ryan health comments 2

Great comments.

The positions you represent, which you probably know, are what is generally called the Austrian school of economic philosophy; with strong skepticism of any government involvement, highest regard for the individual and their ability to optimize without much market correcting mechanisms. This school of thought is emphasized at Auburn, and follows the writings of Ludwig von Mises and Hayek.

1. Yeah, I agree with the questioned need for government intervention. It has to do with efficiency of redistribution in general, an open question (see comment 5).

The discussion on moral hazard here is, if the government is already intervened in markets, and wants to minimize its expenditures, it should focus on reducing moral hazard. And, to do so, it should implement Medicaid and Medicare structures with higher co-pays and out-of-pocket payments, like the HMO approach. This is a major hope for any government program that wants to adapt its payee structure to reduce costs.

2. In any academic model I would write, it would be fatal to assume that individuals are not optimizing. That is a slippery slope which could explain anything. Away from academia and more realistically, I do believe the less-financially well-off forego buying adequate health insurance. My personal belief is that they do so because the effects aren't as tangible as physical commodities, but when they develop what appears to be a costly condition, they seek insurance; classic adverse selection. It's important because, doctors and hospitals and service missions help them, and ultimately, we all foot some of that bill, and that's my realistic general concern. My personal assessment of reality might be wrong. This is another good question.

3. Academically however, for empirical analysis of the degree of adverse selection and moral hazard in the US health insurance market, I like the model by Chiappori and Salanie, discussed in my re-production of that paper at http://mastroresearch.googlepages.com/ "Private Info for Health Care". It's a good complement to the Rand health experiment.

4. The big picture, like you mention, and I talked about in the last post, is the need to eliminate the information asymmetry, private information. That would indeed fix all the market problems. Unfortunately, health is more complicated than automobiles. Nonetheless, there are some institutional changes we could adopt to lessen the asymmetry. Having a more tiered approach; where patients first see a General practitioner before being allowed to seek a more expensive specialist, would greatly reduce costs by lessening the information asymmetry without government intervention. If the individual is not granted the General Practitioner's consent, the specialist visit either should not be covered, or less coverage than if they did receive consent. You could allow for payment recoupment if the individual did see the specialist and was vindicated in their complaints. The whole problem here is liability. Given the complexity of the human body, the malpractice coverage for General Practitioners would be expensive, and therefore they would pass those expenses to the patient. But, as time goes on, better records are kept, machines improve, and we learn more, those costs would drop. Plus, the Practitioners would have incentive to improve their service, reduce need for malpractice coverage, and get more patients. Reducing information asymmetry also eliminates adverse selection. These first tier practitioners would be hired by health insurers to provide screenings for pre-existing conditions.

5. Altogether, these are ways that current Govt Health Insurance programs could cut their costs. Private health insurance programs have already begun to adopt these measures. The need for existence of government health insurance programs is a different story, having to do with the general trend in our country to choose redistribution. Some argue that everyone is made better off by not having extremely sick cohabitating with extremely wealthy. Redistribution is costly, and if you think the costs outweigh the benefits, let your representatives know.

6. Your comment 3 is quite true and almost impossible to rebuke with a structural model; but it's not going to happen in the near term, and we are going to have to continue to pay the bills for government health insurance for at least a little while. Being pragmatic, a short term goal of economic policy analysis "how to achieve same coverage for less." The bigger picture is political and has to do with desired redistribution (comment 5).

7. Bad government policies do not necessarily imply that voters are not self-interested. That would assume that our political structure is perfectly representative, which we have reason to believe it is not. Given the improbability of actually being the decisive median voter, it is often justified as rational for a voter to be politically ignorant. When the costs of government ambivalence finally catch up with our country (not too far future in my perspective), we will see greater citizen involvement in political process. Another reason self-interested voter's policies might not get enacted are other imperfections in our political process, such as translucency in the quality of that individuals' representation. What exactly is the context of the legislation and all its amendments? What did the rep vote? What did the rest of your district want? Did the rep make a deal on that legislation that will actually help on more important policy tomorrow? Altogether, these two situations justify economist's position of why bad government policies get enacted while voters may still be self-interested. For a structural model of how special interest money can influence the political process from standard majority preferences, see my first paper FAMVM, again at http://mastroresearch.googlepages.com/

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Health comment

In response to Ryan's comment from "Looming Health Care Crisis"

btw, thanks for the comments

1) right; health care is not a public good.

