Some fluff, some info

topics covered:

Here is an article from the NY Times about the recent WTO ruling about cotton subsidies. Since linking to the NYT is always spotty, here's a big fair-use chunk of it. Or here is an article from the Economist. Or, for the especially lazy among you, here's a summary:

The WTO's goal is `free trade', meaning the removal of restrictions on the market that prevent the free flow of goods. This usually means tariffs or blockades at the borders. This also includes anti-dumping rules, which make it illegal for a government to pay one of its exporters to send goods overseas, because this would also prevent the market from arriving at the natural price for the goods, at the cost of the industries of the importing country which don't have their own subsidies propping them up.

So what about when a country subsidizes an industry not for the sake of exports, but just hands them lots of money all the time? This too will have a distortionary effect on the world market, and although it is not a trade barrier blocking a free market, it makes it impossible for producers in other countries to compete, preventing a fair market.

Hard question; there was a decade-long agreement in the WTO to just not talk about it. That agreement expired on 1 January of this year, and Brazil immediately litigated the issue, suing the U.S.A. for cotton subsidies and the EU for sugar subsidies (see this Economist article on sugar). Brazil won with the U.S.A. (EU is pending), and the official ruling of the WTO is that the cotton subsidies must stop: they hurt farmers in poor countries all around the world. Our government, for its part, will fight this as far as possible. At the extreme, the U.S.A. may even drop out of the WTO entirely---and when it does so, it will point to the liberal agitators who wanted a better deal for the world's poor and say that it is doing the agitators a favor.

Doing something We'll divide Americans into two classes: people who have no idea about cotton subsidies and their effects on world poverty, and cotton farmers. The cotton farmers are out in full force, hoping to ensure that the U.S.A. defies the WTO and keeps the subsidies coming. The rest of us, who don't grow cotton and think poverty sucks, need to do our part to counter them.

That's right, it's time to write your congressperson. Forget switching to the hippie phone company or picketing the World Bank: this is the easiest, and potentially most effective thing you can do to help alleviate world poverty today.

Here are links to help you look up your Senator and Representative.

A few tips: handwritten letters get much more consideration than printed letters, which get much more consideration than emails, and emails that show distinctness get much more consideration than those with signs of cut-and-pasting. But in the mean time, here are some sample letters, which I hope you will, at the least, cut and paste to your congressman.

If your congressperson is a liberal
I am writing you with regards to the recent WTO ruling that the U.S. must curb its cotton subsidies. I believe that we should make every effort to comply with this ruling.

Personally, I am worried that we do not do enough to help the poor nations of the world. By cutting cotton subsidies, we do just that---and save billions of dollars in the process. The World Bank found that if the wealthier nations cut their agricultural subsidies, then 144 million people could be lifted out of poverty. Cutting the budget and helping the poor at the same time is a win-win situation if ever there was one.

The U.S.A. has lost face in the world since the invasion of Iraq, and needs to improve its image. This is a wonderful (and cheap) way to do so, showing that we have an interest in the world that goes beyond its oil, and that we have respect for international organizations even when they don't entirely agree with us.

The alternative, maintaining subsidies in the face of a WTO ruling that we should not, would leave parts of the world poorer and make them hate the U.S.A. still more. I would not feel more secure in a world like that.

So please, curb the cotton subsidies, as the WTO has mandated that you do. Doing so would help the U.S.A. and the impoverished of the world in equal measure.

If your congressperson is a conservative
I am writing you with regards to the recent WTO ruling that the U.S. must curb its cotton subsidies. I believe that we should make every effort to comply with this ruling.

Our budget deficit is larger than ever, and I know you are looking for more waste to trim. Now you have a international ruling that you must cut billions of dollars in handouts from our budget---what more could you ask?

I know that special interests are coming to you telling you that every cotton farmer in America will go out of business if these subsidies are eliminated, but I don't believe them, and I don't think you should either. Our farmers are still the best-educated, best-equipped farmers in the world, working on some of the best soil in the world. They will compete and prosper in a free market.

I am not asking you to hurt cotton farmers. I am asking you to return them to the same position that the rest of us are in: earning our money by good work instead of good lobbying. In the long run, this will benefit us all, as fiscal sanity and bravery in the face of special interests always will.

