Tuesday, March 30, 2010

Why is insurance such a difficult concept?

Do people not understand what insurance is?

With all this talk about health insurance costs, I find it hard to believe that most of public grasps the idea of spreading out risk - which is the entire idea of insurance.

Everyone knows the argument to force health insurance companies to cover pre-existing conditions, but there is no push to get car insurance to cover accidents that occurred before the policy was signed.

How many people are upset that their health insurance only covers catastrophes, and not routine checkups? Meanwhile, no car insurance company covers oil changes. If they did, you would see mechanics raise the price of an oil change. They know the customers won't shop around as carefully if they are shielded from the price.

The idea of insurance is simple. If there's a group of 100 people that are afraid a Very Bad Thing will happen to them, and the Very Bad Thing will take $1,000 to fix, but it will only happen to one percent of the people in the pool, than everyone can pay $10 into a pool, and the unlucky person will use that money to fix the Very Bad Thing. The risk is spread out to everyone, so no one individual bears the full cost.

It's a little more complicated than that in practice- there are operating costs to pay for the insurance program and profits to justify running it. Those profits are a lot lower than people realize. Some people are riskier to insure than others and plans don't cover just one Very Bad Thing, they cover different combination of problems. There's a lot of math, but the reductionist model still gets the basic idea down.

With health insurance, women tend to use more money from the pool. Insurance companies balanced that out by charging them more. It's the opposite with auto insurance, as men have more accidents than women, and insurance companies charge them more as a result.

But one of those is about to change. The New York Times reported this week, when it reported that health insurance companies can no longer charge men and women different amounts.

Or as the article put it, discriminate:

"In the broadest sense, the new health care law forbids sex discrimination in health insurance. Previously, there was no such ban, and insurance companies took full advantage of the void."
The article goes on to say that while a lot of changes in the new health care law won't happen until 2014;

"...some changes should actually happen much sooner, because the law’s overarching ban on sex discrimination takes effect immediately. The legalese outlawing sex discrimination is not easy to find or to parse, but it refers to existing laws, like the Civil Rights Act and Title IX, to say that the same protections apply to people seeking health care and insurance."
This is not discrimination, this is mathematics. Do health insurance companies discriminate when they charge smokers more? Do life insurance companies discriminate when they charge older people more? Do car insurance companies discriminate when they charge more to people with bad driving records?

Without a trace of surprise, the New York Times article does not mention if car insurance companies should charge men the same as women. It even acknowledges "women used the health care system more than men," which means women use more health insurance dollars than men do. Instead of challenging this decision with any opposition sources, the article repeats the activist slogan, "Being a woman is no longer a pre-existing condition."

I've seen a lot of anti-science on both the left and the right this decade, but this is the first case of an anti-math bias I've ever seen.

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Sunday, March 28, 2010

The Maine maple syrup myth

Today was Maine Maple Sunday, a simultaneous open house at all of the family-run maple syrup businesses in the state. There are pancakes for sale and live demonstrations of sap being boiled down to make syrup and a lot of maple trees with active sap lines.

Localists get to see their dream world in action - local people drawing raw materials from the earth and turning them into high-end organic products. Maple syrup sells for a lot at these events - A local newspaper reported the statewide average as $55 a gallon. Localists see these prices as being earned by independent people, with no corporate strings attached or middlemen.

There's a lot more to the story, and it shatters the cottage-industry image that attracts the "buy local" crowd.

It's true that some of the maple syrup is produced there inside the "sugar house." Maple syrup sellers use cordless drills to put blue plastic tubes into the trees. The sap runs down these tubes into collection tubs and is then boiled down to remove most of the water. That's all there really is to it, and it's considered an organic product. That's kind of like certifying a bag of ice as organic - there was never a chance or reason to use synthetic pesticides or additives.

But that's only one way the independent maple syrup sellers get their syrup.

The other way is they simply buy it.

Companies like Bascal Family Farms of Vermont have large-scale operations, and so they produce maple syrup cheaply. The small operations in Southern Maine aren't very efficient, and the industry could lose a lot of money if the climate fails to produce much sap, which is what happened this year.

One maple syrup maker I talked to said that two-thirds to three-quarters of the syrup they sell each year is purchased as "bulk maple syrup" from a company in northern Maine. Some produce all of their own syrup, and others fall somewhere else on the spectrum. It's a common business plan because it's very profitable.

Essentially, Maine maple syrup businesses are middlemen. They put on a demonstration of collecting sap and boiling it down to entertain customers, but bulk syrup is so cheap that they can just buy it and pour it into their own bottles. This doesn't apply to every maple syrup business in Maine - some do produce everything they bottle. However, those who do buy bulk syrup don't volunteer that information during their demonstrations.

If someone wanted to only eat foods produced in Maine, they wouldn't be happy with this system. Now would people who make a point to know exactly where their food comes from, or those who take "food miles" seriously.

People like me, however, see nothing wrong with the way the system works. People are selling valuable products using efficient production methods. Maple syrup producers in rural area are getting business because their large operations are efficient. The climate was awful this year for syrup production by the small part-time operations, and they would have lost a lot of money without the aid of the bulk maple syrup vendors.