But, there are other market failures besides the markets for non-rival and non-excludable goods, that warrant government intervention, even by conservative economists' standards.

In particular, private information (hard to verify claims) hamper market transactions; whether a worker's back really hurts and he needs time off, or whether a used car salesman's car has some glitch somewhere.

Consider 10 used car salesmen, one of which is selling a lemon, but consumers are unable to discern which. All salesmen then must lower their price below fair value to deal with the customer's belief that their car might be the lemon. Introducing an independent verification service, as long as it costs less than the price reduction from having the lemon in the market, would make the good salesmen better off.

The problem is, with the health market, health diagnosis are not confident enough to stand by a verification service at this point, so the government is legitimately offering to stand in. Even as a minimal interventionist, this makes sense to me. The human body is still too complex relative to an automobile.

As an after thought, another market failure besides 'public goods' and 'private information' that could warrant government intervention in markets is 'market power', when firms don't act as price-takers. In this situation, the firms profit maximizing behavior can differ from a benevolent social planner's behavior when maximizing consumer surplus (total value added by market transactions).

2. I do think adverse selection is a real problem.

Sure, among financially well off individuals, most are buying health insurance as to insure against unforeseen risk. But, in less well off social circles, where money is tight, many individuals prefer to spend their money on more tangible commodities until they begin to believe that they might be afflicted with a very costly condition.

3. Last, health insurance is comparable to car insurance for just the reason you point out, the potential costs on others. Many people would find it objectionable to someone afflicted with a treatable emergency condition to die on the front steps of a hospital. And, since we wouldn't let that happen to those who don't pay for it, we shouldn't make anyone pay for it. Unforeseen emergency afflictions should be covered by a pool of small contribution from all who want to participate.

Sure, if you don't want to be pooled for this cheap coverage, you can wear a tag that either says "don't help me, I chose not to be pooled" or "help me, I don't have the pooled coverage, but I have been verified to have the financial resources to cover this emergency operation up to the level …"
Honestly, it would probably be just as cheap to include both 'those who want pooled coverage on emergencies' and 'those want to forego the coverage', since then insurance companies would not have to do any screening at all. They wouldn't have to worry about any adverse selection (people more prone to emergency, more likely to buy insurance) because everyone would be getting it. So, basically, we'd cover those who don't want it for free.

In conclusion, this is a great and timely conversation. In the wake of a severe implosion to the Republican Party, it reminds us of how the virtues of fiscally conservative policies should be considered in even the most Democratic agendas such as Health Care in order to get the most cost effective coverage with the least government infringement on our individual freedom of choice.

The Looming Health Care Crisis

What exactly is the problem with Health Care? What is all the buzz?

What is the basic reason that all the politicians are proposing policies to influence the Health Care Industry?

The answer sits on the Balance Sheet.

Take a look at the expenses of the Government run health insurance programs: Medicaid and Medicare.

These expenses are the largest rising share of US GDP, while the resources given to the programs hasn't grown with them.

What are the government's options?

1. Give more resources
   
2. Lower costs
   

   
   

   First, let's consider (1).
   

   Government budgets are very lean across the board right now, there is no extra money available.
   

   Therefore, the government can either cut resources from other programs to cover Health Insurance costs, or raise taxes.
   

   If raise taxes, raise taxes from where?
   

   The poor are already poor. The rich provide the jobs and the industries. Taxing their income only incentives their industries less. Maybe there is some government revenue to be had by taxing the incomes of the rich, but not much. A famous Econ textbook publisher recently remarked that he will only be able to keep 7 cents for every extra $ he earns. He's probably not going to work much harder to drive the economy.
   

   We could tax capital, but that only lowers savings. We already face a 'lack of savings' problem, and nobody wants another Social Security program where the government does our savings for us.
   

   
   

   Therefore, let's consider option (2) for the government to deal with the rising expenses of Health Care.
   

   Are there any expenses that we can cut?
   

   Well, analysis shows that some of the expense increases come from the improved Medical service being provided; better equipment, better trained physicians, and better techniques.
   

   We don't want to cut quality of Health Care, are there other growing components of Health Care expenses that can be cut?
   

   
   

   The answer is yes, but it is not easy.
   

   The insurance industry is prone to 2 market failures (moral hazard, and adverse selection).
   

   Targeting these holds promise for decreasing health expenses.
   

   
   

   Eliminating moral hazard would make individuals only go for operations they would get if they were paying for the operation.
   

