Can money really buy happiness?

A big question asked by Allen Sanderson in the Chicago Life magazine. The basic message in his argument is  in the last paragraph:

In the end, GDP and average income may still be the best measures of well-being, in part because they correlate so strongly with other quality-of-life variables such as access to basic necessities, better health, and education. And despite their flaws, they are a pretty good ‘North Star’ to follow. Of course, some people watch Dr. Phil, try to keep up with the Kardashians, are avid fantasy sports league participants, or send 100 text messages a day, exhibiting that even in the midst of plenty you can still have no life.

GDP is not a measure of welfare, it was not designed to be one. But is does have a positive correlation with things that we think do improve welfare, so as a first cut, real GDP per capita is not a bad place to look to get a handle on welfare of a country.

A donor kidney market: pro/con

Los Angeles Times debates the issue of whether there should be a market for kidneys for transplants.

For:

People who need kidneys are dying unnecessarily, and an organ market would save lives.

Dr. Benjamin Hippen is a transplant nephrologist at the Carolinas Medical Center in Charlotte, N.C.

The most compelling reason for setting up a market for organs is that there really isn't any other plausible solution to the growing disparity between the demand for and supply of organs. Even if we were to maximize organ procurement from deceased donors, we still couldn't meet the demand.

As that demand grows, it's not just potential kidney recipients who get desperate — it's also potential donors, who often have a close-up view of what their loved ones are going through. We then see people with health problems, like high blood pressure or obesity, say that they're willing to take on a certain amount of risk so that their loved one can live a better life.

A regulated market would be, in some sense, safer — the pressure would be taken off folks who want to be donors but perhaps shouldn't be for medical reasons. Transplant professionals could then select the healthiest donors, who are at the lowest risk for long-term complications. With a regulated market, we could say to high risk-donor candidates, "No, you shouldn't be a donor, and your loved one isn't going to suffer as a consequence of that decision."

There's also a significant difference between what it costs to maintain a transplant versus what it costs to maintain someone on dialysis. In 2007, $28 billion was spent nationally on people on dialysis; about $2.2 billion was allocated to kidney transplantation. So transplants are vastly more cost-effective, and in general they confer a longer survival benefit. Also, a larger proportion of people are able to go back to work compared with people on dialysis.

The unregulated, underground black market in organs in developing countries has been catastrophic for both donors and recipients. But the reason that someone who is desperately poor may be able to sell their kidney on the black market is that people in countries of comparative wealth have failed to solve their own supply problem. That is a policy failure. If the demand for organs could be met through legal, ethical strategies, some of the driving forces that support black markets would disappear.

If, indeed, the current system isn't meeting demand, then there's a sense in which it's unethical not to establish regulated incentives for living donors or to think more carefully about not doing so. The cost is being paid by the people who are dying on the waiting list, getting sicker on dialysis or selling their kidneys under terrible circumstances.

Against:

An organ market would exploit the world's poor and set the precedent for medical transplant tourism that puts everyone at risk.

Dr. Francis Delmonico is the director of renal transplantation at Massachusetts General Hospital and a professor of surgery at Harvard Medical School. He is also the medical director of the New England Organ Bank in Newton, Mass.

Despite the good intentions of those who would suggest that an organ market could be regulated, it's impossible to do so. A market for organ sales enables brokers and extra payments, and in a global society, the market could not be restricted to the United States.

Right now, our country sets the tone on this issue. Once we say it's OK to have a market here, it condones markets everywhere else in the world, and with medical tourism being what it is, those in search of kidneys will go to the place where it's the cheapest price — Americans won't be limited to undergoing transplants locally.

From there, transplant tourism in global markets brings unanticipated consequences. It increases the risk for diseases like hepatitis, tuberculosis or malignancy, and it also opens the door to a variety of unethical practices involving the donor and their medical care.

