Some Links

Cultural Economics
Commodity Prices, 1934-2010
Simpson's Paradonx of the Day: Immigrant Crime Rates are Overstated A Sample:
How Curling Works
Pro-Poor Competition

Really, NFL?

OK, so I resisted the urge to get too excited over the NFL wanting to be able to share its monopoly brand with Reebok for any and all apparel - let's let the Supreme Court decide that one.

But, can they stake ownership of the phrase, "Who Dat?" as in "Who dat say dey gonna beat dem Saints?" Really, NFL, maybe you should try staying in good graces with fans - you're already in danger of a lockout season if you don't get a labor deal done. Not such a bad thing for a Chiefs fan, I guess.

Price disparities in health care

From NPR (link to the price comparison website discussed here):

Google

This was interesting. Google may be getting a little out of hand. On the other hand, if you just want information about something, this is an interesting new question-answering tool from Wolfram.

If You Can't Bring Compeitive Markets to Health Care ...

bring your health care to the competition.

Competition lowers prices and improves welfare for the average consumer. Trade, offshoring, outsourcing, immigration, privatization, etc. all tend to promote competition. But one problem with health care is that high fixed costs and localization of many markets allow the market to be dominated by a small number of providers who don't have to do much to compete, and often cross-subsidize losses on emergency care with high prices on "elective care." The Economist briefing asks, "What if elective care procedures can be performed equally well in developing countries at a cost low enough to offset the travel cost?"

Until recently most medical outsourcing was limited to hospitals reducing costs by having tests performed and analyzed offshore. But now, folks are taking it to the competition themselves. Other issues here are complex, but it provides an interesting economic analysis in three areas: competition/basic micro; trade and offshoring, and; insurance.

The first two are related and more clear cut. Insurance is an interesting aspect because one might ask what happens once insurance companies start to save a buck by allowing patients to go to India for their knee surgery? Will they begin to require patients to do so if they want that to be covered at their current rates? Will the compensate for it by lowering prices? Will insurers, foreign providers, and patients be equally informed about the benefits and costs? How will US providers respond - will they compete by lowering prices or will they try to differentiate their product by bashing foreign facilities and/or playing to nationalism? All intersting questions. I do not have the answers to them.

More on Guns

I wanted to take a moment to clarify yesterday's post. Information isn't a problem when selling a gun in all markets. For example, in a lot of rural markets, most sellers know most of the people around, and most of them know to whom they should not sell, and most of them even abide by the rule of thumb of not selling to the one crazed lunatic drunk in town, and have no more than one or two degrees of separation between themselves and everyone else in their market.

Problems arise in larger markets, because it's hard to know the entire market you're serving. Problems also arise when these smaller markets are preyed upon as havens for unscrupulous thugs who take them back to cities to commit (second or third) gun felonies. That is the point that (mostly libertarian-minded) New York has made about Southern States, including Virginia, whose lax regulations have allowed felons to obtain guns (by mostly legal means) without coming subject to a background check.

Having these background checks as mandatory keeps the local Bubbas from entering a "prisoner's dilemma," or negative-sum strategic game where, even though some would prefer to check buyers' backgrounds, they are trapped by the fact that competing against rivals who may not. As a result even the best-intentioned vendors in these localities are caught in a race to the bottom. Another advantage of making these checks mandatory is that it mandates federal, state, and local governments to show better diligence in keeping "do not sell guns to this man" lists up-to-date, and therefore lowering the monitoring and information-gathering costs of those honest and well-intentioned distributors.

No Trust in the Invisible Hand

People out there seem to have the misconception that Adam Smith had a lot of faith and confidence in the self-interested actions of individuals in the free market. A more realistic way of summarizing the Wealth of Nations, as PJ O'Rourke might put it, is that Smith had even less faith in politicians and bureaucrats. In fact, from Smith's Moral Sentiments it's pretty clear that he trusted a businessman about as far as he could throw one and didn't think that businessmen should be allowed to do so much as have a cup of tea together.

So how do we manage collusion and cartels? The European model usually involved an adversarial process – the government investigates and anyone and everyone touching the misdeed is prosecuted with the full force of the law. The new model, coming from the US and what it has learned from Enron and other scandals involves protecting and helping whistle-blowers. What this may do, more than anything, is help the investigators know what exactly it is that they should be looking for when they go in, which is the lesson now being learned by British regulators.