   Eliminating adverse selection would cut down major insurance screening costs to make sure they don't sign on people with unobservable expensive prior conditions (note, I am not saying don't provide health care to these individuals in need, I am for reducing the costs that everyone pays the insurance companies to deal with screening).
   

   
   

   I am pretty busy right now, so I think I will save the details of how best to target these problems for my next post.
   

   
   

   I will outline the basic strategies that are used to target these expensive market frictions.
   

   
   

   To eliminate moral hazard, individuals must internalize more of their own medical cost. This is how we get closer to realizing when individuals would really go for care. Also, this would incentivize Americans to lead healthier lifestyles. I do not propose pay-your-own-way, there are benefits to having insurance for unforeseen and unpreventable illnesses; all I am saying is that there are definite moral hazard costs for having too much insurance.
   

   
   

   To eliminate adverse selection, the costly screening by insurance companies, the government should require some low level baseline insurance to cover emergencies and prior existing conditions. The idea is analogous to how everyone must hold car insurance for the damage they may cause others. Since, doctors and hospitals won't let individuals with emergency medical needs perish on the doorsteps, everyone should hold some insurance and that pool covers the emergencies. With everybody then having to hold some insurance for the emergency procedures and prior conditions, insurers don't have to expend as much resources screening.
   

   
   

   As can be seen, as in all economics, there is a balance to be struck here. Not too much insurance or we get moral hazard, but require some to diminish adverse selection.
   

Goal of Econ, Goal of US Const, Goal of America

Imagine you are in charge of all the goods, resources, and services in the US. Now, you are charged with the task of allocating those goods among all the people subject to the condition that after you allocate, you could not make any one person better without making another worse. This conditions is a little stronger than making sure you allocate all the goods, its called the Pareto Condition. Consider the following reason.

 
 

One of your resources is Lake Michigan, and there is a factory located on its shore. It costs the factory $10 more to discard of its byproducts cleanly than to disperse them into the lake. On the other hand, the factory polluting the lake costs the fishermen $30 of lost fish. If you had allocated the goods such that you gave the water rights to the factory, you did not satisfy the Pareto condition. You could have allocated the water rights to the fishermen and then taken $11 from the fishermen to give to the factory. Under this reallocation you would have made everyone better without anyone worse off. The fishermen get $19 instead of zero. The factory disposes its byproduct cleanly, and makes $1.

 
 

Economics literally means "the study of the allocation of limited resources." Finding optimal allocations is not the difficult part of the process. The famous mathematician LaGrange gave us a very powerful tool for finding optimal allocations under constraints. If we had a benevolent social planner, he or she could take all the peoples' preferences and the resource constraints facing our country, simply apply Lagrange's method, and achieve the social welfare maximizing allocations.

 
 

Although some dictators claim they are benevolent social planners, no country truly has a benevolent social planner with access to a detailed Social Welfare Function, a hypothetical description of all peoples' preferences. Is it possible to achieve the same allocations that a perfectly intelligent and benevolent social planner would have chosen without such a social planner and without access to everybody's preferences?

 
 

Believe it or not, the answer is a glorious yes. The great Scottish economist Adam Smith conjectured that allowing potential buyers and sellers to freely meet in the market place and trade their goods until content results in Pareto allocations. Smith's conjecture was studied greatly. Finally, in the middle of the 20th century, it was proven that, with the exception of a few named market imperfections, free markets do achieve Pareto allocations without a social planner and without access to everyone's preferences: The Fundamental Welfare Theorem of Economics. To all but econ grad students, this may sound impossible, but it's true. To me, this theorem's characterization of market allocations is awesome.

 
 

With this useful Theorem in hand, and recognizing that omniscient and benevolent Social planners do not exist, countries faced a decision. Do they institute social planners, and give them powers to dictate to their citizens in hopes of eventually achieving social planner-like allocations; or 2) learn how to correct the market perfections, leave all freedoms and liberties in the hands of the citizens, and allow the marketplaces to flourish.