The central problem of organ sales is that it's a victimization and exploitation of poor people, notwithstanding good intention. The source of these organs is always the lowest socioeconomic class of a particular country — we know that has been the case in the Philippines, in Pakistan, in Egypt and in Iran. And the payment isn't that substantial of an amount, so rather than making them better off or helping them, the money is quickly used, and the donor is left with one less kidney. It's a reality that there's no escaping.

It's true that there has been a plateau of living donors in this country, and something has to be done. For that reason, I do believe in eliminating disincentives for donors. The living donor who doesn't have health insurance should have it — and even life insurance — provided for them, as it pertains to the donation event.

A market is kidneys is just one example of what economists refer to as "repugnant markets".

Interesting blog bits

1. On the AMI bail out:
• Matt Nolan here and here
• Eric Crampton here
• Not PC here
2. Paolo Manasse on The trouble with the European Stability Mechanism
   

   The meeting of the European Council on 24-25 March focused on shoring up the battered Eurozone infrastructure through the European Stability Mechanism. This column argues that the mechanism is seriously flawed. It says it is unlikely to withstand the shock of a severe financial crisis and may even spread the damage to high-debt countries, while leaving the Eurozone in the grip of paralysing vetoes.

3. Tim Worstall on why Fatties and smokers save the NHS money.

   We're told, endlessly, that smoking must be even more highly taxed because smokers cost the NHS oodles of money. Further, that salt, fats, junk food, should all be taxed because fatties cost the NHS lots of money.
   
   This is nonsense, nonsense on stilts.

4. Chidem Kurdas on the Japan Nuclear Crisis vs. the Titanic

   The Fukushima Daiichi nuclear threat and the sinking of the Titanic are both disasters caused by acts of nature – earthquake and tsunami in one case, an iceberg in the other – interacting with technology. Yet they have radically different implications. The Japanese incident has made nuclear power less acceptable, whereas the sinking of a ship, no matter how immense the casualties and spectacular the failure, did not stop shipping.

5. Bryan Caplan on 40 Things I Learned in My First 40 Years.

   Caplan has decided to write a list of important lessons he has learned during his first four decades.

6. Arnold Kling on If Economists Designed Health Policy.

   They would come up with something like this.

7. Ed Dolan asks Is Financial Reform Working or Will It Make Things Worse?

   The 2008 financial crash gave rise to a world-wide call for a review of regulations. In the United States, the EU, and international forums like the Basel Committee on Bank Supervision, the conclusion was reached that regulators had allowed banks and other financial institutions to take risks well in excess of those justified by the public interest. Legislatures were brought into the act where needed to change the regulatory framework. Everyone vowed to fix things.

8. Gavin Kennedy on A Tale of Two Prophets

Global prospects for growth

In this audio from VoxEU.org, Michael Spence of Stanford University talks to Viv Davies about growth prospects in the U.S. and developing countries. He describes the current divergence between growth and employment in the U.S. economy. They also discuss global imbalances, fiscal coordination in Europe, the global investment rate and the threat of rising oil prices to global growth.

In this an IMF video interview Spence talks about New Ideas for a New World.

Austrian thoughts on competition policy

This is from a blog posting by Philip Booth, from the IEA blog, on competition policy. I am increasingly of the view that competition policy is next to useless or outright dangerous. Booth offers an Austrian view of competition policy in which the market is seen as a dynamic process of entry and exit with entrepreneurs discovering new information, new products and new forms of production in ways that actually increase people's welfare. That is, a view that realises that markets really can be good for us. For Austrian's the major issue is whether or not a legal framework allows for the process of competition which sees both entry into the market of new firms and exit from it of failed firms. Standard competition policy looks at the market in too static a manner.

Booth says it better,

Traditional ways of looking at competition policy are problematic in general, but especially in innovative industries. The focus is on the structure of the market as if it is a static entity. There has been more progress in recent years by competition authorities to try to understand the application of different concepts of market definition. But, nevertheless, we have had enquiries into supermarkets and banks in the last decade where the authorities have tried (in the case of the banks) to calculate their super-normal profits using the capital asset price model and (in the case of the supermarkets) taken market definitions to a ludicrous degree of granularity. From this sort of flawed analysis they have then developed policy.