Getting the incentives right is important, which means that on the one hand regulators need to help and give protection to the informers, but also that the pendulum not be allowed to swing too far the other way. In other markets where Consumer Protection has become involved the incentives have been skewed to the point where frivolous accusations cloud the investigative process and discredit the government's involvement in the monitoring process. Such has been the case in Consumer Protection areas from medical malpractice to spilled coffee.

Economic Development in Iraq

Yesterday, VMI hosted Hon. Robert M. Kimmett, Deputy Secretary of the Treasury to give some "remarks" about the Treasury's involvement in economic development in Iraq. His speech was dignified, and well-written, but clearly had been vetted for reasons of security, and probably politics. He remarked how the Treasury has taken an elevated role in helping develop Iraq economically, as our military helps them remain secure militarily.

One important issue in the development of Iraq is the role of oil and natural resources, and the risk of contracting a "Dutch Disease" or "resource curse" whereby profits generated by high prices and favorable terms of trade in the resource sector for exports essentially "crowds out" private investment in the manufacturing sector. So, when we met, I asked him about it whether this was a risk for Iraq, and answered, "no…" and went on to list a number of sectors in which Iraq has seen substantial progress. They included (in no particular order): the construction of roads, the building of schools, hospitals, and agriculture. But, with the exception of agriculture, sectors mostly represent "public goods," and most countries for which the resource curse is applied DO see impressive development in the provision of these public goods. Examples include Dubai, Saudi Arabia, and even Norway.

What is more troubling is how this economic structure might contribute to perpetuation of ethnic tensions. Put in broad terms, when there are factions in a society that identify on ethnic grounds, violence and tensions tend to arise on two fault lines: (1) they arise on the basis of control over the rents received from some strategic resource, and; (2) the ability to control the provision of public goods and confiscate their use for your own faction (and, exclude their use from the other).

Bioenergy Part Trois

Today, I want to close the loop on the topic I began with Thursday's post, and continued with Friday's post. To review, Juan Enriquez's claim that instability in oil prices may serve as a disincentive for investment in alternative energy may well be true, but his solution of price controls are the wrong policy response because they (1) don't work that well, and; (2) have serious consequences.

Suppose we want more stable prices. Energy prices are not a "simple matter of supply and demand." The "law" of supply and demand, or the basic Week Three Principles of Economics analysis which is all the CEOs corporations remember (or which they hope is all YOU remember), only applies for competitive markets. The concept of a "market supply curve" implies that the firm is a "price taker." A monopolist (or cartel) does not have a "supply curve" in the traditional because their own actions have a tangible influence on price.

Prices in competitive markets tend to be much more stable. So we must ask the question: Why is OPEC able to operate as a cartel? Part of it has to do with ownership. The public (government) ownership of oil production in most oil-exporting countries is a major hindrance to competition and serves as a significant barrier to entry. It ensures that only one firm will produce in each country and makes the coordination aspect of cartel decision-making much easier. So one true way stabilize the price of oil would be multiple private firms for oil production in each country.

Privatization is not feasible for a wide range of political and economic reasons, not the least of which being that the state, with its monopoly over the use of coercive force, will always have an incentive to nationalize oil production. We also do not have the right to dictate policy to other states (except the ones we decide to run over militarily), and besides, our politicians should focus their energies on the great job they do screwing up our OWN economy. Plus, this wouldn't necessarily provide incentives for research in energy alternatives, because a more competitive market would tend to dictate a consistently lower price (and yes, in this case I'm implying that is a bad thing because part of Dr. Enriquez's proposed Policy Objective Bundle was incentives for alternatives to petroleum).

So what are some other options? Well, in oil-importing countries, we do in fact have the opportunity to take some of the pricing power away from the cartel. Governments in oil-importing countries have a monopoly over the right to tax. By taxing the hell out of a foreign monopolist we can divert some of the monopoly power and rents (profits) from the foreign government to our own, all the while maintaining a more stable (albeit uniformly higher) price to offer "incentives" for research in alternative fuels.

The reason we do not tax crude is simple: politics in our own country. Politicians buy votes with their plans to "negotiate" or "encourage" low prices for gasoline and energy. Not one of them has the courage to say "yes, the price of oil is $100/barrel, but it must be taxed to take the power and profits away from foreign oil producers." The first to do this would be out of the race in no time. Instead, politicians console us with ill-gotten plans to subsidize our oil habit. This keeps the power of and profits in the hands of the unstable and corrupt governments.