My only qualm is that keeping the real recipe a secret gives localists and the general public a false view of the world. They are organized under the Maine Maple Producers Association, that perpetuates the myth of an all-Maine syrup origin. Businesses should be free to get their materials from whatever side of the border they want, but they shouldn't mislead the public to where it came from.

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Friday, March 26, 2010

What if Maine produced all of its own food?

Last night I attended a presentation by Cheryl Wixson called the Maine Local Twenty, which introduced 20 foods that Maine could potentially produce to feed its residents if a big wall was built around the state.

Now some of these listed foods are specific items, like carrots, while others are broad categories, like seafood. That's not worth griping about because the point is to see if Maine could feed itself with any number of foods that can be found here, not to narrow it down to some arbitrary number.

And no, we wouldn't all die from scurvy. We could get vitamin C from Maine tomatoes.

The other 17 entries are blueberries, apples, potatoes, carrots, beets, salad and braising greens, garlic, cabbages, onions, winter squash, milk, cheeses, eggs, ground meat, maple syrup, honey, dry beans and grains.

Some of the questionable benefits touted from this restricted menu include antioxidants from the blueberries (which is forgivable) and the homeopathic healing ability of garlic (which is not). Wixson didn't spend much time talking about homeopathy, except to call it the "Russian Penicillin."

That's one of the biggest problems I have writing on localist issues. Our world views are very far apart because we're playing with different sets of facts. I know homeopathy is bunk with total confidence, and I have serious qualms with some of the other recurring themes; organic production, isolationism, anti-fossil fuel, anti-genetically modified organisms, etc. Because of this, I have to choose my battles on what facts to focus on, and I don't expect to hear things I agree with very often.

Which totally set me up for some happy surprises with Wixson's talk. She made a compelling argument for deregulating Maine food companies - such as ending a stupid law that Maine chickens can't be slaughtered at the same farm where they live. After all, she said, businesses proudly put their labels on their products, and it's in their best interest to keep their products safe.

It was like she was channeling Milton Friedman. She also hinted at Bruce Yandle's Bootlegger and Baptist theory, that the people calling for regulations sometimes have selfish interests in mind, and not the safety of the public.

If that wasn't enough, she discovered David Ricardo's beautiful theory of Comparative Advantage. Wixson told the 70 assembled localists (and me) that she grows her own vegetables, and has a exchange worked out with someone where he gives her lobster and she gives him vegetables.

I think she undersold how great this is. She has access to lobster without having to get a boat, a trap, some bait, a yellow plastic outfit and a gun.

The gun isn't for shooting lobsters, it's for scaring off lobster thieves and trap saboteurs. Being armed is an integral part the Maine lobster industry.

Instead of casting off into the sea, when Wixson wants lobster she just grows more vegetables at home. She already has the skills and the equipment. By trading with a lobster specialist, she is able to make herself wealthier in terms of food variety. This doesn't come at the expense of the lobsterman, he benefits too. Both parties are wealthier because they specialized and traded.

Even if the lobsterman happened to be a skilled gardener - perhaps more skilled than Wixson, they could both benefit from trading because specialization is so much more productive.


What would an "independent" Maine look like?

Even though Wixson demonstrated the beauty of comparative advantage - whether she knows the history of the idea or not - she does not have a solid foundation of Adam Smith to truly understand the relevance. Smith argued that if another nation can produce something cheaper than a domestic producer, than you should just go out and buy it.

It's not fair to compare Wixson to a mercantalist the way I do with most localists because she was silent on exporting. She said Maine produces more blueberries and potatoes than it eats, which means some of the crop is exported out of state, but her plan never said if those exports should stop or continue.

Instead, her plan detailed a Maine that is self-sufficient in terms of food.

There's a reason self-sufficient societies have always been subsistence societies, according to Don Boudreaux, chairman of the economics department at George Mason University. On the "buy local" episode of EconTalk, Boudreaux said:

"They have this notion that much of what we today enjoy as wealth would somehow be out there and still be available, but it would just be available from people that you know, rather than from strangers. In fact, much of our wealth today would disappear if we gave up exchanging globally. It would just go away."
Now how is that claim justified?

I'm going to steal an example from Pop Internationalism, Paul Krugman's amazing book on international trade. I don't feel bad about taking it because he took it from James C. Ingram's 1983 International Economics textbook.

Suppose Wixson found another person to trade her vegetables with, a rancher who is so productive he will trade her twice as much meat as any other rancher in Maine. That rancher would be praised as a marvel - a visionary who's innovative farming techniques will make Maine wealthier. Sure, a lot of the other farms will have to copy his methods or risk going out of business, but people accept that's how markets work.

However, an investigative reporter reveals the rancher is a fraud. He was simply selling Wixson's vegetables and buying meat out of state with the money. No one is willing to trade or buy from him again.

Small farms are never going to be as efficient as large farms. That's how economies of scale work. Sure, all 50 states could each build one large carrot patch, one large pig sty and so on, but that still wouldn't be efficient enough. They would still irrationally follow meaningless political borders - state lines.