 
 

Many nations chose the former option. It was a formidable challenge. With teams of brilliant physicists, mathematicians, and economists studying optimal allocations they still often fell short. Those of you in my generation may recall images on TV of ultra-long lines at Soviet bakeries. First the USSR had under allocated baking ovens, under allocated distribution venues for the bread, and sometimes hadn't grown the proper combinations of flour and yeast to make bread efficiently. They suffered surpluses in some commodities, and shortages in other. Dictating all the commodities in an economy is an overwhelming task. There is no doubt that the soviets tried very hard, but also that politics and personal preferences also get in the way efficient planner allocations. Today many nations continue to try the command economy. Some have realized it is absolutely impossible to govern all commodities, and so they have decentralized some, but retain control over as many as possible. These countries are characterized by large governments, high tax rates, and few small businesses: examples include, Cuba, Venezuela, North Korea. China is an example of a country which has persevered and is actually realizing decent allocations for their people, although their people still do not enjoy all the freedoms and liberties of a decentralized economy.

 
 

Alternatively, some nations chose option 2, learning how to correct market imperfections subtly. The objective for these nations was to have a government that stood only to correct the market imperfections. With markets corrected, individuals can go to their marketplaces, trade and acquire Pareto allocations, all while preserving individual liberties and freedoms (no extraneous government dictations over their actions). This was the idealistic goal of the United States who led the charge and supported other nations who wanted to participate in the glamorous experiment. The US has definitely not been perfect in their implementation of this ideal. Politics and breakdowns in our system of government has ignored some of our citizens and over represented others. The result of these political breakdowns has often been imperfect market solutions biased for the over-represented special-interest contributors, and has held our country back from achieving the destined goal of Pareto allocations.

 
 

I do not intend to insult our form of governance, only suggest that there is some work left to do. Our constitution, in my mind, is the greatest document of all time. It has bound our diverse and challenged nation for hundreds of years. It is the longest standing charter of any nation, and also the shortest in length. It was written in 1789 by the polymath James Madison, before Adam Smith's auspicious conjecture. It has had to be amended (27 times in fact), and therefore is a working document for us to improve upon as new economic discoveries are made, but the constitution itself is what authorizes it to be amended. Let us not shirk on our responsibility to continue the journey of crafting the constitution so that US citizens can enjoy Pareto allocations all while fully enjoying individual liberties and freedoms.

 
 

 
 

 
 

 
 

RE: Bailout

116 "academic" economists signed a petition against the bailout. stating this is all "fabricated" by wall street.  What say you ?

 
 

Very divisive issue.

Almost all economists are adamantly against, except the most democratic Keynesians.

The surprising factor is that Bernanke endorses it.  He endorsed it even as the original Paulson plan.  Really weird.

But, the fact that he endorsed suggested that it might have merit because just about everyone respects Bernanke.

I talked to one of our most respected professors in monetary policy the other day, and he said that Bernanke is endorsing it because he did his dissertation on the Great Depression, is afraid that the cosmos is realigning, and doesn't want it to happen on his watch.

 
 

Even with the latest version of the plan, there are ample problems.

Democrats demand equity stake in the companies, but this will have very specific problems in the future as the government tries to auction off its t-bills, but will have bias towards the bidders to which it holds equity stake.  Very touchy.

 
 

The good news is that the house voted down the bill endorsed by democrats and the administration might be signaling that the Republican party is actually coming back to its platform of minimalist government intervention and divorcing itself from the current administration. 

Or, since it looks like the Fed and world bank and …. are going to cover the bailout anyway, they may have voted it down in a surreptitious move to prevent the Dodd-plan regulation in the banking industry and still steal $700B.

Your guess.  Are you optimistic or pessimistic about House Republicans.

 
 

The only real solution is, we should never have gotten in this mess in the first place.  Where the hell was the SEC?

 
 

 
 

 
 

What's wrong with Cheap Insurance?

In continuation of 2 posts prior, Securities Trading: The Wild West.

I suggest that there is a problem with cheap insurance, in addition to the problems caused by lack of regulation in securities markets.

The problem with cheaper insurance is that people will buy more insurance, and thus our economy will suffer more from the 2 market failures caused by insurance: Moral Hazard and Adverse Selection.

Moral Hazard is the change in behavior caused by insuring. If I have health insurance, I will go to the doctor more often and incur higher health expenses for my insurance provider than I would have had if I were directly responsible for my own health expenses. If I have car insurance, I will be more likely to take a few more risks on the road. Or, if I am a company and am insured under higher costs, then I will take less effort to ensure lower future costs.

Due to private information, information unavailable to the insurance provider, individuals and corporations act slightly less responsible when they are insured. Unfortunate, but true.

Adverse Selection is the tendency for a disproportionate amount of those in need of insurance to buy insurance. Those who are unhealthy or have indications that they will be sick buy more health insurance. Health insurance providers try to control for this fact by analyzing your families medical history and charging you a higher premium if there is indication that you will suffer illness and cause them higher costs. Corporations that have inside information that their profitability will decrease are more likely to insure themselves by selling securities.