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The social security tax First, I have to mention that the social security tax is the most regressive tax in the U.S.A. today. `But', you say, `people are contributing to their own pensions that they'll eventually take out later.' This is, of course, a myth, supported by annual mailings from the Social Security administration. Every dollar the government takes in goes into one big pot, and every dollar taken out for this year's budget, whether for pensions or bombs, is taken out of the same big pot.

The populace has been duped into thinking that social security is a more moral and just tax, because it is somehow a separate fiscal entity which supports itself and nothing else. In your accountant's dreams it does. It's a tax just like the income tax, only it starts taxing at the first dollar you earn, taxes only labor, gives you no deductions, and the wealthy are 100% exempt.

[Here is a cute paper by Ed McCaffery about cognitive errors applied to tax policy. You can question his lab methods, but I have no doubt that this would generalize with no problem to the population at large.]

Eliminating the Social Security tax and raising the income (or any other) tax accordingly would undoubtedly make the U.S.A. a less polarized place and provide a much easier life for the struggling among us. Too bad it'll never happen.

Immigration and pensions Now that I've talked about how horrific pension taxes are, let me tell you about the latest buzz: portable pensions.

There are two simultaneous issues which wealthy nations (the U.S.A., the EU) face relative to the poorer nations (Mexico, the Ukraine): the wealthier nations aren't having kids at a replacement rate, and they attract lots of immigrants.

So we want some sort of incentive to get people to flow back to the poorer nations, which is where portable pensions come in. The idea is that if you choose to move to Mexico, your imaginary social security account goes with you. This is a good thing for circular migrants, and for the large number of illegal immigrants to the U.S.A. who pay social security taxes and never get anything back. Conversely, if people choose not to use the portability, they can stay in the country they've migrated to and not think about it.

At the same time, this is a strong incentive for old people to get out of the country. A dollar in Mexico buys about eight times what it does in the U.S.A.---and it's sunny. A regular retirement paradise.

There are people who support this idea because they think the alternative is that the dark skinned people will take over the country and never leave. Dubya's platform supports them. But just because *uckheads agree with an idea doesn't make it automatically wrong.

I take a more multicultural approach to assessing the value of the proposal: circular migration is a good thing. As more people commute across a border, the border eventually becomes irrelevant. If somebody comes to the U.S.A., gets a great education, and then chooses to go home to disseminate knowledge, then that's frigging optimal. Of course, if the person is forced out coercively, then this is significantly less than optimal, and is even sort of evil. Portable pensions, conversely, are actually a lessening of government restrictions---nothing but creating more options for people to decide among.

So the portable pension idea is a nice way to induce more circular migration, which would bring more capital (=the pensions) to the net-out-migration countries, and either augment their human capital or at least alleviate any brain drain. Plus our old folks will have more options for living on a limited income.

Finally, getting back to the fuc*heads, this is a way to convince them that their country is not being invaded. That means that with portable pensions come more porous borders, which is also a good thing.

Anyway, so that's my thinking. I haven't spent enough time pontificating to see the evil dark side of portable pensions. On the analytic side, I've retrofitted my immigration model for (name of international development group) to test whether portable pensions will do what we want them to. (Name of international development group) has me so supremely outclassed, by the way: I provide the model and they provide the data to run it with, and they came up with the most beautiful data set you have ever seen, ever. My model isn't worthy. So I'll be working, trance-like, for the next several dozen hours to make my model classier. Will try to remember to eat, sleep, and inhale at regular intervals.

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Mr. JE of New Orleans, Louisiana, asked me about this article, which is a libertarian commentary on a boycott of Taco Bell. The story is one we've heard a hundred times before: workers are mistreated, in this case the Immokalee Indians of South Florida who harvest the tomatoes, then liberal college students hear about it and a boycott is organized, causing a couple of college campuses to close their Taco Bells and many a chalupa to not get sold.

The libertarian response is predictable: the boycott is interfering with the market, which only hurts the people whom it is intended to help. "It is an attack on capitalism and an attempt to impose moral connotations to simple purchasing actions of consumption goods. [...] Prices are not set by arbitrary moral standards, but rather by available levels of supply and demand in the market."