As noted, the Austrian view is to see the market as a dynamic process of entry and exit with the big question being whether the legal framework utilised for competition policy allows for the process of competition, something neoclassical models are not good at doing. Booth continues.

Competition authorities with their neo-classical models have sometimes adapted to this way of thinking in a limited way. They have sometimes replaced models of market structure with models of contestability and looked at barriers to entry.

Booth argues that this approach while an improvement doesn't go far enough.

But this does not take the Austrian perspective far enough. As Vince Cable suggested in some disparaging remarks he made about business, it could almost be said that the purpose of businesses is to create monopolies. What Vince Cable did not say, though, is that, except when governments create monopolies, those private monopolies come under continual attack from potential entrants. Competition comes both from actual entry and the threat of entry. The structure of the market at a particular point in time does not necessarily indicate the degree of competition.

Booth then asks What can Austrian economics tell us about competition policy? His answer:

As ever, the main function of the economist, as Hayek put it, is to help us understand how little we know. One of the chapter headings of Law, Legislation and Liberty read: ‘If the factual requirements of “perfect” competition are absent, it is not possible to make firms act “as if” it existed’. In other words, if we do not have perfect competition there are unexploited opportunities for welfare enhancement that entrepreneurs still have to discover. If they have not been discovered we do not know what they are and therefore we do not know how to correct for the market failure.

This is clearly a problem for the authorities. But, there is another problem. The potential for monopoly profits must be a spur to innovation, research and development. If this were not the case, then why do we grant patents? If we restrict the monopoly profits that arise before a monopoly is contested or before innovation makes the monopoly irrelevant then we will reduce invention and innovation. We can never, know, of course, by how much invention and innovation will be reduced because it is impossible to know what might have been invented in different circumstances. We only know what has been invented: not what has not been invented. I wonder, therefore, if we should have a less restrictive patent regime – especially given the legal uncertainty that most patent regimes lead to – and a less restrictive competition policy regime. To some extent, both are cancelling each other out whilst creating greater legal uncertainty. But, the main point is that competition policymakers are working in the context of two huge unknowns and they are, as Hayek put it, pretending that they know more than they do.

The competition policy authorities might respond by arguing that they need to use some models and that the static models of market structure help them muddle through in this difficult area. The alternative point of view was put by Kirzner who said: 'Now the mere failure of a theoretical picture to replicate with precision all features of the reality it seeks to explain, is not necessarily fatal for the usefulness of that theoretical picture. But mainstream theory filters out of the picture those aspects of reality which are at the core of an adequate explanation for market phenomena.'

Cutting the budget ......

or not.

John Taylor explains the budget debate going on in the U.S. right now:

perhaps the biggest difference is that the House Budget brings outlays as a share of GDP back close to 2007 levels as a share of GDP, thereby removing the large spending increase of the years 2008-2009-2010, while the Administration budget effectively locks in that increase.

Arnold Kling notes:

Somehow, we could ratchet up spending by hundreds of billions at the drop of a hat. Reducing spending by less than $100 billion becomes Armageddon.

So what goes up may not come down. Physics does not apply to politics!

The problems of getting involved in public debate

From Greg Mankiw's blog:

Mankiw Says Higher Taxes Won’t Increase Revenue

The brief article alleges to summarize what I said in an interview. My first reaction was, I didn't say that. My second reaction was, did I misspeak? Fortunately, the audio of the interview is right there. So I listened to myself (always a painful experience), and I think I said what I really believe--that tax hikes do not generate as much revenue as you might think. The Bloomberg headline is an unfortunate misrepresentation.

This kind of thing doesn't improve the incentives for getting involved in public policy.