Again, due to private information, information advantage of the individual or corporation, insurance providers are at a disadvantage.

The moral of the story is that while it is good that companies have found cheaper means of insuring against risk through the securities markets, the proliferation of insurance does carry a non-negligible cost. More insurance means more moral hazard behavior (less rigorous investment in the future by corporations) and more adverse selection (more junk bonds/ more securities that wind up being worthless).

Identifying moral hazard and adverse-selection behavior econometrically has long been a daunting task. It requires estimation of a system of stochastic simultaneous equations. Progress has been made however, and as can be seen in my Public Finance project on Health Care (http://mastroresearch.googlepages.com/ , (private info in health care, on the right side)), is now identifiable.

Using similar techniques adapted to the securities markets, I believe that it can be shown that corporations trading a higher volume of securities experience lower stock returns. Similarly, in the field of International Finance, I purport that countries trading a higher volume of securities experience lower growth.

Overall, cheap insurance is good, but more intricate contract terms (like HMOs have implemented in the health insurance market) or regulations are needed in the securities markets to prevent our economy from taking two-steps forward and one-step back.

Securities Trading: The Wild West

The recent world of Securities Trading is a very dangerous place; a modern day equivalent of the wild west, very limited law and enforcement.

Everyone wants to 'hedge their risks' with securities. Banks, ibanks, hedgefunds, and companies themselves are choosing to insure in a more sophisticated and inexpensive way than the traditional insurance provider. Why pay the premium?

Every company has risk. For example, Delta Air Lines will lose profitability when oil prices rise.
Delta could take out an insurance policy that says
"in the case that oil goes up at least $4/barrel, I want to be covered for $10M."
A traditional insurance company would say "sure, let's calculate what that would cost."
If the acknowledge probability that oil will go up $4/barrel is 20%, then we expect that will cost us $2M.
Plus, we charge a standard 6% premium, so that insurance policy will cost 2x1.06=$2.12M

Or, Delta could insure through selling securities: derivatives of its stock.
If oil does not go up, Delta expects its stock to sell at $10/share.
If oil does go up, then Delta expects its stock to sell at $9/share.
Given the 20% chance of oil going up, you would expect Delta shares to be selling today for $9.80

To insure through securities, Delta could sell it's stock today with the condition that

if oil does not go up, they will buy it back from you for $10.20
and if it does go up, then they will buy it back from you for $8.

If Delta can sell 10 million of those derivatives, it gets the same insurance as the policy offered for 0 premium, saving $120K.

Even if Delta sold the security that

If oil does not go up, they will buy it back from you for $10.21

And if it does go up, they will buy it back from you for $8

And they sold 10 million of those, they are getting the same insurance policy for $2.1M and saving $20k.

Everybody except the insurance company wins. If you buy that security, you expect a 5% return on average, and Delta saves $20k.

Delta can actually do even better.

If an oil company happened to come around, then Delta might even get the insurance for a negative premium.

Since, if oil goes up, oil companies do better and if oil goes down, they do worse, Delta and the oil company happen to compatible conditions to mutually insure.

If oil goes up, Delta doesn't do well but the oil companies do.

If oil doesn't go up, oil companies don't do well, but Delta does.

Thus, the two companies could work out an arrangement to ensure that they both get insured at a 0% premium.

It's not always easy to find just the right company or combination of companies that would provide your mutual insurance. Then, you go to a bank, ibank, or hedgefund. They'll provide the service for you for a small cut. And the same idea goes for virtually every market, not just oil.

Consider a Countrywide selling mortgages for an interest rate. There's a good chance that the home-buyer will default, in which case Countrywide will not be profitable. Let's not insure against that risk for a 6% premium, let's sell a derivative of our stock through a hedgefund who can find a buyer with mutual insuring conditions.

So, what's the problem? As a libertarian I'm sorry to say, the problem is inadequate legislation.

These "securities" are really very risky assets. Yes, they act as insurance for the selling company by securing a less volatile financial future, but for the buyer, they are risky. People and companies buy $millions worth of these risky assets, and sometimes the buyer's losing side materializes. Many times, people can't cover their losses. They had bought more risk than they could afford and have to file bankruptcy. In this case, everybody loses. The gambling buyer is bankrupt, and they company who wanted insurance, is no unable to get paid. Sorry.

