Differences-in-DIfferences explained, albeit with a macroeconomics example

Another great video from MRU.  Teaches students how to "create" natural experiments using non-experimental data.  

To complement this video, try the "Hidden Causality" and "Spurious Correlation" exercises for this free web app described in A Simple Way to Teach Regression.

Costco's profit comes mostly from membership fees

 In 2018, Costco's profit was equal to its membership fees.  In 2020 membership fees were 87% of profit.  These barely profitable prices (only 30¢ out of every $100 in sales is profit) increase demand for Costco membership.   In other words, people pay to become Costco members because they get very good prices, on average.  

HT:  Merle Hazard

Odds of dying from break-through Covid vs. other risks

 

Vaccine inequality

From The Economist:

By late August 2021 around 60% of people in higher-income countries had received at least one dose of a vaccine. In poorer countries only 1% had.

The extended lockdowns have huge costs: 

The need to extend social-distancing measures, loss of revenue from tourism and business travel, and the likelihood of social unrest in the event of a prolonged struggle against the virus, among other factors, will all weigh on their economic trajectory.

 

Why would an air traffic controller deliberately put two planes on a collision course?

In 1974, it became more difficult for air traffic controllers to qualify for "burn out" disability insurance.  They needed some hard evidence that they were actually burned out.  

In response, some deliberately put planes on a collision course to generate "near misses" that would qualify them for disability.  The good news is that they did it in low-traffic periods so that the controller could closely monitor the two flights to make sure that they did not actually collide.  (link to article)

China gives the poor a bigger slice of the proverbial pie, but if it affects incentives...

...it will also make the pie smaller.  

The Economist reports on the efforts of the Chinese government to redistribute income from rich to the poor.  Chairman Xi has pronounced, “We must not allow the gap between rich and poor to get wider.” He seems to be channeling Confucious whose writings he frequently quotes, "a wise leader worries not about poverty but about inequality." 

 If this sounds familiar, it may be because the top 1% in China own 30.6% of household wealth; close to the US figure of 31.4%. The trick will be to redistribute income without muting the incentives that have made China so successful. 

[See earlier posts about the incentive aligning effects of private property in China]

Should physicians be bill collectors?

On the upside, physicians would see the bills as their patients see them, which would remind them of the tradeoffs associated with expensive treatments.

One the downside, physicians have to play the dual role of healer and bill collector.

FROM JAMA:

Through increasing deductibles, coinsurance, and co-payments, the privately insured population in the US is responsible for a larger share of health care out-of-pocket costs. Although many studies have examined the effects on patients, the implications for physicians have received less attention. The increase in cost sharing is forcing many physicians and health systems to take on the role of bill collectors. It is a task for which physician practices are unsuited. The result is a system with substantial administrative burden, frustrated patients struggling with confusing bills, and physicians receiving less compensation. This Viewpoint describes the drivers of this trend, the consequences for physician practices (with a focus on physicians but discussing issues relevant to a range of clinicians), a wave of new companies looking to solve the problem, and what might be done to improve the situation.

HT:  Allison

"Them Geezers is Bleedin' us Dry"

... or so claims a colleague of mine. He was referring specifically to their staunch defense of increased medicare spending. He might have been a bit untactful. I argued that it is likely appropriate to increase transfer payments for the medical care of senior citizens for at least two reasons. First, medical care has increasingly become effective. We have developed more treatments for more conditions and the pace of medical innovation is quite impressive. Or the marginal benefits of a dollar spent here has increased. Second, we are wealthier. We can better afford to subsidize others. Or the marginal cost has fallen. He grudgingly agreed but claimed this is not enough to account for the increase. When he told me expenditures per medicare enrollee increased tenfold, I was incredulous ... until I looked at the numbers. Sure enough, the number of enrollees increased somewhat, but expenditures per enrollee per year increased from ~$1,000 in 1980 to ~$10,000 in 2009. Folks, the automatic increases at this pace just aren't sustainable. I sure wish we could have an honest debate about it.

How did our underfunded public pensions do during the pandemic?

Previous posts have focused on the underfunding of public pensions caused by unrealistically high discount rates, e.g., 7%.  For these "defined benefits" plans, the states and cities usually do not save enough.

For example, if a pension fund needs to pay a teacher $100 in 20 years and uses a 7% discount rate, it must save 100/(1.07)^20=$26.  Then, if it invests $26 and earns a 7% return, the fund will have $100 in 20 years when the employee retires.  

However, if it earns only 4.7%, the fund will have only $26*(1.047)^20=$65, a shortfall of 35%.  

MarketWatch reports on a Boston College study of the effect of the pandemic on defined benefit pensions:

2020 funding of public-pensions to invest sector plans at 74.7%, up from 72.8% last year.

The good performance was due to the huge stockmarket gains.  Instead of using the gains to move to a defined contribution plan, like Wisconsin's, I fear the gains will sow the seeds of the next pension crisis by inducing pensions to increase the discount rate they use.  

Trust only 1/3 of the results from Pscyhology, but 2/3 of the results from behavioral economics

Dan Ariely (psychologist and behavioral economist) was forced to retract a well-cited paper based on fraudulent data. Ariely, a frequent TED Talk speaker and a Wall Street Journal advice columnist, cited the study in lectures and in his New York Times bestseller The (Honest) Truth About Dishonesty: How We Lie to Everyone — Especially Ourselves. We have blogged about Ariely's work and want to warn readers that we may have retract the blog posts, pending the outcome of an internal investigation.  

Professor Ariely's problems are part of a larger "replication crisis." It began when the journal Science found that only 1/3 of the psychology experiments underlying the most cited papers in the field of psychology  could be replicated.  A bigger and more recent study finds much the same thing.  [Behavioral Economics does better than psychology, as 2/3 of the results can be replicated.]

Contributing to the crisis is what is called HARK, Hypothesis After Results Known.  Due to the pressure to publish statistically significant results, researchers do science backward.  They begin by looking for a statistically significant result (p hacking).  Then, they specify an hypothesis to explain it.  Now, good practice requires that researchers register hypotheses before testing them.  Note that a similar problem plagues non-experimental data as well (regression fishing).

We regularly blog about deviations from the rational actor paradigm, and include some of the more useful results in our textbook, notably loss aversion (losses hurt more than gains help), and hyperbolic discounting (overweighting the present).  To the extent that these findings cannot be replicated, we could be wrong.

For the sixth edition, we will do our best to determine whether these Behavioral Economics results can be trusted.  For now, place a 2/3 weight on them being right.