EconTalk this week

Gavin Andresen, Principal of the BitCoin Virtual Currency Project, talks with EconTalk host Russ Roberts about BitCoin, an innovative attempt to create a decentralized electronic currency. Andresen explains the origins of BitCoin, how new currency gets created, how you can acquire BitCoins and the prospects for BitCoin's future. Can it compete with government-sanctioned money? How can users trust it? What threatens BitCoin and how might it thrive?

A profile of Al Roth

The Boston Globe has a piece on Alvin Roth one of the leading market design economists,

Academically speaking, Roth is a pioneer of so-called market design: finding situations where a market is failing — often, a place that most people wouldn’t even recognize as a market — and making it work better. Roth has influenced a cadre of young, energetic market designers, many of whom have taken up prominent positions at top universities. Inspired by Roth’s work, these rising economists are also setting their sights on real-world problems. Some are looking at dating websites; others are interested in how universities could do better at scheduling their students’ classes. Like Roth, all of them envision a world in which economists, as unlikely as it may seem, are recognized as society’s mechanics.

Sitting in his office last week, Roth talked about how it was time for economics, as a field, to turn a corner — how merely describing markets as they naturally occur was no longer enough. Instead, he said, economists have to make themselves useful by fixing broken systems in which people aren’t getting what they want.

[...]

Roth had noticed instability in the National Resident Matching Program, and soon started seeing it all over the place. In 2003, he helped redesign the process by which kids were assigned to schools in New York, making it more likely that kids were sent where their parents wanted them to go. A few years later, he repeated the trick in Boston, and around the same time, he helped establish the New England Program for Kidney Exchange. He has also helped redesign the job markets for gastroenterologists and economists.

It’s not always easy, bringing economics into the real world like that. Bureaucracy gets in the way a lot, and so do political pressures. But as Roth has learned over the past decade and a half, sometimes the biggest hurdle is that the people he and his fellow economists are trying to help are not totally eager to be helped. People tend to be a little territorial about their problems, Roth said, and they don’t always understand why someone who works at a business school is sticking his nose in. At his first meeting with officials from the Boston public school system, Roth recalls, an administrator asked whether he and his fellow academics knew what they were dealing with.

“We’ve given our spiel, and in the question and answer session, one of the guys says, ‘Professor, you know, the school system is...complicated,’ ” Roth recalled. “His point was there are lots of details in a school system — that it’s not some abstract thing.”

That kind of skepticism is just par for the course, Roth said: People have pretty fixed ideas about what economists do, and some of those ideas don’t really apply to him and his fellow market designers.

Roth’s most recent project is helping to set up a nationwide kidney exchange, which would make it possible to find even more matches than the existing regional networks can find on their own. Running this national network has been a bureaucratic nightmare, and since it opened for business last fall, only two transplants have actually been carried out under its auspices. The problem is that depending on blood type, it can be hard or easy to find someone a compatible kidney. And when a hospital has an easy-to-match patient, its administrators are more likely to withhold that information from the other hospitals in the network because they’d rather do the transplant themselves, and get the business.

But this practice hurts the system, and ultimately cuts down on the number of transplants that get done. The way to fix it, Roth argues, is to assure hospital administrators that they will be given credit down the line for every transplant they give up as a result of sharing information. “Many of them will not understand right away, and we’ll have to say it louder,” he said.

Michael Giberson at the Knowledge Problem blog makes a point worth remembering with regard to market design,

Some market-oriented people will react negatively to the idea of “economists … as society’s mechanics,” but the negative reaction is based on a misunderstanding. Roth is no central planner. The point is to rework organizations so that participants in those organizations can more effectively achieve their goals.

Investment and unempliyment: why not fight about it, some more

Paul Krugman has responded (on 31 March) to a reply (of March 31) by John Taylor to two of Krugman's critiques (afternoon and evening of March 30) of Taylor's January 14 post on the negative correlation between unemployment and investment. Taylor has now replied to Krugman's 31 March response here.