I realize a lot of the localists think large farms are immoral, and this isn't the place to delve deeply into that subject. However, suppose they were right. Gains from specialization is a basic economic concept, and there's nothing in the rule to suggest that those gains come exclusively from moral compromises. If there are bad things happening on those large farms, they could be erased. A large good farm is more productive then a series of small good farms.

If Maine wanted to produce all of it's own foods, there would be a lot more jobs in agriculture in Maine. But as I've said before, this is not a good thing. Paul Krugman called this a "paradoxical principle" in 1995:

"The kinds of jobs that grow over time are not the things we do well but the things we do badly. The American economy has become supremely efficient at growing food; as a result, we are able to feed ourselves and a good part of the rest of the world, while employing only two percent of the work force on the farm. On the other hand, it takes as many people to serve a meal or man a cash register as it always did; that's why so many of the jobs our economy creates are in the food service and retail trade. Industries that achieve rapid productivity growth tend to lose jobs, not gain them."
Relying on local foods is a purposely inefficient scheme. If the number of people needed to produce our food went up to twenty percent of the population, those workers would have to abandon other careers - like medical researchers, artists or social workers. But it wouldn't matter that we didn't have people available to fill those jobs, the cost of food would jump up and a lot of those jobs world be cut as well. The opportunity cost would be staggering.

Alan Moore wrote about a young man resigning from the patent office in Victorian England because he believed "everything had already been discovered or invented." thus there was no further use for a patent clerk. I'm unsure if that anecdote if real or not, but the mindset is important. As Jared Diamond said in Guns, Germs and Steel, freeing people from food production gives them time to invent and discover new things. This is where wealth comes from.

Wixson's plan would make Maine more like a poor African nation than anything else. There would be a lot of poverty and some jobs would need to come from out of state. We would be able to import technology from out of state, assuming Maine was the only place that decided to try this and that people weren't fed up with it within the first year. We would have to forsake a lot of luxuries, more than supporters realize, because of the loss of wealth.

Having more potential trading partners to pick from means more chances of saving money. However, the localist strategy grossly limits trading partners. It means we only have small, inefficient producers to pick from. It's a recipe for poverty.

While it's true we wouldn't waste our money on stupid things like singing fish plaques and spinning rims, we would also miss out on important things like new communication technologies, medical care and comfortable housing.

Some of Wixson's supporters argued we will return to ancient farming techniques, like plowing with oxen, because we're going to run out of fossil fuel and the world will collapse. This is a lot more far fetched than people realize, and it wasn't part of Wixson's argument, but it is important to address. What I didn't understand is that some of them seem to welcome this regression.

After all, one of them said, those people were able to feed themselves. Yes, that's true, but that's pretty much all they did do. They didn't have nuclear magnetic resonance imaging or X-rays, they had leeches. They didn't have the Internet, they had books. There were no cars, only horses. Sure, some of those things are still fun (except for the leeches) but life was a lot harsher than we romanticize. Our standard of living would go down much more than they realize.

This argument, that the world is very different today and all the old rules of economics must be thrown out the window, comes up all the time. It wasn't true before, and it's not true today. Petroleum is just a single resource and it can not be critical enough to change what we know about economics.

The basics of economics are very real, scientific concepts and people who attack them are not sophisticated experts who seek to overturn a dusty, antiquated idea. They are enthusiastic guessers who don't understand them.

I want to stress that I'm not saying localists are stupid. Far from it. Some are agriculture and botany experts. What they aren't, however, is economic experts. And since this is a question of resource distribution, economics is the relevant field to study.


Why should Maine bother to feed itself?

Wixson's talk focused on if Maine could feed itself, not if it should, so I asked her directly what are the best reasons we should switch to her plan, and what trade-offs we could expect. I informed Wixson what kind of blog I write and she still answered my questions civilly, and she deserves a lot of respect for that.

The biggest issue to her was food security. Her example was last summer Maine had a fungal infection from tomato stores, which traced back to the much-maligned "big box stores." Her group argues that trading with other states runs the risk of bringing out of state crop diseases with it.

Well yes, it does, but that's a lot more circular than Wixson realizes. The people hurt by the tomato blight, according to her own website, were gardeners who bought partially-grown plants - not professional farmers. The tomato blight hurt a lot of people, but it wasn't like tomato blight was unheard of in Maine before. From the University of Maine Cooperative Extension in 2008:

"Early blight of tomato, caused by the fungus Alternaria solani, is perhaps the most common foliar disease of tomatoes in the Northeast and is also common on potatoes"
I don't want to completely write this off. We can insulate ourselves from some crop diseases by shutting down our food borders. The questions is, at what cost? There is still the risk of Maine-based crop diseases spreading within the state, but she didn't argue to only buy from the same town - or the same street. That would insulate it even further, but the costs are a lot more obvious.

Our current food pool is still vulnerable to food contamination, like the spinach scare a few years ago. However, that risk would still exist in her plan, but it would be concentrated to specific producers. I'm not sure that would be any safer, and once again there is a heavy cost to using that system.

Wixson said again and again that America only has a three day supply of food, and some large disaster could cut off our shipments of new food. She said she solves this by keeping a well-stocked root cellar of Maine-produced food for herself.

