"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.  

Grow a pony tail and cut taxes

The strategy employed by the Swedish Finance Minister seems to be working.

He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. "In most cases, the company would not have been created without the owner," he says. "There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden."

HT:  Carpe Diem

Price transparency at last!

Colleague Larry van Horn's efforts to require negotiated prices between payers (insurance companies) and healthcare providers (doctors, hosptials) be made public are about to bear fruit.   Larry showed that

Even when insurance covers the cost, there is, on average, a 300 percent price variation within a market for the exact same services.

As a special advisor to President Trump, Larry encouraged the President to force the bargaining pairs to make public their negotiated prices.

The first data is now trickling out and the NY Times seems to approve, and gives President Biden credit for not reversing Larry's efforts:

The requirement to publish prices is a rare bipartisan effort: a Trump-era initiative that the Biden administration supports

MEA CULPA:  

17 years ago, when I was Chief Economist at the FTC, I wrote a letter to the California legislature suggesting that price transparency would have the opposite effect.  At the time, my thinking was that (i) transparent prices could facilitate collusion; and (ii) a provider would be more likely to accept a lower price if the provider did not have to disclose it to others.  I was primarily concerned with protecting bargaining competition, and I didn't grasp the perverse incentives of the bargainers.  As the NY Times notes:

The insurer also may not have a strong motivation to [negotiate lower prices], given that the more that is spent on care, the more an insurance company can earn.  

Vanderbilt alum Richard Stephenson is quoted in the Times article and runs Redu Health, a "national self-pay discount network empowers employees and members ... with transparent, upfront pricing."   

We are so busted!

 https://freakonomics.com/podcast/reasons-to-be-cheerful-rebroadcast/

Good but long podcast.  This caught my eye:

BAUMEISTER: …And incidentally, professors complain a whole lot. I remember visiting a university and I was having a conversation like this. I say, “This is a wonderful job,” and so on. And they looked at each other and said, “Well, we never say that out loud. You have to always be complaining. Otherwise, the administration won’t give us a raise. We always have to act like everything’s awful.” 

Economists vs. environmentalists

 Economics and environmentalism are belief systems that shape their adherent's way of thinking about the world.

                                                --Robert H. Nelson (link) 

When I earned my PhD, I started doing God's work (link to funny essay, "The Market as God") at the Justice Department, challenging anticompetitive mergers and putting price-fixers in prison.  My housemate was trying to do the same at the Environmental Protection Agency, using marginal analysis to design incentives to get polluters to face the consequences of their behavior.  If polluters produce up to the point where

    MR=MC

an output tax equal to the harm they cause, T=P, would bring pollution down to the point where the benefits of producing more are equal to its costs, including the costs of pollution.

    MR=MC+T.

There is legitimate debate about the magnitude of P but the principle seems obvious.  But not to [some/many?] environmentalists at the EPA.  They worship another God, and view all pollution as heresy.

In 2009, this debate made it up to the Supreme Court, where the economists prevailed, 6-3:

...the Supreme Court overturned [Sotomayor's earlier appellate decision that straightforward benefit-cost analysis was illegal] in a 6-3 ruling...

For the time being, benefit-cost analysis is OK.  

Training Artificial Intelligence to not discriminate

The top book review on Amazon reduced Prediction Machines to three propositions: 

• Artificial Intelligence (AI) is mostly about prediction 
• The cost and price of prediction is falling, 
• This will increase demand for complementary skills, like judgement and decision making.

As the cost of developing predictions has fallen, tremendous innovation has followed.  For example, AI can identify tumors with much greater accuracy than humans.  

However, AI can also identify race with "frightening" accuracy:

Whatever the algorithms were seeing, they saw it clearly. The software could still predict patient race with high accuracy when x-rays were degraded so that they were unreadable to even a trained eye, or blurred to remove fine detail.

To see how this could create problems, imagine training AI to diagnose and treat patients.  And imagine that the training set reflected the racial disparities sometimes associated with healthcare, i.e., minorities are under-treated or under-diagnosed relative to non-minorities.  With such a training set, the AI would "learn" to continue the disparate treatment.  

The director of medical imaging research at Royal Adelaide Hospital, calls AI's ability to recognize race “the worst superpower.”

House affordability

 

We have blogged extensively about the zoning restrictions that restrict the supply of new homes and raise the price.  

Historical Knockout Auctions

The Journal of Political Economy, one of the more prestigious economics journals, gets submissions of interesting economics related anecdotes for its back cover. The most recent issue contained this:

Collusive Bidding and Intermediary Profits in Congo a Hundred Years Ago

Five traders, who have hurried up in their cars, were waiting for the market to open. The region here has not been conceded; the market is free and the bidding began at once. We were surprised to see it stop almost immediately. But soon we understood that these five gentlemen were making a ring. The first carried off the whole crop for seven francs fifty a kilo, which probably seems a very fair price to the native, who only recently was selling his rubber at three francs; but at Kinshassa, where the traders resell it, it has fetched for some time past between thirty and forty francs, which leaves a very respectable margin. What about our gentlemen? As soon as the business is concluded with the native, they meet together privately in a little room, where another auction begins and they divide the spoil among them. The administrator is powerless against this secret auction, which, with every appearance of being illicit, does not, I am told, come within the power of the law.

[Andre Gide, Travels in the Congo (1927), translated by Dorothy Bussy (Hopewell, NJ: Ecco, 1994), p. 45. See also Daniel Graham and Robert Marshall, “Collusive Bidder Behavior at Single-Object Second-Price and English Auctions,” J.P.E., vol. 95, no. 6 (December 1987), 1217–39]

(Suggested by Laurent Lamy)