Interesting blog bits

1. Ed Dolan on Why we are losing the war on drugs

   No one who has ever taken Econ 101, or read the works of Friedrich Hayek, should be the least bit surprised. The drug cartels are strong because the US strategy in the drug wars makes them strong. Here's why.

2. Roger Kerr on The Truth about Privatisation: Blog # 7

   You often hear the suggestion that if state-owned enterprises (SOEs) are sold, the government should limit shareholding to ‘Kiwi mums and dads’. In short, not a good move.

3. Tim Worstall on Why we need more markets and less government

   William Baumol, that’s why.

4. Thorvaldur Gylfason on Oil-spill economics: How Ghana can succeed

   And its not what you think. Ghana is about to become a major oil producer. The country’s newfound oil is expected to bring in many billions of dollars, changing the face of its economy. Ghana is the first African country where a major oil discovery is greeted by a well-functioning, albeit young, democracy. This column outlines how it can avoid the resource curse and take full advantage of this historic opportunity.

5. Bjorn Lomborg points out that 'Earth Hour' won't change the world

   There is a certain irony in renting brightly lit advertising space to exhort us to save electricity for one hour — but this is apparently lost on the organizers.

6. Mark Perry at Carpe Diem brings to our attention these clips of Milton Friedman.

   See here, here, and here.

7. PJ Byrne on To have or to be? A reflection on the anti-cuts march

   Byrne reflects on the recent anti-cuts march in London and the rhetoric used by Labour leader Ed Miliband. The movement's materialism and disregard for ideas, says Byrne, will be its undoing.

8. Henry Overman asks, How did London get away with it?

   When the global crisis hit, many predicted that London would suffer more than other parts of the UK, given the city’s reliance on the financial services industry. This column explores how the UK capital’s economy suffered far less than the rest of the country.

9. John Taylor on A Good Exit Strategy Proposed by Philadelphia Fed President Plosser

   Charles Plosser, President of the Philadelphia Fed, proposed an exit strategy for the Fed. It’s the first explicit exit strategy to be put forth by a member of the FOMC, so it deserves careful consideration and discussion.

Investment and unempliyment: why not fight about it

John Taylor argues that the most effective way to reduce unemployment is to raise investment as a share of GDP. His blog post is Higher Investment Best Way to Reduce Unemployment, Recent Experience Shows. He argues for a negative relationship between unemployment and investment. But Paul Krugman isn't having a bar of this. See here and here. What is the role of housing in all of this? Taylor responds in Investment and Unemployment: A Reply. Justin Wolfers thinks this looks like fun and comments here and here. Taylor responds here.

What started all of this is this graph showing a negative relationship between unemploment and investment.

The question is which way does causation run? From investment to unemployment or the other way round? Or is the relationship due to some other third factor?

What’s new in the second edition of The Undercover Economist?

Yes there is a second edition of The Undercover Economist by Tim Harford due out in the U.K. in Apirl. What's new? From Tim Harford's webpage:

I have tried to preserve as much as possible of the original book rather than surrendering to hindsight bias, but I have tried to update as many of the statistics and examples as possible as seamlessly as I can. (Occasionally I have used footnotes to highlight changes between the first edition and the second – especially if the changes have either proved me right, or made me look silly.)

A more substantial change has been to replace chapter six – which was originally about the dot-com bubble – with a new chapter about the banking crisis that began in 2007. The dot-com bubble, alas, now seems fairly benign in comparison with the banking crisis, and it felt impossible to publish a second edition without trying to make sense of it all.

The politics of milk

The stuff.co.nz has an article on the Commerce Commissions decision to investigate milk prices which makes more sense than most of the media output on this topic, and the headline days it all: Election blamed for milk price investigation,

Election year jitters in the Beehive are thought to be behind the sudden decision of competition watchdog the Commerce Commission to investigate retail milk prices, less than a week after telling a Parliamentary select committee it would not do so.