But the people who are boycotting Taco Bell are the market. The first piece of confusion in the libertarian view is the belief that there are millions of perfectly atomic consumers within the market, who don't interact, and then there are these Jesuits and labor unions who come to them, from outside the market, and stick a screwdriver in the works. But the students who boycott are as much on the demand side of the market as the guys who still buy their tacos from TB, and it is an error to suddenly exclude somebody from a model of the market because they care about ethics. The above article acknowledges this: "Boycotting Taco Bell lowers the demand for tacos" and in the same paragraph denies it: "Staging a boycott against Taco Bell does not change the guided self interest of taco eating teenagers."

Why would a libertarian make such selective inclusions and exclusions? The root problem is in the narrow-path presumption that a person's utility function may only include a limited set of elements. Taste, convenience, price: OK. Ethics, affect, peer influences: forbidden. Academic economic models facilitate this, since price is much easier to model than ethics, and it's generally true that ethics really don't enter into most people's utility functions as strongly as price.

But ethics do matter, for everyone. I believe that every one of us could think of one product out there that they would never buy, whose production is somehow repulsive: maybe Metallica CDs, snuff videos, copies of the Communist Manifesto, or Krupps coffee makers. I'm a fanatic vegetarian, so I've got my list. It would be silly to put these considerations outside of the market mechanism: my utility from a Taco Bell taco stems directly from the fact that many franchises use animal fat in their rice (according to this source. Last time I saw an official ingredients list, it listed chicken stock in the rice, but that's apparently changed). To the extent that I'm a part of the market, the demand curve is directly affected by my ethical beliefs.

An interesting feature of ethics is that the vast majority of people don't care, but for those that do it's a deal-breaker. This is hard to model for the economists, and hard to deal with for the companies: do you alienate a thousand people for the sake of saving a penny on a million units? Part of the equation is the contagion problem, that if a person is sufficiently alienated then they will not only stop consuming, but they'll complain about you to all of their friends, which could hurt sales still further. The cost/benefit analysis would be different for every case: it's surely true that a company would have to shut down if it tried to satisfy all the ethical qualms of all of its consumers, but it's also surely true that a company which ignores the ethics of all of its consumers shoots itself in the foot.

Affect also matters. The clearest proof of this is that companies like Taco Bell spend billions of dollars a year on it. The narrow-path economists insist that advertising exists only to inform the consumer of new products or perhaps demonstrate the company's stability, but people who actually work in advertising would laugh at this: most advertising is about making the product emotionally appealing, by implying that attractive and desirable people use the product, or otherwise making you feel warm and fuzzy when you see their logo. If you can get people to have an emotional attachment to your product, then you can charge more for the same product---that is, emotional attachment is the best investment a perfectly rational producer can make.

The academic economists downplay affect for the same reasons they downplay ethics: hard to model, and price generally matters more. Many will argue that it's reasonable to ignore it in the design of an academic model, since many of the features of emotional attachment can be explained using other things like a desire for consistency or shared preferences between producer and consumer. But regardless of whether it should be included in a good model, it is certainly a real-world issue on which real-world companies spend billions of dollars.

Ethics and affect are tied. My affect toward Taco Bell is based upon all my information, including both the advertisements and my knowledge of how their proverbial sausage is made. The aforementioned libertarian article is happy to acknowledge half of this, by the way, pointing out that much of Taco Bell's demand comes from that frigging dog that says `Yo quiero Taco Bell'. [Better would have been `Quiero el taco bello', meaning `I want the beautiful taco'. But, alas, Taco Bell is named for its founder, Mr. Bell.] I can not explain why our libertarian friends say that demand can be shifted by something as squishy as a talking dog but not from the squishy issues of ethics.

Consumers are irrational. We can make up general rules about how they'll behave (like how demand falls with price, though we can't even prove that), but in the end they'll buy what they darn well please to. The role of the companies on the supply side of the market is to work out what those irrational desires are, regardless of where they came from, and cater to them. And the role of the think tank, by the way, is not to wish away those irrationalities or define those people it considers to be irrational as somehow outside of the market, but to discuss how society can best facilitate suppliers meeting those arbitrary demands. This is a hard question when the strong desires of a few (for fair-pay tomatoes) directly clash with the weak desires of the many (for cheap tomatoes), but the article I'm critiquing ignores it, and I must acknowledge that I really can't offer a generalized solution.