The problem really is as simple as this. Sure, the situations aren't usually just two cases and therefore the probabilities and prices aren't always easy to figure out, but people do (this is the heavy math of financial engineering). I remember reading a while back that Tim Geithner, president of the New York Federal Reserve Board, was fighting for a piece of legislation to get more accurate auditing of financial portfolios and prohibit the purchase of assets that the buyer would be unable to cover in some case.

The volume of derivatives traded is enormous and the turnover is very fast. Consider what happened to Delta. They had a good size of securities for the case of an increase in oil. They buyer resold the asset and the same thing again. When it was time to collect, it was found that the company now holding the derivatives was bankrupt and could not be collected from. Delta had counted on that insurance, and eventually had to file bankruptcy themselves. An unfortunate domino effect with negative implications for our economy, all of which could have been prevented with a simple piece of legislation authorizing more accurate portfolio audits and prohibiting the purchase of excess risk.

There is actually a second problem with securities trading, but I'll save that for another post.

ND Football 07 & Contract Failures

In economics,there is a topic called "contract theory." One particularly important result of Contract Theory states that when two parties enter into a contract (for example one firm hires the products or services of another firm), if the new relationship requires any relationship specific investment, then there is an optimal contract duration.

For example, if coal-mining firm enters in a contract to supply a coal-burning power plant with coal and the power plant will benefit from investment in its factory to tailor its coal-burning process for the type of coal its new partner is supplying, then the two parties would benefit from specifying that their relationship is guaranteed for some particular duration, and early termination by a party incurs a penalty.

To see why, imagine that the two parties agree to maintain their relationship only for a period of time less than the optimal duration. The power plant will not be incentivized to fully invest in the relationship specific assets needed to get the most from the coal. The power plant will therefore get less profit from each unit of coal and therefore not be willing to pay as much to the coal supplier as if they contracted for a longer duration.

There is still a problem. Suppose that the coal-provider and the power-plant contract for the optimal duration. If relationship specific assets depreciate at all, the second after the contract is initiated, from the power plant's perspective, the remaining duration no longer warrants the same degree of relationship specific investment. The power plant will choose not to invest in replacement of depreciated relationship specific assets.

How do the two parties perpetually stay on the margin, always keeping the optimal contract duration in the future. The answer is a continually self-renewing contract, the Evergreen contract. Instead of contracting for a fixed duration, the parties contract to remain in the relationship until one party calls for termination at which point, after a fixed length of time the contract is over. This way, a sufficient amount of duration always remains on the horizon to justify optimal investment in relationship specific assets.

There are many industries in which Evergreen contracts are prevalent and often the norm. Restaurants hiring wait staff generally require a 2-week termination notice. Some people think that the time is so that the restaurant can find and train replacement (which is partially true), but a major reason is so that the restaurant can be justified to provide the wait staff proper training, development of a special relationship specific, the wait staffs knowledge of the restaurant. Evergreen contracts have also become popular in oil and oil-service contracts.

Perhaps Notre Dame' s Athletic Director could benefit from practicing some contract theory. Kevin White's problem is not contracting for too short a time period, but for longer than optimal duration. Who can really blame Charlie Weiss for looking past the near term, either consciously or sub-consciously? When you are provided with a 10-year contract extension, over investment in relationship specific assets becomes a real problem in the near term. You begin to redecorate your office, make sure your child is in the right school district, you treat your staff more congenially, you revamp your recruitment travel process all because you know you will be benefitting from these actions for the next 10 years. Yeah, these actions should pay dividends in the future, but the near term performance is gonna suffer.

It would be nice if ND football could be awesome today, and awesome tomorrow. Maybe it could be if ND's AD offered Coach Weiss an Evergreen contract. We would be getting that type of season that we will be getting in 5 or 6 years today and every year onward. Let's just hope that our near-term suffering isn't bad enough to drive away recruits for the long-term. Luckily it hasn't appeared so yet. Since NBC doesn't Evergreen contract with ND, we're able to get recruits who want to be seen on tv for the next 5 years even though we were abysmal last year. Two wrongs can sometimes make a right.

There are plenty of other explanations for ND's season last year. Coach Weiss wasn't acclimated to the college scene and ran the program too much like a pro program the first year and never developed his youth… All are probably true, but I just wanted to lend an economic perspective to the discussion. There is a pattern of behavior there. Coach Willingham's contract didn't end up being optimal duration either.