While the commission in a statement late yesterday said Commerce Minister Simon Power had not asked it to initiate a dairy price control inquiry, the turnaround is likely to be politically charged, Wellington and dairy industry sources suggest.

and

The [commerce] commission in its statement yesterday said "a number of parties" had laid specific complaints about the retail price of milk and called for an inquiry. But when pressed on this, a spokeswoman could only say that "a number" of informal approaches had been made to the commission by people unhappy about the price of milk since January. The commission did not discuss specific complaints, she said.

and

An observer close to the situation was sceptical.

"This is about rising milk prices in election year. It takes it off the radar screen for a few months - takes it off the front page. You know how long it takes the Commerce Commission to do anything."

The real downside to all of this is that it makes the Commerce Commission look politicised and that is a very bad look for an "independent" body like the commission.

Economics The Onion way

Its April 1st, so I guess we shouldn't be surprised to learn that the Continued Existence Of Edible Arrangements Disproves Central Tenets Of Capitalism:

Upending more than two centuries of free-market theory, leading economists across the globe announced Thursday that the fundamental principles of capitalism had been "irrefutably disproved" by the continued existence of the designer fruit-basket company Edible Arrangements.

"In theory, the market should have done away with Edible Arrangements long ago," said American Economic Association president Orley Ashenfelter, who added that one of the crucial assumptions of capitalism is the idea that businesses producing undesired goods or services will fail. "That's how it's supposed to work. Yet somehow, despite offering no product of any worth whatsoever, this company not only makes payroll every week, but also generates strong profits."

"It's mind-boggling," Ashenfelter continued. "I honestly have never even heard the name Edible Arrangements mentioned in conversation before. Seriously, has anyone?"

[...]

"To understand this enigma, we must discard the naïve notion that free-market prices reflect what consumers are willing to pay," Nobel laureate Joseph Stiglitz said. "Otherwise, how else are we to rationalize the phenomenon of a human being willingly spending 84 bucks on 18 green apple wedges and a Mylar balloon?"

[...]

Clearly the invisible hand has led us astray when it allows for the continued existence of a store that manufactures 'Sympathy Blossoms' of chocolate-dipped orange slices for funerals and wakes," said N. Gregory Mankiw, a former economic adviser to George W. Bush. "And when people are buying 3,000 'Orange You Gonna Feel Better Soon?' bouquets a day, the idea of consumers as 'rational actors' goes out the window pretty fast."

The standard of NZ's economic journalists

The point that Matt Nolan and myself have noted about the claim that raising your price can be anti-competitive raises another question with me: Why have none of our "economic journalists" asked about the validity of this claim?

I mean it does on the face of it seem a very strange claim. The normal anti-competitive pricing activities would be things like predatory pricing or the closely related limit pricing, but both of these involving lowering your price in such a way as to either force competitors out of the market or prevent them from entering. But raising your price is the opposite of this, it would seem to involve giving an incentive for firms to enter the market or if already in the market expand supply, thereby increasing competitive pressures. So have none of the economic journalists out there asked themselves, Can raising your price really be anti-competitive? Have any journalists thought of going to the Commerce Commission and asking them to explain the logic behind this claim?

This is one for the X-files (updated)

There have been some seriously weird things said about the price of milk recently but this comment in an article from stuff.co.nz has to be the strangest yet:

Dairy market heavyweight Fonterra is artificially inflating the price of milk in New Zealand in a deliberate campaign to lessen competition, says an official complaint to the Commerce Commission.

Now I can not for the life of me see how inflating the price of milk can lesson competition. That is just weird. Predatory pricing or limit pricing are anti-competitive but involve lowering the price of a good to force out or keep out competitors. Raising the price of milk would increase the number of competitors; its competition increasing, if its anything.

The stuff article goes on to say:

The allegation, formally laid with the competition watchdog late last week, is understood to have triggered the commission's announcement it is starting an investigation to determine whether a price control inquiry into retail milk is needed.

