Why Californians keeps voting for Democrats

Babylon Bee:

 “We already sunk $126 billion into the high-speed rail project. We can’t stop now.”

~ Joe from Camino

Hospitals respond to revenue caps by treating fewer higher-cost patients

 From WSJ:

Hospital care is the largest category of medical expenditure. It accounts for 41% of the cost of health insurance—more than doctor visits and prescription drugs put together.

Policy makers confront two problems when trying to reduce medical expenditures by setting "Global Budgets" or revenue caps:

• MORAL HAZARD: hospitals will treat fewer patients, and ...
• ADVERSE SELECTION: ... avoid higher-cost ones.

WHAT HAPPENED IN MARYLAND?

The Obama administration .. required Maryland to limit total revenue at each hospital—in ... in return for ...receiving higher Medicare and Medicaid reimbursements...

...the 2014 reform substantially eliminated the incentive for Maryland hospitals to attract and treat additional patients. From 2008 to 2023, the state went from treating 7% more hospital-admitted patients per capita [moral hazard] than nationwide levels to 18% fewer. The relative volume of outpatient care has also fallen.

...Community hospitals have increasingly dumped costly patients [adverse selection] on the state’s academic medical centers, which haven’t been fully compensated for the additional load and which typically are short of beds. ... Between 2012 and 2023, kidney-transplant rates statewide declined from 161% to 60% of the national average. Between 2014 and 2023, emergency department wait times in Maryland rose from 137% to 153% of nationwide levels—much longer than in any other state.

Increasing wait times is a higher ''price'' paid by patients, so it rations care to those willing to wait. But this higher price does not benefit the hospitals, so it doesn't give them an incentive to increase capacity. 

BOTTOM LINE: Better information about the effects of medical treatments can give decision makers more information which can allow them to design better incentives.

Does Surgery Work?

 The Economist: Many surgical interventions are little better than placebo

The results are upending the field. Removing an inflamed appendix, an operation that around 5-10% of people have had at some point in their life, has turned out to be no better for most patients than a course of antibiotics. Trials comparing different surgical techniques have also revealed that cheaper and less complex operations can be more effective. Most striking, the data show that some widely used surgical procedures, such as spinal fusions and rotator-cuff repairs, have effects indistinguishable from placebo or non-surgical care such as physiotherapy.

Worse, some types of surgery may do more harm than good. A trial in Britain found that prostate-cancer surgery had no effect on patient mortality 15 years on, but worsened sexual and urological problems. A Finnish trial of a common knee procedure, meanwhile, concluded that patients who had real surgery had more problems in the affected knee ten years on than those who had had sham surgery (anaesthesia followed by a superficial incision). David Ring, an orthopaedic surgeon at the University of Texas at Austin, reckons that most operations in his field may be unnecessary. Surgery itself, it would seem, could use a major intervention.

Costco Employees Can Enjoy Labor Day

 

Most major retailers remain open on Labor Day, often running special sales. Costco is unusual in that it closes its U.S. stores, called “warehouses” by the company, on Labor Day. At first glance, closing on a potentially busy shopping day looks expensive. But the visible lost revenue may substantially overstate the true cost. Former Costco CFO Richard Galanti says most of those sales simply shift to the days before or after the holiday. A shopper planning to buy groceries, paper towels, or a television at Costco may just go on Sunday or Tuesday instead. The relevant cost of closing, therefore, is not the revenue Costco could have collected on Labor Day, but the contribution margin on sales that disappear altogether rather than shift to another day.

The benefit, seemingly obvious, is even harder to quantify. Costco CEO Ron Vachris says the company closes so employees can enjoy the holidays with family and friends. That benefit may extend beyond the value of the day off itself. A company willing to sacrifice sales for its employees may generate morale, loyalty, retention, and recruiting benefits that never appear on an accounting statement. They instead show up indirectly through lower turnover, easier hiring, or greater effort. Costco therefore faces two hidden quantities: the cost of closing may be much smaller than the day's lost sales suggest, while the value to employees may be much larger than the day's wages suggest. If most sales merely shift to neighboring days while employees highly value having the holiday off, closing the stores can create value even though neither side of that calculation is readily visible.

Hidden Cost of Environmental Protection

 REASON:

Greenpeace and its activists allies have blocked for more than two decades the adoption of Golden Rice, which is genetically enhanced to produce the vitamin A precursor beta-carotene. The result, according to new calculations by DC Abundance founder and research director at the Golden Gate Institute for AI Abi Olvera, is that "delay has killed about 106,000 children and left another 210,000 to 425,000 blind."

The effect of California's $20 minimum wage

From MarginalRevolution:

...prices [of Food Away From Home or FAFH] rose, quantity demanded fell, and that’s what killed the jobs—not robots replacing workers.

In terms of welfare, the bulk of employed workers get an 8% wage increase, a small minority get disemployed. The big transfer was from consumers to workers. California has roughly 39 million residents, all of whom face 3.3–3.6% higher FAFH prices. The transfer is likely regressive — lower-income households spend a larger budget share on fast food specifically. So the policy effectively taxes low-income consumers generally to raise wages for a subset of low-income workers, while eliminating jobs for another subset. Your mileage may vary but I don’t see this as a big win for workers. ...