Well first of all, we've had a lot of large disasters in America, and we've always been able to get food through, so I don't find this as scary as she does. But more importantly, if running out of food is a problem, then couldn't we solve it simply by keeping canned food in our basements? That's what the Mormons do.

Behind security, Wixson listed economics. That is the focus of my blog, and I feel I've already done a bang-up job at burying the buy local economic myth. If not, maybe David Henderson or Karen Selick are more convincing.

Wixson does not recognize her plan's vast trade offs, which I've already gone over. She said the only trade off will be our food variety will be smaller.

But this will give us "a deeper appreciation for luxury goods," she said. Which I completely agree with. She shared a personal story - and my mother has told me the same story about my grandfather - about Christmas in old Maine. There was a tradition of getting a single citrus orange in the toe of your Christmas stocking, and that would be the only orange you see all year. Because of this, you appreciated that orange a lot more.

Of course this is correct. It's like in Charlie and the Chocolate Factory when Charlie gets to have a chocolate bar, which is a rare treat for someone as poor as him. However, this is clearly just a demonstration of poverty in action. We could achieve the same results by making everyone homeless for 51 weeks of the year. We would absolutely love the one week we got to sleep indoors, but does that sound like a sensible thing to do? Why should we impoverish people in order to heighten the thrill when that poverty is temporarily lifted?

But there is one sneaky detail I've left out and Wixson included this on her list of reasons - and I completely agree with her. She genuinely gets a kick from knowing the food she eats is from Maine. She loves organizing her root cellar - she said she spends several hours doing so each week.

Wixson does not go to grocery stores, and instead works in her garden, trades with other food producers and spends time in the root cellar. She clearly loves doing all of this, and it saves her the chore of the grocery store. Therefor, it's completely rational of her to live like this. She can afford the time and cost of eating Maine foods, and she would be miserable if she didn't have that option.

And other localists feel the same way. It makes perfect sense for them to live like this. Other people, like me, don't feel the same way. I don't care what side of the New Hampshire border my food came from, or what side of the American border for that matter

The people of Maine have a wide diversity of views on this issue, and the best solution is for people to simply buy the foods they want. The localists are able to drum up a market for what they want, and I'm still able to buy food from away.


Maine already produces its own food

The most important thing I want to stress is that Maine already produces all of it's own food.

Back to her vegetables-for-lobster exchange. What if instead of producing vegetables, she produced firewood and traded that for lobster? In that limited world, there are now three ways to produce lobster: lobstering, gardening and chopping firewood. This will save the lobsterman the trouble of getting his own firewood, and both parties benefit.

But hold on, someone is exchanging firewood for food - doesn't that mean there will be less food? No, again, the lobsterman will catch a little more lobster and waste less time on his own firewood. Everyone ends up doing what they're best at.

It makes no sense to only exchange food for other types of food - but that is what her argument boils down to.

Would it change anything if the lobsterman lives on the New Hampshire side of the border? Not one bit.

In the real world, Mainers go to work and do their jobs. Instead of directly trading one resource for another, they change those resources into dollars and trade with those. Money is just a proxy for resources, and it's a lot easier to find trading partners by using money.

Whether a Mainer is gardening or welding iron together, that labor produces the food Maine residents eat. It's a beautiful system and it already works fine.

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Wednesday, March 24, 2010

Health care bill trade offs

Back in December I outlined what I saw as the major causes of high health care costs in America. While some of them can't be legislated away, like the increasing costs of new technologies, some were and some were not addressed by the President and the health care bill.

Stop covering routine checkups
This was not addressed. Our health care system will still suffer from the "cruise ship buffet" problem, where people consume more than they need.

Bring higher co payments into the equation
If this was in there, I couldn't find it. This would have been one way to thwart the previous cruise ship buffet problem by discouraging people from taking unnecessary treatments. In fact, it looks like it will be more difficult to have Health Savings Accounts because of the bill.

Allow people purchase health insurance from other states
This was not included, so states will still have oligarchy's protected from competition. However, this is not a federal law and there is nothing stopping individual states from changing this.

End mandated coverage requirements
Of course this one wasn't addressed. I realize it's unrealistic to expect Washington to push something through without having chunks of it compromised by special interest groups. Mandated coverage requirements, where insurance companies are forced to included specific treatments, are here to stay. My biggest fear is that alternative medicine hucksters will weasel their way into the state-run insurance plans.

Provide "death panels"
Doesn't look like triage teams will be taking center stage after all. Medicare will still be sunk into seniors during the last two years of their lives without helping them. Unfortunately, it would take a wizard to figure out when those last two years begin before the person actually dies.

Tax health care benefits
Yes! Finally a victory, but a Pyrrhic one at that. This was solved back in January, but with one fatal catch - it won't effect most of the people it should until 2018. Some wages were shielded from the taxman by taking the form of health insurance instead of dollar bills. I'm glad they closed this loophole, but I feel betrayed that union workers, including most government employees, will still enjoy that loophole for eight years. There was no logical reason for this exemption outside of the realm of politics and dirty deals.

Snag the freeloaders
I don't see anything direct, but the problem of people using the emergency room with no intention of paying for it may be solved by more people having some form of insurance. Thus, they will not need to do this. This will be rather simple to answer in the next five years - we will simply see if the rate of people doing this drops.