The Commerce Commission is taking this idea seriously?! I really would like them to explain how increasing your price is anti-competitive.

The thing to keep in mind is that the price of milk in New Zealand will be the world price. For a good like milk the market is the world market and the price is set by supply and demand conditions in the world market. So the correct question to ask is, Are we paying the world price? If so, then there is no problem.

If the article had been published April 1st it would have made a lot more sense.

Update: Matt Nolan at TVHE seems as confused as I am.

Declaration of independence

Allen R. Sanderson, who teaches economics at the University of Chicago, has had enough. For too long, he says, the U.S. has been far too dependent on the rest of the world for imports of vital commodities. And he has a plan:

My fellow Americans,

For too long, the United States of America has been at the mercy of foreign interests — and nations in faraway lands that are often at odds with our core values — when it comes to the production of perhaps the vital resource that drives our economy. We remain far too dependent on this imported commodity that could, in the time of emergency or international political crisis, be denied to us and thus cripple our productivity and reduce us to quivering masses of migraines in a matter of hours. The time for change is now.

And the commodity?

I speak, of course, of our complete dependence on coffee that we are importing mainly from Brazil and Colombia. It's time to wean ourselves from this harmful addiction. My "Coffee Independence" proposal is the key first step.

And as president of the U.S. he would implement his plan to deal with this crisis:

Thus my administration will propose that we begin immediately to invest in this city [Detroit] and state [Michigan] and turn them into the coffee capital of North America. It will create jobs, jobs, jobs; stimulate economic development; and put Michigan back on the map. After all, it was a beer that made Milwaukee famous, and cows that turned Wisconsin into America's Dairyland. Why not think of Michigan when you think of mocha?

Going without our morning venti half-caf latte and afternoon frappuccino grande will take some time to get used to, of course. As will building the hothouse infrastructure, turning seedlings into hearty trees; and fully implementing our "Cash for Coffee" stimulus program. And until those beans can be picked by American workers who are paid a living wage, have great health care benefits, 40l(k)s and union representation, this will call for shared sacrifice.

To complement this initiative, I will also propose to Congress that we invest in Florida orange juice production, Nicorette gum and California wines, all 100 percent American products. (And we can thus reduce Brazil to a nation known only for its Carnival, bikini waxes and getting suckered into hosting the 2016 Olympic Games.)

Once fully implemented, we will then turn our full attention to growing cocoa in New Hampshire, a state that figures prominently in the 2012 primaries, instead of importing our secondary caffeine and fat additions — chocolate — from the Ivory Coast and Ghana. After that we will move on the idiom — "For all the tea in China" — and have farmers in another early primary state, Iowa, convert some of their corn (aka ethanol) acreage to tea, thus stopping the flow of American dollars to China and India.

And then for the final phase, I am fully prepared to give new meaning to the term "Banana Republic."

American needs this man!

Car insurance and the arbitrary quality of egalitarian justice

Mark Pennington writes on a recent judgement from the European Court of Justice. Pennington says,

Classical liberals claim that theories of justice must be judged by their practical capacity to facilitate positive sum games in society and to eliminate scope for the exercise of inconsistent and arbitrary political power. Unfortunately, as one of the recent rulings by the European Court of Justice reveals few people in today’s legal and political elites are willing to conceive justice in this regard. Three weeks ago the European Court ruled that it was inadmissible for car insurance providers to take into account sex-specific differences for risk assessment and actuarial purposes on the grounds that this breached the fundamental ‘right to equal treatment’ for men and women. As a consequence, European women will no longer be able to benefit from cheaper driving insurance resulting from their lesser likelihood of involvement in automobile accidents than men of equivalent age and experience. It is difficult to see how this decision is compatible with a positive sum view of society. Men will not be made any better off by the decision as their insurance premiums will at best remain unchanged and women will be made worse off as their previously cheaper premiums will now be equalised upwards in line with those of men.