For Taco Bell's owners, paying its workers more should be part of the advertising budget. If behaving within the bounds of the consumer's ethical beliefs helps to improve consumers' visceral affect, then it makes as much sense as spending millions on affect-improving advertising, no matter how irrational or arbitrary those ethical rules may be.

In this context, the boycott absolutely makes sense for the laborers, although it is potentially risky. Consumers with certain ethical beliefs will want to maximize the cost to Taco Bell for ignoring those beliefs, which means not buying tacos and convincing as many people as possible to not buy. This works entirely within the market mechanism, by moving demand. To repeat the quote from above: "Prices are not set by arbitrary moral standards, but rather by available levels of supply and demand in the market." This is true, but levels of demand are influenced by arbitrary moral standards, which then influence price. The more vehement the arbitrary moral standards, the more influence they will have on price.

What T.B.'s managers will do about the increasing effect its labor policy has on demand is hard to guess. It may acknowledge that a penny a taco, shifting everybody's demand down a touch, is worth the benefit from restoring lost demand among boycotters and their expanding network. It may also find other means; such as buying tomatoes from some other group of laborers who aren't as organized; or maybe just ignoring the whole thing and reducing tomato purchases, losing money for the workers (which is the libertarian prediction; see below). The boycott has both costs and benefits to the workers, and I certainly don't have the numbers in both columns calculated---but then neither does our libertarian friend. Meanwhile, I have no reason to think the Coalition of Immokalee Workers is run by idiots, and I expect they are aware that sometimes the squeaky wheel gets the grease and sometimes the squeaky wheel gets the shaft. They are aware that Taco Bell's decision will be based entirely on costs and benefits, not the board of director's heart strings---and so they are doing exactly the right thing to convert their ethical complaints into the largest possible shift in demand, which Taco Bell's managers (being rational market actors) will respond to.

A final note: I feel that I should specifically respond to a few points in the article, though they don't generalize very far and won't be of interest except as a rebuttal.

A more effective method of raising the wages of Immokalee migrant workers would be to stage the exact opposite activist campaign. If college students were to buy more tacos and ask for extra tomatoes on those tacos the demand curve would be moved in the appropriate direction, raising migrant workers wages. But this realization seems farsighted from the anti-capitalists.

The Jesuit Volunteer Corps seems to be burning the migrant workers match at both ends. We've seen how the boycott would have a lessening effect on the migrant workers' wage rates, what we have yet to mention is that the JVC regularly encourages college students to gain the cultural experience of being a migrant worker. While lowering the demand for their goods and services, JVC kids travel to south Florida and work along side the migrant workers, in effect challenging them for the very jobs they are trying to spread a message of value for. This action raises the supply of labor and reaffirms the low pay scale.

In this case, I think that it is the author who is being short-sighted [or in economist-speak, is looking at a partial equilibrium model where he should be looking for the general equilibrium]. The goal is to maximize the benefit that Taco Bell gets from paying tomato-pickers more. The obvious way to do this is to provide less labor and demand more tomatoes, as suggested. However, one person's request for extra tomatoes has a small effect, but one person's refusal to buy---and encouragement to lots of friends not to buy---creates a much larger effect. The board of directors is asking, `what is the benefit to paying more for tomatoes?' and it seems obvious that the benefit the board sees is larger in the case of a public boycott that affects the demand decisions of a larger group than the private actions of a smaller set of people.

The Jesuit labor thing is similarly a long-term issue. If we have a person who marginally expands the supply of labor for a summer, and then spends the next decade encouraging others to care more about labor and shifts demand by self and others accordingly, then the long-term marginal shift may dwarf the short-term. Clearly the JVC thinks so.

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I think I've worked out that detail which causes liberal folk to hate the World Bank. The WB is the largest and best hope for global poverty alleviation we have, so one would think that it'd be the darling of liberals everywhere, but it has one fundamental difference from the typical liberal: it's not pro-labor.

It's hard to pinpoint the lack of a position, but I posit as a matter of opinion based on reading loads of World Bank reports that it has no position on labor standards. We can try Google, for what it's worth: the search "labor standards" site:worldbank.org turns up 530 hits, "working conditions" site:worldbank.org turns up 844, and "investment climate" site:worldbank.org turns up 16,500.