Cap malpractice insurance
Nope, tort reform was left out. I have heard plenty of lefties claiming that the right believes frivolous malpractice lawsuits are the main reason why our health insurance is so expensive, but I never once heard a conservative actually make that claim. It is a problem, just not the biggest one, and it still hasn't been solved.

Solve the pre-existing condition puzzle
They solved this in two ways. First, the formation of a high-risk insurance pool - this is an acceptable solution. Second, by forcing everyone to buy health insurance, and any company larger than 50 people must provide health care or get slapped with a fine of $2,000 for each person. This is an awful, crude solution. It looks like no one was clever enough to solve this riddle.

I've looked over the changes to our health care system that we should expect and there is one major problem I see. It's just more of the same top-down, over-regulated solutions, but now with a higher price tag.

Keep in mind Obama campaigned on a health care system that would cost less, and then once in office lowered the target to costing the same amount. It seems that's out the window too.

Still, as Greg Mankiw wrote, more people will be insured. This is the trade off for our lumbering, costly solution.

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Sunday, March 21, 2010

Do video games have a liberal bias?

This morning as I was exploring the galaxy in the space opera Mass Effect 2 on my Xbox, my ship arrived at the planet Anhur and I was greeted with this cringe-inducing description:

"A garden world with heavy populations of humans and batarians [an alien race], Anhur was home to one of the ugliest violations of sapient rights in modern human history. A consortium of corporations and corrupt politicians, fearing batarian economic competition due to their custom of legal slavery, passed a resolution that abolished the minimum wage - effectively relegalizing slavery on a human-dominated world."
I understand that when an artist creates a world, that world runs exactly the way the artist believes it would. In American Beauty, a gay basher is secretly gay. The 18th century painting The Bostonians Paying the Excise-Man shows ugly, cruel Americans abusing a British customs official. Likewise, the Mass Effect universe is filled with evil corporations.

In the first Mass Effect game, every time you encounter a corporate researcher, they are covering up some unethical experiment. The planet Noveria is populated with scrupulousness corporate laboratories performing illegal experiments where the government can't see and the mission to planet Feros reveals a corporation is running an evil experiment on their own colonists. You can't bump into a single private company in this universe without finding a closet full of skeletons. No opportunity to wallow in the inhumanity of capitalism was skipped.

While I'm at it, the short description of planet earth in the game included:

"Sea levels have risen two meters in the last 200 years, and violent weather is common due to environmental damage inflicted during the late 21st century."
I will give the Mass Effect writers credit for the capitalist character Ratch, who demonstrating the Beckerian idea that merchants are harmed if they act on racial prejudices. Ratch is the only character who is kind to you on a hostile world, simply because he wants you to buy from his store.

Don't get me wrong, I love the Mass Effect games and I plan to keep playing them. I just have to tolerate a lot of eye rolling, such as when the privatized space prison is lead by a brutal, corrupt warden. I feel comfortable concluding that this individual game has a liberal bias, but what about the stories of most video games?

Most video games are politically neutral - Tetris had nothing to say about the abortion debate and Mario only weighed in on the death penalty when it dealt with marauding turtles. I freely admit that I don't have a study, my sample size is limited to the games I encounter and all my observations are vulnerable to recall bias. Despite these limitations, I feel it's reasonable to believe video games have a liberal slant when they do introduce politics.

Other examples include the opening scene to Mirror's Edge and the corrupt right-wing Enclave in Fallout 3.

Grand Theft Auto IV, however, did it right. The conservative talk radio station We Know The Truth (WKTT) features the Rush Limbaugh parody "Richard Bastion." Bastion says things like:

"In old America, the America I fell in love with, we dealt with stupid people very discreetly, OK? Now, now I don't know if it's - if it's something in the water, or - or the lack of separate water fountains, uh, but it's like a plague has taken over."
Or:

"What we've been given from our forefathers - the freedom from thought. That, for my money, is real freedom. Knowing you're always right - that's real freedom!"
These parodies of conservatives are pretty harsh. Bastion calls the ideal conservative world a "limited-access paradise." These writers were not kind to the right.

But they weren't kind to the left either. The public radio parody station features a vain self-indulgent Hollywood actor who says his extreme environmental expertise is because he went to acting school. A radio ad for luxury cars featuring a pepped-up guru who says:

"I play to win, if you don't play to win, you play to lose - like a liberal."
Grand Theft Auto is hard on conservatives because it's hard on everyone. The jokes can be pretty harsh, but the writers made sure to give everyone a healthy dose of ridicule.

As for the claim from Mass Effect 2 that eliminating the minimum wage is an evil act akin to slavery, economic science doesn't agree. Most economists believe that one consequence of the minimum wage is an increase in unemployment. There was a contrary study released in 1994 by David Card and Alan Krueger that got a lot of attention, but it was criticized for using a small sample size and unreliable data collection.

The basic argument is that unskilled workers are shut out of employment because it's not worth hiring them at a high wage. If there is a $10 minimum hourly wage, a teenager with little experience or skill who is expected to only produce $9 of value an hour will not be hired. Thus, most economists argue that minimum wages hurt the people they are supposed to help.