700 MHz Auction Results

http://blogs.zdnet.com/BTL/?p=8382
(note the last paragraph, sneaky)

Govt Role to Decrease Inequality: But What Kind?

Countries should have preferences over Information Equality (there exists moral hazard implications with more pointed goals).

With income equality, agents can procure what they want, including health if that is what they want. Therefore wealth redistribution is a more general goal, and health redistribution is more pointed goal. There is less moral hazard associated with more pointed redistribution goals. With income redistribution there is distortion in labor supply and savings decisions including investments in health. With health redistribution there is still moral hazard, but less. For purchase of commodities, agents must still work accordingly, however there is still lack of incentive for adequate personal investment in health.

I claim that the optimal commodity of redistribution by the government is information. Access to information contains all the answers agents could ever want to achieve any goals they would have. It provides the keys to vast warehouse of tools to serve the needs of all individuals desiring to cultivate their own potential. Achieving information equality consists of procurement of library services for public use, subsidies and at least mild de-tiering of internet, subsidies of information databasing firms, hiring of services to assist the access to information such as librarians and search cost routines.

tax competition

by the way, today starts the spectrum auction.

some new interesting unfoldings as to the participants expected strategies.

will have to post some more later.

back to Net Neutrality

i post again about net neutrality just because policy on this issue is so imminent and so important.

About Pareto Efficiency

In response to Adam’s comment about the idea of Pareto Efficiency.

Following the last posting, Adam asked the definition of “Pareto Efficiency,” namely is it unique and what metric is it based on?

Let me first point to a technical definition - http://en.wikipedia.org/wiki/Pareto_efficiency

Let me sat that this is a good question. Pareto efficiency is a subtle point. It means only that resources are not being wasted and that no one can improve his/her welfare (“utility” to economists) without lowering someone else’s welfare. So, as long as a government is enforcing property rights, once a Pareto Efficient allocation has been achieved, no one can do any better from further transactions.

What Pareto Efficiency does not say is that if individuals begin with non-efficient initial allocations (A would like to trade to improve A’s welfare and there is a B out there who is willing to trade with A and both A and B end up at least as well off as before they transacted) which of the many possible Pareto Efficient allocations will be achieved. A might increase his utility and B may stay the same in one efficient allocation. B might increase while A stays the same. They might both increase the same amount…. Because it is seemingly arbitrary to place weights on the importance of different individuals’ welfare, Economists sometimes only characterize optimality of allocations up to identifying the set of Pareto improving efficient allocations, a more generalized notion of optimality.
Again, this can all be seen diagrammatically in Figure 2 and explained with the accompanying discussion at http://cepa.newschool.edu/het/essays/paretian/paretoptimal.htm

If initial allocations are not efficient (as they usually are not), which of the very many Pareto Efficient allocations will be realized depends on who holds the bargaining power in the transaction. If A has full bargaining power then A can make B a take-it-or-leave-it offer and A will enjoy the surplus from transacting while B’s utility will remain the same or vice versa.

Bargaining power may depend on multiple factors; your desperation, your outside alternative options, whether bargaining is allowed to banter back and forth, your response time in the bantering relative to the depreciation of the good being bargained for.

In the presence of an externality, when there exist indirect effects to others welfare, which Pareto Efficient point gets achieved depends on the government’s intervention in determining who holds property rights. In essence, politicians weight welfare of individuals or firms against each other by decreeing initial property rights. In the common example, the government’s decree about whether a construction firm has the right to build an airport near a subdivision or whether the homeowners have the right to quiet surroundings determines which Pareto Efficient point in the set will be realized.

Economics in Family Decisons

Economics in Complicated Family Decision Making Situations

I was talking to my sister, a MSW (Masters in Social Work), how Economics has changed my perspective in how markets and societies work.

I said that I am a big believer in near laissez faire behavior.
The response was, “well, what about within marriage and families?”
In the interest of conversation simplicity, I had left out a significant stipulation. And the retort question had hit that stipulation right on the head. I didn’t, and don’t have a simple short-winded answer, as good questions don’t usually have that. But, here’s something.

The Fundamental Welfare Theorem of Economics says that under some basic conditions, if everyone does what is directly best for them, then the resulting competitive equilibrium allocates resources efficiently.
[efficiency (pareto efficiency), means that nobody can do better without someone else necessarily being worse off]
This is a good thing in that resources get used without waste and nobody ends up preying on anybody else.