I haven't been able to find a straight answer, but as far as I can tell, somewhere between a great number and the majority of the WB's employees are short-term consultants---that is, they have no benefits, no insurance, and no job security. The Bank has a rule that nobody can work as a short-term consultant for more than 120 days/year, which often means that people wind up working for free for much of the year.

We can go to the coffee shop in the atrium, which serves SBUX coffee (SBUX being famous for treating its employees nicely, but I think the WB is just serving their coffee). There are about six varieties of coffee on tap, and only two of them are Fair Trade certified. Could you imagine a choice of Fair Trade or not-Fair Trade coffee in the SEIU lobby? Heads would roll. At the Bank, nobody detects anything awry at all.

Trying to detect the lack of a position is further complicated by the fact that the Bank is a decentralized mess, because policy written for Africa is not necessarily any good for Latin America. With policy written on a region-by-region or even country-by-country basis, there are thousands of human beings whose statements get blobbed together after a header like `the World Bank states that...'. Some of them are clearly pro-labor.

Caveats and paltriness of evidence aside, I'm still going to make this negative assertion, and you can evaluate it next time you have a WB report in your hands: the World Bank is not pro-labor.

Which brings up an interesting question:

Can one be liberal but not pro-labor?

Today's recommendation, for my usual audience of mathematicians and social scientists: Miss manners (RSS). No, not because of the usual reasons that no doubt sprung to your head when you saw mathematician and manners in the same sentence. I recommend the etiquette column because it is a paragon of social science analysis.

The first rule you need to bear in mind when reading on etiquette is that none of etiquette is arbitrary. Take this as axiomatic; if you believe that a rule violates this axiom, then you don't understand the rule and should try again.

The problem of etiquette is exactly the problem of law, economics, and the social sciences in general: given that people have competing objectives and perceptions which are often in conflict, what is the mechanism that minimizes conflict and maximizes social benefit? The problem is more difficult than most economic problems because etiquette is not law, and therefore not everyone is following it. I.e., we need a mechanism which is a Nash equilibrium for an asymmetric game where one side is playing the rule of etiquette and the other side may or may not be. This can be orders of magnitude more difficult than the symmetric problems with which we economists satisfy ourselves.

Etiquette columns are fun because each summarizes a conflict and its resolution, often in a clever-in-a-good-way manner. Miss Manners (aka Ms JM of Washington, Columbia) does an especially good job of keeping upbeat in the face of conflict after conflict.

I picked up a copy of Miss Manners' Guide to Excruciatingly Correct Behavior (BUY!), wherein she explains her own frustration with the misunderstanding of etiquette:

"If Miss Manners hears any more contemptuous description of etiquette as being a matter of 'knowing which fork to use,' she will run amok with a sharp weapon, and the people she attacks will all be left with four tiny holes in their throats as if they had been the victims of twin vampires." [p 119]

As for the rudeness of others, Miss Manners finds that is conquered by politeness. For example, a gentleman of Miss Manners' acquaintance dislikes being honked at by impatient drivers for not starting his automobile quickly enough when a traffic signal turns to green. Instead of honking back, however, he puts on his emergency brake, emerges from his car, presents himself to the honker in the vehicle behind, and inquires gently, "Did you summon me?" [p 4]

Advice

There are also a few people who do etiquette for the oversexed. [BUY!]

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If you know me personally, you know that I had a number of contracts at the Bank. Some went well, but most were for a rather shifty individual who was somewhat dishonest, both academically and more generally. The contract stipulated pay for eight days, and I cut bait and left after maybe four months of mostly full-time work trying to fit models to his hypotheses--and he still withheld payment.

There you have it, right in front, and you can read the rest of this article knowing my bias. Though, I'd worked out most of the below over a year ago, and you can tell by this header that I'm self-conscious enough not to base any of the below on one personal data point.

The World Bank is huge, and that is not necessarily wrong. If we somehow broke it into ten separate organizations, those organizations would have constant turf squabbles and fights over funding, constantly need each others' assistance and/or replicate each others' work, and would probably wind up setting up some sort of interorganization council that doesn't differ too much from the Bank's top management. There are umpteen thousands of people working in development, and that's an organizational problem no matter what.

Now, there are two eminently sensible ways to divide expertise: you can go by geographic region, because Central Asia is a very different place from Sub-Saharan Africa, or you can go by topic, because poverty reduction is a very different issue from gender issues. The Bank does both: the management chart is a grid, with departments like Central Asia-poverty and Africa-gender (except everything is an acronym, so it'd be ECA PREM). That is, everybody has two bosses, thus giving everybody something to complain about at the water cooler.

