't want it to wipe you out (economists, you want to smooth consumption across states of the world), so it's reasonable to buy insurance until your marginal benefit from equalizing consumption across states of the world, equals marginal costs arising from mh and as.

3a) another way health care costs could be lower is if the government insured more people. if the government was buying everyone's medication, then it could negotiate lower prices on medications. it would be only buyer (monopsonist) from many sellers.

3b) the government already insures a lot of people and buys a lot of medications and has pretty good bargaining power. also, the government is the source of high medication costs, and rarely do two wrongs don't make a right.
medication prices are high because the government grants patents to pharma companies protecting them from competition. sure, dissolving these protections reduces the incentive for pharmas to innovate new drugs, but most economic analysis shows that optimal patent protection levels are far lower than current levels. current protection levels probably have to do with the strength of the pharma lobby.
to me a better way to reduce medication costs is to reduce patents and introduce more competition among suppliers and reduce the medication sellers' bargaining power.

4a) the last justification folks use to advocate government involvement in the health care market is expanding coverage. its inhumane and reflects poorly on our society to let those who choose no coverage just die when it's possible to treat them.

4b) many might argue that, if that's what people want, that's what they chose, then they should get that. even if that's too harsh, there is a much more minor government solution instead of government run health care. it's similar to the car insurance market. just as the govt mandates ownership of coverage for an emergency, problem 4a can be handled by requiring (and assisting those unable) to have emergency coverage. now we won't have to leave those uncovered dying folks on the street, when they are treatable and a hospitable er is available.

[this policy has a minor benefit in that once everyone must have this baseline coverage, adverse selection (screening applicants) is not a problem. insurance companies don't have to be fearful that those in gravest danger are those buying insurance because now everyone has to have it. nonetheless, the screening verification service markets and data show that adverse selection isn't a major cost anyway].

in conclusion, the justifications for government involvement in the health care market to reduce costs are weak at best; and a simple policy (already implemented in car insurance markets) can handle the coverage concern.

to add to that, consider these thoughts.
health care costs haven't increased that much considering the amazing increase in health care quality (mri,...). and, now that people are living longer, those extra years at the end of life are the most care intensive.
granted, many goods (think electronics) even though quality increases, prices still drop.
but, recent govt-out solutions have been successful in dropping costs. in particular, hmos have been successful by reducing moral hazard through more effective innovative cost-sharing operations.

do any of these justifications for government involvement in health care substantiate a large government health care solution in your mind?

13 February 2010

Did You Know 4.0

the proliferation of information and thus the importance of information management

10 February 2010

why i research politico-econ

econ is aimed at trying to find efficient allocations of goods.

we know how to efficiently allocate private goods: markets.
[private goods = rival (one's consumption prevents another) and excludable (the seller can exclude non-paying consumers, free-riders). example = chewing gum].

we know how to efficiently allocated common goods; ascribe property rights and they can also be efficiently allocated by markets (coase thm).
[common goods = rival, but non-excludable. ie, boston commons. these are goods generally susceptible to externalities, hence the application of coase's thm].

the jury is still out on club goods (goods susceptible to market power, p>mc).
becker is confident that the costs of govt intervention are larger than the benefits because dynamic competition on that good brings p closer to mc without the dwl of govt intervention.
also, was just watching one of milton friedman's last interviews, and he said his biggest mistake was being such a proponent of anti-trust regulation in his younger years.
[club goods = non-rival, excludable. roads, golf course, cable networks].

thus, the last type of good, public goods, are the only type of goods that all economists, except for the extreme anarcho-capitalists, trust should be allocated by the government, and can be done so efficiently through a vcg mechanism.
[public goods = nonrival, nonexcludable. ie national defense. protecting one does not prevent the protection of another. if someone doesn't pay taxes, we can not prevent their protection. think missile defense].

other market failures, ie asymmetric info, can be handled by markets too. introduction of a new information resolving service market. how carmax is making money in the lemon market.

macro-economists are probably pointing at the potential of curing inefficiencies in dynamic environments or by manipulating aggregates.

with dynamics there as some additional games you could play like Shell and passing forward a generation to make the old better and hurt no one else because of infinity, but that's kind of lame.
manipulating aggregates, let's not go there. see any hayek vs. keynes discussion.

point is, we're at a time, when the standard econ game might be closing down.
overall this is good because it means we know how to efficiently allocate many things.

to me, the questions with the biggest remaining welfare implications have to do with positively characterizing inefficiencies in our political process. the efficiency of current political resource allocations in our grab bag system.

many facets of our system are very good and have lasted a long time, but are they optimal? are there welfare gains that could be had from minor modifications?

i keep my research at
(but it is in need of some maintenance and paper version updates)

14 July 2009

Remembering McNamara

As we struggle to find the best avenue out of our current recession, a Robert McNamara quotation always seems to percolate in the back of my head. In rememberance of his recent death, I'll take this opportunity to share.

"The government is not in the business of putting small business out of business."

A good way to intepret this quoatation is the following. In every industry and every market that the government participates (either the government provides a good or service, purchases a good or service, or regulates non-government to non-government transactions of goods or services), its participation influences the market, generally making it more difficult for small businesses to survive.

When the government provides a good or service it is very hard for private industry small businesses to compete with them. The government does not have to be profitable and is financed by a large and captive audience.

Less directly, consider the market effect when the government regulates a market. OSHA, the government office that tries to regulate labor markets to make working conditions better, may at first glance appear to do no wrong. in reality however it can be a very subtle and very manipulated agency by large business victimizing small business. Large businesses give politicians campaign funds. One way politicians may reward such businesses is to make code overly protective and convoluted so that the entry of a new small business competitor is prevented by compliance costs. They are repaying the business by eliminating competition, and to the unaware citizen, these policies can seem glorious. In public finance terms, government regulation can act as a significant and highly regressive corporate tax.

As an alternative, if we simply allowed the worker to choose for himself if he were willing to work a particular job for a given wage, two competing firms would have to ultimately compete to lure workers by providing them higher wages and safer work environments on their own. Suddenly government safety regulations no longer appear as necessary or innocuous.

A bad way to interpret this quotation is as i was instructed during my military acquisitions training. sometimes when the government hires private defense contractors to provide goods or services the government knowingly provides them a profit. i suggested that the government could save taxpayers money by not paying that profit, to which the instructor quoted McNamara "the government is not in the business of putting small business out of business." But, as long as the government isn't requiring a firm to provide a good or service, they should never take a contract that's not in their interest anyway.

in conclusion, for those large-government command & control democrats who want lots of government interaction in a variety of markets, remember the impact on free enterprise encapsulated in this McNamara quotation. "the government is not in the business of putting small business out of business"

For sell-out Republicans who espouse policy that favors the big businesses that wine and dine them, remember you are just as guilty of creating an environment unfriendly toward American small business free enterprise. i offer a parallel quoatation "the government is not in the business of making big business bigger"

the business of the government is simple, and was simply identified by Arrow in the 1950s. The government is in the business of simply correcting market failures.

thanks to mcnamara for inspring today's conversation.