I don't mean say this ends the minimum wage debate. Card and Krueger's study was approved by people like Paul Krugman, and as a result the opposition to minimum wages from economists no longer enjoys an overwhelming majority. The general public, however, doesn't seem to know very much about this issue, and the simplistic story the writers of Mass Effect presented is painfully ignorant.

Update: Visitors to the city of Nos Astra in Mass Effect 2 are cautioned not to sign anything because the city has "free trade." They clearly mean "a free market" because the city is awash in drugs, slavery, prostitution, and greed - but no word on punitive tariffs or trade barriers.

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Monday, March 15, 2010

Where will lottery profits come from?

Stop the presses - it looks like Maine is going to be getting in on another multi-state lottery game after yesterday's unanimous approval by the Legislative Appropriations Committee.

"[Senator Bill] Diamond said the hope is to start the Mega Millions game in May so some revenue is gained in the current budget year. He said that while the move does not generate a lot of revenue — about $1.5 million in its first full year of operation — it will help as the panel tries to finish work on the budget this month."
Usually the word "revenue" is a code for taxes, but in this case it really can be thought of as the state making a profit. The only problem is that number will not be as high as $1.5 million.

Apparently, our elected representatives think Mainers are burning bales of money on a regular basis, and offering this lottery will convince us to burn $1.5 million less.

Dan Gwadosky, the state lottery director, gets partial credit for saying the lottery sales will "cannibalize" some existing state gambling profits, like scratch tickets and the state Megabucks lottery. What he failed to mention is that this $1.5 million was not really going to be set on fire, but would have been spent on other things - like restaurant meals, new tires or bottles of maple syrup. The state would have collected some of that money in the form of sales tax.

Some of it would have gone out of state - to Amazon.com or maybe a bed and breakfast in Connecticut. It doesn't matter exactly what it would have been spent on; we could expect some of it to return in the form of slightly-wealthier tourists.

While I support legalizing gambling and realize a lot of that $1.5 million would come from poor people who aren't good at calculating the odds, my real concern is the slopping arithmetic. Resources are simply being displaced, not created. We will see state jobs created at the expense of private jobs. We will see the lottery sales go up at the cost of the other sectors of the economy. Some of those losses will be in the form of tax revenues.

Whatever total the Mega Millions brings in for the state, it will only be part of the equation.

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Thursday, March 11, 2010

A tough week for lesbians in schools

Don't like the Catholic church? Then stop helping them.

There's a lot of talk right now about why it was wrong for the Sacred Heart of Jesus School in Boulder, Colorado to tell a lesbian couple that their 5-year-old girl daughter will have to find a new school next fall.

I've been surprised at how shocked and angry my friends and acquaintances have been that a Catholic private school would reject a student because of her parents' lifestyle. Yes, I don't think it's a nice thing to do. I wouldn't have made that same decision. But what I don't understand is why people are so bent out of shape and want to find a way to force the church to reverse it's decision.

Here's a news flash: It's the Catholic church, for crying out loud. We already knew they see homosexuality as a major sin. Why are people so shocked that they would have policies based on this view?

It's not often that I find myself defending the Catholic church. I have a different world view and I don't see gay people in the same dim light the Catholic church does. Despite those differences, I believe the Catholic church has a right to hold views I find primitive or unbecoming, as well as the right to reject pupils for any reason they see fit.

As Larry Iannaccone has written, we have a market for religion in America. People are free to attend whatever church they like - or none at all. As a result, different religions have to compete with one another to attract followers. Religions with unpopular views either change or see their congregation dissolve.

My own family has had an experience with this. My parents wanted to raise my brother and I as Catholics, but we were rejected because, as my dad puts it, they didn't pay to have a Catholic priest attend the wedding. The Catholic church considered their marriage unofficial, making me and my brother bastards in their eyes. The local Lutheran church, however, didn't care and welcomed us in. Besides the offering money each week, my dad sang in the choir and my mom eventually became church president.

But this issue is about a school, not a church, right?

Well no, it's about both. Religious schools are supposed to be allowed to teach their own doctrine. In effect, they are selling a product. Sometimes that will mean teaching something other people find repulsive. Such as unfairly rejecting a group of people based on irrelevant details.

It doesn't matter that the school is soft on other sinful parents - like adulterers and divorcees - because as a private school they should be able to reject anyone they want - even if it doesn't make sense.

So what do the protesters want? It's hard to say, some people want to school to change it's policies. Other people want the anti-discrimination laws to force the girl back into the school.

Neither of these feel right to me.

While I agree people should try to appeal directly to the school, it should be the other parents leading the charge. I think the protesters would make a lot more progress if they would appeal directly to the parents of other pupils and ask them to demand a policy change.

This also leads to an important question: Why would someone protest a school policy if they wouldn't send their children there in the first place?

If I had kids, I probably wouldn't send them to a Catholic school. I feel that crosses me out of the list of who should draft the policies of a Catholic school. I've noticed a lot of the people who are upset about this issue think even less of the Catholic church than I do. They would never send children to this school, no matter what the policies are.

As for using the legal system to intervene - is that really the best way to find a business that is going to take a lot of your money and teach moral lessons to your children? Why on earth would you want to do business with them?