The next problem is that new projects come and go at a pretty rapid pace, and always involve subject that are a bit far afield from the expertise of the managers. The solution: hire contractors. Lots and lots of contractors. The Bank doesn't have a dam-building division--they contract. Nor do they have a dam-evaluating division; that's contracted too. Nor do they have sufficient expertise in virtually any of the subjects that your typical Bank report is about.

So when you sit at the coffee shop in the Bank's spacious atrium--and a whole lot of Washington is like this--you find a small core of individuals who are there for life and a constant flux of two-year RAs and contractors. Also, you'll see that only two of the five coffees they serve will be Fair Trade certified.

Now, if you work in a technical field, you know that finding people who are both technically apt and good managers is supremely difficult. Further, even if they were the best of the best twenty years ago, maybe their COBOL skillz aren't so impressive now. I would contend that in the pool that the Bank has to draw from, there are simply not enough people who are experts in country plus subject plus general management to fill all the posts. They have to compromise.

And the compromise the Bank chooses, time and time again, is to go for the people who can best manage the stream of contractors. Subject knowledge can be hired; familiarity with the Bank and its protocols can't. To add to this, managers are rotated every few years, so if somebody really buckles down and learns everything there is to know about labor in Europe, it's down the drain when they're moved to managing technology dissemination in China.

Now, management skill generally goes with political skill, and much of the work of a Bank manager consists of not pissing off politicians. So this is one more reason to bias toward managerial knowledge over subject knowledge. It is also why most Bank reports don't actually say anything of substance.

I suppose the arrangement of hiring subject knowledge could work, but the Bank culture kills it. The Bank's employees are trained to think like business managers. Impoverished countries are referred to as "clients", and I have heard at least one manager give a speech explaining in no uncertain detail about how the Bank must be run like a business. There are clear management goals; growing GDP by 7% per year in an given country is always a popular one--and even if it is achieved via inequality-expanding means, all boats will eventually rise with the tide.

However, the Bank's questions are only partly business on the ground. A huge percentage of the Bank's product is reports, about the business climate, about how [trend of the month] can reduce poverty, about the environmental effects of dams. So the contractors the Bank will hire are a mix of the usual survey-takers and other such laborers, and academic types.

As demonstrated by me and my shifty boss (really, I had some nice ones too!), academics and hard-nosed managers don't mix. Academics want to write something that is correct to the last detail; managers want something that gets the point across. Academics want to hold off judgment until the data is in; managers want to write the introduction to the report before hiring the academics. Academics need time; managers need output by Friday. Further, experienced academics are not cheap. They have day jobs, and if you need original research, that distracts from the navel-gazing they'd rather be doing.

I asked one well-known academic, “what do you think of the World Bank?” and he snapped back, “Did they pay you?” Then there's the graduate student who confided to me that she didn't tell her adviser that she's working at the Bank; due to so many bad past experiences, her department has a policy of not allowing students to work there. After I gave up on the project at the head of this column, shifty manager attempted to contract two experienced individuals working in my field, and both refused. I'll stop with the anecdotes there.

The end result from all of this: the Bank generally runs on the young and inexperienced. If you just got your Master's, they've got work for you to do. If you can't necessarily do original research, but you know how to run Microsoft Excel, then you have what it takes to write the flagship publication, the World Development Report. If you skim through the thing, you'll notice that (1) it is primarily a very long lit review, and (2) none of the original data work goes further than a bivariate graph. Most of those bivariate graphs (e.g., pp 2.14 and 2.20) are Excel charts based on a manually-enterable number of data points. That is, it's the sort of report that you expect from a team of Master's students.

Of course, that report has its value, and if you want a survey of global poverty in 2005, you should definitely click the link above. But does the following statement inspire confidence in you?: "Resources to eradicate world poverty are allocated based upon the best research by the most eager graduates of the last few years."

In short, the Bank's structure consists of a core of managers, many of whom learned their economics in the '70s, and a constant stream of generally inexperienced subject-knowledge labor. The result is well-managed and well put-together graduate-level work, upon which life-changing policies are decided.