But those basic conditions are crucial. They say that markets need to have perfect competition, and (this next one is the important one in our conversation) that there should not exist externalities (spillover effects). It is the role of government to intervene minimally to correct those potential market failures.

Externalities occur whenever an individuals’ actions indirectly effects the welfare of others. It probably happens all the time in sociology. In economics, it doesn’t happen all the time because most effects are reflected in the price, but still it happens a lot. For example, if you buy a loud stereo, then the direct effect is the change in your wealth and the firms profit, but the indirect effect is the degradation of the welfare of your neighbors. There are positive externalities too. For example, when you pay a good street performer, the direct effects are a deduction in your wealth and an increase in his, but the indirect effects are an increase in the welfare of other passer bys who also get to enjoy watching the performance.

Normally, as stated before, the remedy should be minimal govt intervention to restore fair pricing. In the stereo example, it could be a tax on loud stereos with the government's revenue being used to compensate the disturbed. In the street performer example, it would be each individual paying according to their benefit, and the performer getting rewarded for the total effect of his performance. For the economists out there, you would recognize the fact that externalities are correctable through government intervention as the Coase Theorem (http://en.wikipedia.org/wiki/Coase_theorem).
(New Orleans used to actually do this, in that they would help subsidize some of the performers based upon how they viewed their impact. And other governments do similar things. Good moves. Granted, governments do some pretty bone-head moves also, but that is another story).

The parallel here with marriage and families is that the externality effect is huge. The decision by your spouse has huge indirect effects upon your welfare and vice versa. And similarly the solution should be like a government intervention. A separate entity, the family (or the couple or group), should make that decision for the family (or the couple or group). What are this aggregate unit’s values? What is the best decision for this aggregate unit? Subsequently communication is critical. Now all component parties should know exactly the effect that their decision will have upon the other parties and can now be accurately incorporated into the aggregate’s decision. For instance, if a solution really benefits one party, then that member could use of some of their surplus to appease the other party. This is good that there is a solution, but it is a total burden in the form of ample communication.

For large groups, deciding on the organization and fair operation of the group is a very complicated problem. One must protect against the possible formation of factions that can deviate for subgroup improvement at the cost of the other members. This was the source of the majority of debate by the framers of our constitution in the Federalist papers. In many ways they have succeeded, but in some ways factions have definitely achieved real power. This is another discussion for another post.
http://www.foundingfathers.info/federalistpapers/

So, there is the long winded answer. Good in theory, but not sure if it’s any good for practice.

If still reading, or still interested, the intro on the Wikipedia page kind of explains the same thing.
http://en.wikipedia.org/wiki/Fundamental_theorems_of_welfare_economics
also, see the introduction and discussion associated with figure 2 on the site
http://cepa.newschool.edu/het/essays/paretian/paretoptimal.htm

Communications Technology

"In the beginning" [meaning a couple years ago] there were 5 major communications medium(there are more if you count cb radio, walkie talkie, ham radio...).
They were Wifi , Cell phone (cdma/...) , Satellite, Inground Cable, Inground Phone.

Inground Cable-
inaccessible for the mobile user
great bandwidth
(services provided by TimeWarner, Cox, SBC,...)

Satellite-
impractical for common 2 way communication (unless you have a huge transmitter)
great coverage
(GPS, DirecTV, Sirius, XM)

Wifi-
2 way accessible
decent bandwidth (~60Mbps)
weak range (1/4 mile at best without a relay from a standard router antenna)
currently practically implemented mostly by piggybacking on cable signal and broadcasted from cable hotspots
(802.11 abg)

Cell phone-
2 way accessible
weak bandwidth (constantly being reoptimized, now can get mediocre transmission speeds on your cell phone, but nothing you want to use consistently)
decent range (couple of miles depending on cell phone tower and phone antennas)

Inground phone-
2 way accessible
original voice transmission mission being picked up by inground cable
current focus to support cell phone communications


with all these contenders, which technology was going to win out?
which technologies would develop to be used for mainstream communication, and in which ways?

the answer depends on 3 critical developments.
1. the digitization of old tv broadcast frequencies, which in turn frees up a whole new bandwidth, the 700MHz blocks
2. creation of WIMAX
3. how the fcc decides to auction the blocks on the 700Mhz bandwith. whether they keep a block reserved as open. whether they make "net neutrality" a priority. and how communications companies end up when the auction is said and done.

How do I see the communication picture unfolding?
Stay tuned for the next posting.