As Milton Friedman said, allowing businesses to discriminate makes them pay for their own prejudice. When a school rejects a pupil, they miss out on the tuition dollars they would have made.

I hope these people that dislike the Catholic church realize that if this protest succeeds at overturning the ruling, it will keep the same church around longer. By discriminating, they are punishing themselves, and helping their own competitors. They also risk offending the community, like we can see here. Why bother to bring the clumsy hammer of government into it if the problem is going to solve itself?

Which leads to the other story this week - A public school in Jackson, Mississippi canceled the prom because two lesbian students wanted to go together.

In a typically cowardly fashion, the county school board releases a vague statement, saying the prom is canceled "due to the distractions to the educational process caused by recent events."

Oh please. If they cared about the "educational process" so much they wouldn't be on the school board for a public school in Mississippi. The school officials knew they couldn't possibly get away with banning the couple, so they decided to ruin it for everyone instead.

The difference between the issues is that this a public school, financed with tax dollars. They do not have willing customers - students are assigned to a school by geography.

In Maine the public schools teach acceptance for gays. It appears in Mississippi they are teaching the opposite. My stance has always been that school should keep out of social issues whenever possible. This would mean no "coming out week" posters, but no prom cancellations either.

I don't have enough faith in the government to always pick the right side of a social issue, so I think it's best if they just stay out. Let people live their lives how they want, free from government approval or disapproval

On the plus side, the ACLU has gotten involved in the Mississippi case. They've got something very important going for them.

They're right.

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Tuesday, March 9, 2010

Locavores from a historic perspective

Once again James McWilliams posts a critical essay on locavores on the Freakonomics blog, and once again the comment section lighted up with enraged food elitists.

McWilliams characterizes the buy local-buy organic mindset as a desire to eat like people did before the twentieth century with all of its industrialization and efficiency.

"But did people living in the 1860s really see themselves as eating a simple diet? Not so much. This was an era of frequent food adulteration, with consumer goods being leavened by sawdust, engine grease, plaster of Paris, pipe clay and God knows what else."
It looks like the food of the past wasn't as pure as we think it was.

Not only did nineteenth century people want to eat like their grand-grandparents, but McWilliams rolls back history to show that every generation had a mythical view of the eating habits of the previous century. It's common for people to aspire to live in some fictional golden era of the past, and McWilliams did a great job of placing locavores in the historic context.

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Sunday, March 7, 2010

Maine legislature debating cell phone-cancer link

The AP reported that the Maine legislature has assembled a collection of kooks and scaremongers into dredging up the old cell phone-brain cancer link.

The debate is being held to see if cell phone companies should be required to slap warning labels on their products. Possibly these labels would read:
Warning: You are using a cell phone. Technophobic fear mongers are aware that there is no evidence that cell phones cause brain cancer, but they want to remind you there's no evidence that they don't. Keep that in mind as you call your loved ones.
It doesn't matter that the science still shows no link, as proponents of the labels are able to cherry pick the experts they want from as far away as New York state and Sweden.

"Dora Anne Mills, director of the state Centers for Disease Control and Prevention, said research by federal health and safety agencies does not justify a warning, although she acknowledged that uncertainty exists about the effects of long-term cell use..

But Mills said that if the state was to require warnings on everything with undefined risks, everything "from apples to xylophones" would have to be labeled."

The burden of proof is on the claim maker. Perhaps there is an increase in exploding eyeballs from long term Internet users. I can't find one study saying there is no correlation, but that doesn't mean every web page should be forced to display a warning sign of burst pupils just to be on the safe side.

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Wednesday, March 3, 2010

We don't have a free market in health care

A great opinion piece this week from the Wall Street Journal on the problems with President Obama's narrative on health insurance.
"...the original sin was the exclusion of employer-provided health insurance from taxable income—imposed carelessly by the IRS in 1943 so defense contractors could compete for workers without transgressing Roosevelt-era wage and price controls...

Everybody knows this turned "insurance" into something else. Call it prepaid health care, as Milton Friedman did. Call it a giant tax Laundromat for the nation's private health spending.

It became a massive subsidy to third-party payment, an incentive to channel every ache and pain through an "insurance" bureaucracy. It became an incentive for the most economically competent Americans—the secure, high-earning employees of corporate America—to overspend on health care, treating it as a free good.

What a surprise that the medical-industrial complex reorganized itself in light of this central driver. Nobody was looking for price tags so price tags disappeared, as did any competition on price, and any clarity on price versus value. VoilĂ .

To Mr. Obama, however, such insurance is insurance—the way it's supposed to be, and anybody who doesn't agree must be smoking something."

If your theory on the cause of a problem is wrong, the solutions you propose will also be wrong.




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Friedman on uncertainty

Thomas Sowell on Milton Friedman, his former teacher:
"I remember doing a paper in which I said at one point, 'Either A this will happen or B that will happen.' And he wrote in the margin 'Or C, your analysis is wrong.'

And when I saw him afterwards I said, 'Where was my analysis wrong?'

He said, 'I didn't say your analysis was wrong. I just wanted you to keep that possibility in mind.'"

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Tuesday, March 2, 2010

Who needs to spend $20 for a microphone stand?