Benefit-Cost Analysis of California's electric only mandate

Ted Stroll: The Bay Area Air Quality Management District wants to mandate electric water heaters and says it “will avoid an estimated 37 to 85 premature deaths per year.”

The Santa Clara County Association of Realtors surveyed contractors who estimated costs per home at $43,950 to $224,000. Its figures rely on replacing stoves and dryers as well as water heaters and furnaces.

Let’s pick a random lower figure and assume the Bay Area Air Quality Management District ban will cost each home $12,000. If 120,000 homes need a new water heater annually, the cost will be about $1.5 billion every year. That is a lot of money to “avoid an estimated 37 to 85 premature deaths,” assuming there’s a basis for that claim.

What could we do instead with that amount of money?

One answer would be to spend $1.5 billion annually to remediate homeless encampments. Encampment fires are ubiquitous in Santa Clara County. San José Spotlight reported in February that “over the past year thousands of non-structural fires have been sparked by homeless camps, causing toxic fumes and safety problems for people and property.”

Stroll correctly points out that the opportunity cost of the mandates is whether there are better uses for the money.

Why are cancer patients more likely to commit crime?

Economist: "When your future may suddenly be cut short by illness, prison is less of a threat."

What caused the jump in US residential energy prices?

The opportunity cost of US natural gas rose.    

Andy Masley Substack:

...Russia invaded Ukraine, Europe stopped buying Russian gas, America was suddenly competing with European countries more for natural gas from other places, and natural gas prices spiked for a bit. Here’s a graph of natural gas prices:

How not to grow: lessons from India's poorest and youngest state

Economist:

Lately Bihar’s leading parties have been talking about expanding the system of “reservations”, which provides preferential access to jobs to members of castes that are deemed to need a leg-up. ...

Only about one-third of 15-to-29-year-olds are in the labour force, among the lowest rates in the country. ... Growth would transform lives in Bihar, more than anywhere else in India. If only politicians would spend more time debating how to make the pie bigger—and less time fighting over how to slice it up.

Best Teaching Video ever! (comparative advantage)

 From MRU via  Alex Tabarrok 

The excellent Don Boudreaux on comparative advantage, one of the deepest and most important ideas in economics.

As a new semester begins this is a good reminder that MRU has great videos for learning and teaching economics, all entirely free and open. (Of course, these videos pair delightfully with Modern Principles of Economics).

Timely topic.  

Sunk Costs while Playing Tennis

Roger Federer's 2024 commencement address at Dartmouth has received some attention on social media partly because of his admirable humility. In one part, he notes that, while he won almost 80% of his matches, he lost 46% of his points. Why relate this statistic?

Here’s why I am telling you this.

When you’re playing a point, it is the most important thing in the world.

But when it’s behind you, it’s behind you... This mindset is really crucial, because it frees you to fully commit to the next point… and the next one after that… with intensity, clarity and focus. 

Sunk costs don't matter.

CA min wage goes up ==> CA employment declines

The classic book, Economics in One Lesson reduces all of economics to a similar lesson:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

The lesson of Chapter 3 is similar:

• Consider all costs and benefits that vary with the consequences of a decision:
• If you miss some, that is the "hidden cost fallacy"
• If you take account of irrelevant ones, that is the "sunk-cost fallacy"

 This hidden-cost fallacy comes from California, via Instapundit.com:

California raised the minimum wage statewide for “fast food restaurant employees” to $20 per hour last April following the passage of a ballot proposition in September the year before.

Analysis of unadjusted data from the Quarterly Census of Employment and Wages, the NBER found “that employment in California’s fast food sector declined by 2.7 percent relative to employment in the fast food sector elsewhere in the United States from September 2023 through September 2024 … Our median estimate translates into a loss of 18,000 jobs in California’s fast food sector relative to the counterfactual.”

The fast food sector has also cut workers’ hour and increased automation to avoid paying rising employment costs.

Any econ student could have predicted this using a shift in the supply curve, but someone at UC Berkeley predicted the opposite:

A new study published by UC Berkeley’s Institute for Research and Labor Employment confirmed that California’s $20 minimum wage for fast-food workers has led to significant benefits for workers, without the devastating consequences that critics predicted.  

Fortunately for us, we have an adversarial system, so that mistakes by one side are usually brought to light by the other.  

FOOTNOTE: a middling economists' take on weighing the benefits of our adversarial system. (link)

Mowing Your Own Lawn

Roland Fryer has a nice opinion piece in the WSJ about "The Economics of DIY." He points out that even wealthy people tend to do household chores that they could affordably outsource. He relates an incident:

When a friend invited me to play golf and I declined because the yard needed mowing, he didn’t hide his disbelief. “You can pay someone to cut your lawn,” he said, “but you can’t pay someone to have fun for you.”

At first blush, it seems as though the tenured Harvard economics professor mowing his own grass needs a refresher in cost-benefit analysis. But he points out that many of the benefits of DIY are often hidden and ill-defined while the costs are fixed and precise. Three economic concepts help to better understand some hidden benefits.