The European Court could have made a better decision had they bothered to read a paper by an old (yes, I really did mean to emphasis the "old" in this sentence) teacher of mine, Alan Woodfield. Back in 2000 Alan published a paper in New Zealand Economic Papers on "Preventing Insurance Markets from Separating into Gender-Dominated Price-Coverage Combinations". (New Zealand Economic Papers, 34(2),  2000, 243-268). The abstract reads:

This article first examines the extant literature on regulatory attempts to prohibit gender-based risk categorization in insurance markets as adopted in a number of countries and proposed in New Zealand's Human Rights Bill 1992 (but not subsequently enacted). The literature suggests that regulators' aspirations and expected outcomes may not materialize. Stronger regulations that effectively impose unisex pricing requirements at either the level of the individual firm or the market level, and which attempt to prevent markets separating into price-coverage combinations dominated by one or other gender, are then evaluated. While these raise the likelihood that targeted gender groups or the majority of their members are made better off via access to pooling contracts, the desired results are still not guaranteed. A variety of outcomes are possible, including pooling contracts that make no insured person better off and separating contracts that make targeted groups better off. Outcomes are sensitive to various parameters and also to the concepts of equilibrium deemed appropriate to the problem.

In conclusion Alan writes,

This article has examined the nature of contracts and welfare implications of interventions in competitive insurance markets which attempt to compensate for gender-based differences in risk. Although these interventions fail to enhance efficiency, they might be expected to raise the welfare levels of those agents allegedly suffering discrimination in insurance markets. For the case where females, for example, are uniformly riskier than males, it is shown that females may not necessarily be better off as a result of regulation, although they will be so in a number of situations, whereas males are always worse off. Where females are riskier on average, but some females are low-risk types and some males are high-risk types, it is shown that if the information required to assign individuals to the correct risk class is prohibitively costly for insurers to obtain, then while high-risk females are typically better off as a result of regulation, they need not be so, and can even be worse off, compounding the inefficiencies associated with adverse selection. The welfare effects for low-risk females are extremely variable, and are critically dependent on the specific form of the regulation, the underlying parameters of the problem, and the choice among alternative myopic (Nash) and non-myopic (Riley, Wilson, Spence-Miyazaki) concepts of equilibrium. Further, equilibrium will not always be characterized by pooling rather than separating contracts even when unisex insurance prices prevail everywhere, and where pooling contracts do prevail, regulators cannot be assured that all members of a disadvantaged gender group will be made better off by regulation.

I'm guessing that the European Court of Justice did not think the issue through. The set of possible outcomes is more complex that the court seems to think. And the outcome they did pick looks like one of the worst.

Balanced budget law

At the Adam Smith Institute blog James Paton is discussing a balanced budget law. He writes,

In 2009, the German constitution was amended to stop the federal and state governments from running budget deficits. The plan in Germany has been set over an eleven-year period. From 2016, governments won’t be able to run a deficit of more than 0.35% of GDP and from 2020 a deficit won’t be allowed to run at all. In America, 49 states have some form of a balanced budget provision (the exception is Vermont). In Oregon, the law forbids a state surplus of more than 2% of GDP. If there is one, anything above this threshold is refunded to taxpayers. The Federal government does not have a cap on its spending at all, but there have been various balanced budget proposed. This has been brought to Congress within the 1991-1992, 2001-2002 and 2005-2006 sessions. These have failed due to the difficulty to pass amendments, which needs a two-thirds majority in both houses in Congress and three-quarters of states ratifying it.

I'm guessing Ganesh Nana would not be too keen on the idea but I think many other economists would give the idea support. The size of budget deficits being run in many countries is of concern to economists. Recently in the U.S., for example, 10 former chairs of the President's Council of Economic Advisers wrote,

There are many issues on which we don’t agree. Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention.

Given such concerns that the idea of a balanced budget law being discussed is understandable and not without merit.