...when you and a friend can build one out of a bird bath, a piece of wood, some poster board, a paper towel tube, plastic ties and tape?





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How to avoid discussing economics with the ignorant

In my previous post, I lamented against people who like to talk about economics, but can't be bothered to learn anything about it.

Economist David Henderson has termed this concept as "Do-it-Yourself Economics" and defined it as "firmly held intuitive economic ideas and beliefs which owe little or nothing to textbooks, treatises or the evidence of economic history."

It's not easy to spot these people. They aren't just the general public. As Henderson and Paul Krugman have said, they can be politicians, high-ranking civil servants, talking heads and academics.

Clearly a conversation with a common-sense economist/DIY economist/pop internationalist is destined to go nowhere. They are pretty confident in their economic expertise, despite a lack of relevant education. Unless you're good friends, it's probably best to avoid the subject with them entirely - but how do you know when you've got one?

I recommend the following test. Find a way to ask them if they know what comparative advantage is. This can be as subtle as a roundabout inquiry, or as blatant as a direct question.

Comparative advantage is crucial for understanding economics with any sophistication. When Greg Mankiw was asked what three economic concepts every American teacher should know, he listed comparative advantage, supply and demand and market failures.

Krugman once wrote, "If there were an Economist’s Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage' and 'I advocate Free Trade'." In his great essay "Ricardo's Difficult Idea," Krugman listed understanding of comparative advantage as the great divide between the world views of economists and non-economists.
"I believe that much of the ineffectiveness of economists in public debate comes from their false supposition that intelligent people who read and even write about world trade must grasp the idea of comparative advantage. With very few exceptions, they don't - and they don't even want to hear about it. "
Comparative advantage is the great chasm that separates the people who understand economics from those that don't. Imagine having a biology discussion with someone who has never heard of genes. The only difference is most intelligent people have heard of genes. Comparative advantage is sadly obscure.

That doesn't stop a lot of people from talking about who should get paid what and what jobs should be done where. Without comparative advantage, these opinions are painfully uninformed. Someone who does understands comparative advantage, however, will probably have an insightful view of economics and is worth listening to.

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Monday, March 1, 2010

My war with common sense

I keep hearing people I know and respect talk about "common sense" as a good thing.

It's pretty hard to separate common sense from "conventional wisdom," but neither are always reliable. I think of common sense as a straightforward, unthinking conclusion. For example, common sense tells us the sun revolves around the earth. We know this because we can see it with absolute clarity.

Of course, research taught us that the earth revolves around the sun, and not the other way around. Research and common sense can be very much at odds with one another, and I toss my lot in with research as the best way to know things. Sure enough, research can be wrong. However, it's further research that corrects it - not naked, clueless observations.

That being said, there are a lot of people that attempt to know things by using common sense and ignoring research.

Take creationists. These people, well intentioned as they may be, know next to nothing about biology. They do not study biology. Normally, I wouldn't fault a person for that, but these people have a great interest in biology. We know this because they speak about biology all the time. They do not make sophisticated criticisms based on intimate knowledge of the subject, but instead make "common sense" observations on a simplified version of biology. For example, "If we came from monkeys, why are there still monkeys?"

That common sense observation may convince some people, but those who study biology know that we do not come from modern monkeys. Instead, monkeys and humans share a common ancestor. That doesn't make the creationists stupid, but it does show that they are intellectually lazy and rely on "common sense" observations.

I feel the same way about "buy local" activists. These people aren't stupid or dishonest. Instead, they have fallen for a common sense solution that doesn't pan out. Clearly, localists have a deep interest in economics. They talk at length about the multiplier effect, supply and demand and growth. They don't know anything about comparative advantage, economies of scale, opportunity cost or creative destruction. Apparently, their interest in economics isn't strong enough to get them to actually study economics.

That's the part I've never understood, and respected even less. If you have such a strong interest in a science like economics, why would you try to guess your way through it with common sense? Shouldn't you be concerned that something counter-intuitive will come up? As Scottish economist John Kay said on the idea of "Do it yourself economics";
"Anyone who claimed expertise in 'practical physics' derived from their experience of driving an automobile or boarding an airplane would immediately reveal himself a fool. It is a measure of the failure of economists to persuade the public of the value of what they do that those who claim practical knowledge of economics suffer no such reactions. There is almost no DIY dentistry, little DIY history or law, rather more DIY medicine. There is much DIY economics."
Common sense tells us that if there's a problem in our society, we should have the government solve it. It tells us that making guns harder to buy will make us safer. It's common sense that closing sweatshops will make life better for people in poor nations. All of these common sense solutions sounds really good, but have the opposite effect.

Perhaps the flaw in settling for common sense explanations is obvious to someone who wants to know what really motivates the other side of an issue, but the flaw is invisible to someone who jumps to conclusions if they are presented by a trusted source, such as an activist with a similar world view.

Of course, one should ask, how do you know if this activist knows what they're talking about, or is just using common sense?

EDIT - A reader called me on my characterization of government solutions as always counterproductive. I overspoke and to the point of being false. I would have been better off listing specific examples like the embedded link - public transportation. Counter examples, where the government does help, include World War 2 and enforcing property rights.

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