Auctions for Upgrades

Many airlines have long had mechanisms for using, say, frequent flyer miles to upgrade from coach to business or first class that typically operated just before boarding. Now, 10 airlines are using the PlusGrade system for online auctioning of these seats.

"You can buy the cheapest ticket and still have a chance of sitting in business class," said Danny Saadon, North America vice president for El Al Airlines, where the average winning bid for a business-class upgrade is $800. That's a deal when the airline's business-class tickets cost anywhere from $3,000 to $10,000 more than coach.

Not everyone is happy.

Frequent fliers with top-tier status and easy access to upgrades are already complaining that auctions have eroded their ability to snag cushy seats.

Airlines holding the auctions say they take care of elite-level frequent fliers by processing their upgrades before awarding seats to auction bidders.

Doesn't  this defeat the purpose?

Does Head Start work?

Finally, it looks as if someone in the government is trying to seriously measure the impact of its many programs, like Head Start

 ... to determine if access to Head Start caused better developmental and parenting outcomes ..., the study randomly assigned Head Start applicants either to a Head Start group that was allowed to enroll, or to a “control” group that could not.

Here is what they found:

·       ..., the advantages children gained during their Head Start and age 4 years yielded only a few statistically significant differences in outcomes.

Professor Esther Duflo, who advocates such randomized trials to evaluate policy, has been appointed to the administration policy council.  Will she recommend policy changes based on the science?

Commitment Mechanisms and Conference Realignment

The 15 university members of Atlantic Coast Conference (ACC) have agreed on a "Grant of Rights." These rights vest the conference, not member schools, with media rights. Even if a team university were to leave the ACC for another conference, the ACC earns the lucrative revenues from broadcasting games. Since much of the recent conference realignment has had to do with the TV rights to football games, the ACC members have committed to taking this incentive to leave off the table. ACC teams universities can make stronger commitments to intra-conference rivalries knowing that the conference membership is more secure.

Hat tip: Josh Price

Is it profitable for health care providers to cut costs?

In a world where providers are still paid for doing stuff to patients, it is hard to cut costs.  The NY Times has a story of a Chicago provider "Advocate," that signed a contract with a payer (in this case Blue Cross Blue Shield) where

.... certain patients are assigned to the accountable care framework — about 380,000 — and their health costs are projected. If Advocate achieves savings below that amount while meeting explicit quality targets, it splits the money with the insurer. If not, its revenue is at risk.

In some ways, accountable care resembles earlier efforts to control medical spending, including the health maintenance organizations that proliferated in the 1980s but fell out of favor, in part because they severely limited patients’ choices. But accountable care differs by giving doctors and hospitals a direct financial stake in saving money and a reason to invest in various programs of preventive care rather than relying exclusively on the fees they would normally earn from providing services.

To make money on these patients, Advocate must keep them out of the hospital.  So far, it is making a tiny bit of progress:

So far, Advocate has achieved a small but significant savings of about 2 percent below projected costs, Blue Cross Blue Shield said, but it is not clear whether it can continue to make progress. Already, some Advocate hospital chiefs have expressed fears over losing revenue and warned about the threat to their financial performance. Doctors fret that their incomes may suffer. “We’re doing it because it’s the right thing to do for patients,” said Dr. Stuck, the Advocate family physician. “We’re not making more money.”

What happens when you tax the hardworking, and subsidize the needy?

Danes are some of the happiest people in the world:

  ...Parents in all income brackets, for instance, get quarterly checks from the government to help defray child-care costs. The elderly get free maid service if they need it, even if they are wealthy.

...Danes work short hours and all enjoy perks like long vacations and lengthy paid maternity leaves, not to speak of a de facto minimum wage approaching $20 an hour. 

The only problem is that Denmark is  running out of money to pay for the big safety net.   With marginal tax rates as high as California's (56%), many workers are jumping out of the labor market and into the generous safety net.  Over 9% of the workforce is "disabled," and thus qualified to receive generous benefits. 

Robert Nielsen, 45, made headlines last September when he was interviewed on television, admitting that he had basically been on welfare since 2001.

Mr. Nielsen said he was able-bodied but had no intention of taking a demeaning job, like working at a fast-food restaurant. He made do quite well on welfare, he said. He even owns his own co-op apartment.

...“Luckily, I am born and live in Denmark, where the government is willing to support my life,” he said.

Marginal analysis of Premiere League Football in the UK

The Economist published the above graph, showing that the price per point varies across England's football clubs:

If the market for footballers resembled a textbook labour market, the players' wages should reflect their "marginal product": the amount they add to the firm's output. If the output of a Premier League side is points, then a player's wage should reflect his addition to the club's points-haul. But if that were the case, then every club would rack up the same points per pound.

Perhaps a better explanation is found in the fact that clubs don't maximize points, but rather payoffs, and there is a big payoff to being the best (e.g., more playoff games, more jerseys sold), and a big negative payoff to being the worst (relegation to Division I).

As a consequence, clubs near the top and bottom are locked into arms races with each other. If one club spends more to finish in the top four, its rivals must spend more also. In particular, it is worth spending a lot to finish first rather than second, as Manchester City did; or 17th rather than 18th, as Queens Park Rangers managed to do. It is worth rather less to finish 11th like Swansea rather than 12th like Norwich City, who finished just below the Swans in the points-per-pound ranking too. That may explain why the clubs near the top and bottom of the Premier league cluster near the bottom of our points-per-pound table. They're not necessarily inefficient or irrational. They're just playing a positional game.