Diminishing Marginal Utility - The value of an activity falls as you do more. In his example, when time with his kids is short, he frees up time by outsourcing more - cooking, cleaning, ride-sharing, etc. The cost of the meal, the maid, or the ride is fully observable. The value of the time shared is less amenable to an accounting ledger.

Experiential Utility - There is often pride in doing. We value our ability to do things and we recognize these talents in others.We admire the craftsmanship in DIY car restoration, woodworking, quilting, or calligraphy.  Hobbies can be fun. Moreover, there can be joy in seeing yourself improve. And the nostalgia of learning from an elder can bring back fond memories. 

Signaling - Cutting the lawn sends a signal to your neighbors and yourself. You are the kind of person who takes care of things, who others can look on with admiration for the care you take. You provide positive externalities.

WSJ: Why EU lags US in tech.

Someone at the WSJ read Why the U.S. Produces More Unicorns than the EU

• Limited Presence of Major Tech Firms: 
• Apple's market cap > entire German stock market, 
• Structural Barriers to Innovation: 
• risk-averse business culture, 
• stringent labor laws, 
• heavy regulation
• smaller venture capital pool
• Talent and Incentive Challenges: 
• lack of stock options makes it harder to align incentives--and retain--innovators.  
• Underinvestment in Emerging Technologies: no quantum computing and artificial intelligence. 
• Dominance of Legacy Industries/lack of dynamism:  EU firms founded in 1911, US in 1985

Acquired Podcast: Costco

Listening to the Aquired podcast about Costco.  Lots of interesting history and economics in it.  

• The start of discount retailing by figuring out how to skirt manufacturer RPM's (resale price minimums) with the "club format," Fed-co (nonprofit) to Fed-mart (
• The first US Hypermarket, idea imported from France
• How Costco evolved from retail to wholesale warehousing, where manufacturers take care of all the logistics: once a pallet is dropped off, it is immediately available for sale.  
• To Price club, which opened up to credit union members as a benefit, which had a huge word-of-mouth advertising.  
• Limiting # SKU's (#products=3800) to increase volume and get lower prices from manufacturers.
• To adding hot dogs from Hebrew National, $1.50 for hotdog and a drink, Costco's only loss leader
• Costco turns inventory 12x/year, where vendors finance Costo's inventory because it sells faster than the payment terms (pay manufacturers within 30 days).
• To two-part pricing (selling at MC and making money on the membership fees).  
• Costco clones:  Wal-mart, Home Depot, Starbucks

HT:  Charles

The hidden cost of regulatory uncertainty

Innovation drives growth and at our current growth rate of 2%, US income doubles in 36 years. In contrast, EU income doubles in 108 years. There are many reasons for the US/EU difference regulation, income taxes, subsidies and "regulatory uncertainty." President Biden’s appointees have createdted huge regulatory uncertainty in antitrust (see earlier post) which deters acquisitions which are the proverbial “exits” that drive startups.

Failures ==> Learning ==> Success

Economist:

...SpaceX’s existing Falcon 9 rockets had a similar string of spectacular failures (it even released a blooper reel). But there was a method behind all the explosions. The idea is that flying lots of hardware, and failing rapidly, lets you learn from reality, which is the best teacher of all. That sort of mindset, best-known in Silicon Valley, is not how the rocket business has traditionally worked. But it is hard to argue with the results: SpaceX’s Falcon rockets have now made more than 350 successful landings. That has helped the firm cut the cost of getting a tonne of payload into space by perhaps a factor of ten. It now dominates the launch industry.

Why has US left other rich economies in the dust?

Economist:

On a per-person basis, American economic output is now about 40% higher than in western Europe and Canada, and 60% higher than in Japan—roughly twice as large as the gaps between them in 1990. Average wages in America’s poorest state, Mississippi, are higher than the averages in Britain, Canada and Germany.

WHY?

• Economies of Scale: a good idea hatched in California or product built in Michigan can, in short order, spread to 49 other states. 
• Flexible Labor Market : ...allowing people to move to better-paying jobs and drawing workers to more productive sectors. 
• Immigration: A long, porous southern border [allows] the labour force to steadily grow ... to fill the hard, dirty jobs that many native-born Americans have no interest in doing. 
• Oil & Gas:...the improvements in techniques for extracting hydrocarbons from once-unpliant shale rocks have turned America into the world’s biggest producer of oil and gas.
• Light touch Regulation:  ...has given high-tech companies room to play and grow. It also enabled the experimentation which led to the shale revolution. 
• Better regulation: After the global financial crisis of 2007-09, [regulators] clean up bank balance-sheets, and making aggressive use of monetary policy to support growth. 
• Good Macro policy: government’s willingness to step on the accelerator pedal when [the economy] has sputtered, ...[response to the] covid slowdown ... with...fiscal stimulus packages that left other countries in the dust.

Hidden costs of the Chernobyl accident: US deaths from air pollution

From MarginalRevolution.com:

Namely, Chernobyl caused many more deaths by reducing nuclear power plant construction and increasing air pollution...