-Bang

Bioenergy Part Deux (Pronounced "Duh")

Following up on last night's blog on the instability of oil prices, for all of the wonderful ideas and insights of Dr. Enrique's TED Talk on bioenergy I almost had to weep at the very end of his presentation. Energy price instability is more of a problem than the averages around which they currently fluctuate, and this may indeed lead to disincentives for entry to the "alternative energy" market. If he had ended his talk there, I would have stood up, applauded, and gotten to work thinking of options that would help resolve the issue.

But he didn't stop there. He called for a "stable price of oil." He said it should be $35, $40, whatever you want it to be (keep in mind the talk was given several months ago and the video was posted recently). In light of recent developments $80 or $90 might be more appropriate, but the number really does not matter much. But wait, there's more. In order to maintain that price, he proposed that a tax be levied when the price is below that arbitrary level and a(n) (implicit) subsidy be remitted when the price is above it. I can not think of a more destructive way to "manage" the problem than price controls-they simply do not work, and they have disastrous unintended consequences like black markets, disincentives for investment, and so on.

So, let's be deliberate and actually carefully outline Dr. Enrique's stated policy objectives: 1. A stable price of oil; 2. Reduced dependence on fuels whose extraction may be dangerous or otherwise unfriendly to the environment or mankind; 3. "Incentives" (read: subsidies) that allow for a predictable return for alternative energies, including biological hydrocarbons.

I'm going to be a jerk and drag it out... I have papers to grade. See you tomorrow.

Bioenergy

Just a quick thought -- I watched November's release of this year's TED Talks Presentations. Juan Enriquez on Bioenergy. It's not just for ethanol anymore. The concept of bugs eating coal and tunring it into gaseous hydrocarbons or accelerating the farming of hydrocarbons from plants as "concentrated sunlight" seems a lot more appealing than gutting an entire mountain, but I'm not sold that it's the first best idea--somewhere the policy has to account for global warming, which won't happen when we use organic byproduct.

Dr. Enriquez makes one important economic point though: The instability of oil prices (not their levels) may prove to be a disincentive for innovation, which involves entry to the energy market and a threat to OPEC's profit. One day price is high and it's all well and good for investing in alternative energy (bugs eating coal and creating hydrocarbon gas) because you can make money at it, but suddenly, BAM! OPEC sees competition entering, and suddenly engages a limit pricing strategy to drive out the competition by producing more and allowing the price to plummet. Then, once the coast is clear of credible competitors, they jack the price up again. Since it's never clear which strategy is the best for OPEC in "pure" strategies (setting a high monopoly-like price or a lower, entry-deterring, "limit price"), OPEC oscillates between the two, depending on certain conditions for entry, essentially playing what game theorists call a "mixed strategy." On top of this unpredictability in the outcome in the cooperative side of the game, each country has an "incentive to deviate" or break the cartel agreement by over-producing, which also would tend to lower the price until the cartel re-organizes. Hence, inherent price instability.

More on this tomorrow. I just wanted to give a quick teaser on OPEC and their cartel price/limit price/deviate strategies and how they contribute to the wild fluctuations in energy prices.

No more Monopolies for Apple

I've often wondered why Microsoft is so villified for their downstream so-called "monopoly" over their operating system/office suite software. Or, better still why is Apple so sactified by folks when they in fact excercise considerable monopoly power in their own segment of the market. (In fact, Apple's monopoly may in fact be more insidious to competition and consumers because their protected "trade secrets" extend not only to software, but also to hardware, which is proprietarily owned by Jobs' company. PC hardware is public-knowledge and mostly reproducable.)

The latest chapter in the saga is phones. The iPhone was supposed to be revolutionary, and Apple knew it had (for the time being) a tidy little monopoly, so they priced it at $599. Sorry, Steve-O, but I can get a laptop PC with Windows pre-installed for that! Now we can all thank Microsoft and that dirty greedy Bill Gates for offering competition. Initially, the Windows Mobile Phones are retailing at around $600 as well, but the Windows be offering a mobile operating system for phones and PDAs that will rival Apple's, and will also be compatible with a wider range of devices, which should ultimately lead to a lower price for the consumer. So all you suckers for the latest technology go buy yours now while I wait for competitive pricing to begin to take hold of the market.