Letter to an undergrad on learning economics

Dear John,

Sorry to hear that your econ classes are not going so well.  Many undergraduate econ classes are built around mathematical models, and largely devoid of application.  This is not the only way to teach the subject, but most econ professors learned it this way, so that is how they teach it. 

First of all, it used to be a lot worse, partly because competition between schools for students was not as intense.  Remember that competition aligns the incentives of firms with the goals of consumers.  Without much competition,  there was little pressure to teach well.  And it seemed as if I had more than my share of bad professors and graduate students teaching the classes. 

I took it as a challenge not to let bad teachers get in the way of my education.  I remember gloating whenever I got a good grade in a poorly taught class.  Although the expression was not yet in use, I would have said "I don't need no stinking professor to learn econ."  It helped to get into a study group.  Made it fun (us against the professor), and being able to talk about the subject with others made it easier to understand.  It is a truism that you don't really understand the ideas of economics until you have to explain them to someone else.  Plus, you won't feel so alienated. 

There are some really good online lectures (with quizzes) on a range of various topics at MR University.  I suspect that listening to these may help you see the point of some of the abstract models you are learning.  I took the development econ class, and it is pretty good.

I will leave you with the horrible truth that education is like everything else in life--you will get out of it exactly what you put into it, no more no less. 

Good luck.  Luke

Required/Prohibited Vertical Integration

Should a supply chain be required to be vertically integrated? Should it be prohibited from being vertically integrated? Colorado is contemplating the former for Marijuana retailing and the latter applies to the alcohol supply chain policy. In the words of  Warren Edson, attorney for the newly legitimized marijuana industry in Colorado:

"Medical marijuana is one of the few industries, if not the only industry, where retailers are forced to own the whole line of production," he goes on. "It's a huge pain in the ass to run a business like that -- and to force that model into retail is ludicrous, particularly given that Colorado voted to regulate marijuana like alcohol, and alcohol is just the opposite."

How so? Edson points out that "at a recent city council meeting, they did a nice job of talking about the history of prohibition, and how you're not allowed to be an alcohol distributor and a manufacturer. They thought it would be an easier way to regulate and control if they were separate -- yet some members of the medical marijuana industry and some of the legislators act like vertical integration is easier."

Value may be created from some level of integration and from some level of outsourcing. The firms in the industry would know best and have incentives to exploit it. There may be a public interest in regulating recreational drugs which could be made easier from one form of supply chain versus another. But it is not likely that what makes it easiest for alcohol makes it hardest for marijuana.

When you pay people with disabiltiies, ...

...you get more disabled people. 

The graph above illustrates the sorry state of the US labor market.  Unemployment is falling only because people are dropping out of the labor force in record numbers.  Some of them are going onto social security disability.  You can see this in the falling labor participation rate (number of people who have jobs or are looking for jobs divided  by the working age population) while the number of working divided by the number who could be working has not recovered from the recessionary lows.

NPR had another story, The Startling Rise of Disability in America, that is making me re-think my opposition to subsidies for public broadcasting.  Here is the essence of the problem:

There's no diagnosis called disability. You don't go to the doctor and the doctor says, "We've run the tests and it looks like you have disability." It's squishy enough that you can end up with one person with high blood pressure who is labeled disabled and another who is not.

As a consequence of the squishy diagnoses, you get moral hazard, i.e., some people on disability don't belong there.  

Interestingly, Great Britain has tried to reduce disability rolls by testing recipients.  Here is what happened:

... in an attempt to make the replacement scheme more rigorous, applicants now undergo the WCA, which can require them to undergo a face-to-face medical assessment and provide a report from their doctor.

But government figures have shown that more than nine out of 10 people who claimed the new sickness benefit have been deemed fit enough to work.

More than a third of the 1.3 million people who applied for Employment and Support Allowance were found to be fully capable of working.

Is it time for a similar test in the US?

UPDATE: 
Donald Marron tells me that the trust fund for the disability part of Social Security is currently expected to run out of money in 2016. So there may be a budgetary "forcing" event requiring Congress to consider what changes to the program might make sense.

UPDATE:
WSJ has a front page article on the growth of Social Security Disability Program.

Front running the government

...will become more profitable as the government grows.  

Shares in several big insurers rose as much as 6% between the time the firm, Height Securities, made its prediction at 3:42 p.m. and when markets closed. Volume for those companies in those final minutes was higher than the rest of the trading day put together. The government announced its change in policy about 35 minutes after the emailed scoop, ...

A Height executive acknowledged that the firm's alert led to the trading surge but said it did nothing wrong.

When will the bubble burst?

David Stockman, Reagan's former budget director, who resigned in protest over what he calls the "state wreck" of capitalism by Republicans and Democrats alike, offers this prediction,

If and when the Fed — which now promises to get unemployment below 6.5 percent as long as inflation doesn’t exceed 2.5 percent — even hints at shrinking its balance sheet, it will elicit a tidal wave of sell orders, because even a modest drop in bond prices would destroy the arbitrageurs’ profits. Notwithstanding Mr. Bernanke’s assurances about eventually, gradually making a smooth exit, the Fed is domiciled in a monetary prison of its own making.  ... 

...there are trillions of dollars of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest housing market “recovery,” artificially propped up by the Fed’s interest-rate repression. The United States is broke — fiscally, morally, intellectually — and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is.