Policy recommendations

The Bank is clearly over-managed, in the sense that there are just too darn many layers of management and the corresponding politics and unproductive inoffensiveness is stifling. It is also overmanaged in the sense that it is run like a business with a series of financial goals for its clients, rather than an organization whose goal is to understand poverty and eradicate it.

Coauthoring is efficient. The latest Journal of Political Economy has seven articles, five of which were coauthored. To produce a good report about environmental issues in India, you can hire a full-time India-environment specialist, or you can hire a full time India specialist and a full time environment specialist. The team stands a good chance of producing a better paper and finishing in fewer person-hours than the lone author. Thus, the grid is redundant: a team of the best and the brightest for each country and for each topic, plus a nice coffee stand where then can all interact, may be sufficient, and can run with a fraction of the managerial overhead.

What do the best minds in academia want? [And let me make very clear that I am decidedly not referring to myself.] First, they want to feel that their work will actually go somewhere. Everybody understands that things go slowly and nobody's recommendations are magically implemented a week later. But it is disheartening to know that your careful and interesting work will be reduced to the politically least offensive denominator. For a report to be interesting to one's academic peers, it has to say something.

For Bank contractors, much of the pay is in the form of carrot-dangling about how maybe one day you'll have a real job at the Bank and at the least you'll have a recognized name on the resume, both of which are premia that only a recent graduate could love. The incentives to advance for the full-time employees are primarily about being able to control more money. The World Bank has no advancement path of any sort for a person who has experience and knowledge regarding poverty and economics.

Since there is no means of retaining those who are interested and capable regarding the intellectual challenge of fighting poverty, such people are guaranteed that the Bank will be an unpleasant place for them, and if they want a community of people thinking about poverty, they are better off elsewhere. The Bank could be the focal point where the smartest people in the world meet to tackle the world's hardest problem, but instead it is a house of bureaucracy, hiring lowest-bidder contractors to provide management solutions to the government officials who are its clients.

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I live in Baltimore.

OK, so what was the first image that came to your head when you read that? For most folks, the associations with the word Baltimore are either crime, poverty, or general blight. Maybe you got that impression from a TV show like The Wire, or from a TV show like Homicide: Life on the Streets, or even from a pop song like Baltimore by Randy Newman, or a pop song like Baltimore by Lyle Lovett.

I recall everybody's reaction at my high school when I got accepted to the University of Chicago: “Y'know, it's cold there.” I got that line maybe twenty times. Yes, it does get cold there. But what these people didn't realize is that half the year, Chicago is obnoxiously hot.

I suppose it's no real surprise that when I tell people I live in Baltimore, they assume I'm shot at every day. But they fail to realize that half the town is kinda nice. The Borders & Noble just opened four blocks from my house, bringing with it the eighth Starbuck's in the city, and an exceptional stats shelf. And if that's too pricey and megacorp for ya, the Book Thing is two blocks away. But nobody says to me `Oh, you're from Baltimore? That's the city that reads!'

How do these stereotypes develop? How does a city get summarized into a verbal postcard that nobody bothers to think about anymore? More importantly, how do we get those stereotypes changed?

Detroit: Capital of the Rust Belt ⇒ Slowly returning to nature!

Baltimore: Stab wound or gun wound? ⇒ A hospital on every corner!

San Francisco: Everybody's gay!! ⇒ The rising creative class!

Seattle: Kurt Cobain drank coffee here ⇒ Monorail!

Variance

By the FBI's data, Baltimore had 11,248 violent crimes per person and a population of 641,097, for a violent crime rate of 1.75%. But the great majority of crimes are property crimes like larceny from vehicle (aka `stealing from somebody's car'), which is not the sort of thing that keeps people up at night. There were 269 murders and 162 rapes in Baltimore in 2005, giving us a rate of 41.96 homicides per 100,000 and 25.27 rapes per 100,000.

Now let's look at a few other haphazard cities:

	pop	crimes/100,000	murder/100,000	rape/100,000
Detroit	900,932	2,357.56	39.29	65.38
Bmore	641,097	1,754.49	41.96	25.27
Washington, DC	550,521	1,401.58	35.42	29.97
Houston, TX	2,045,732	1,172.54	16.33	42.63
Columbus, OH	730,329	836.75	13.97	70.93
Salt Lake City, UT	184,627	694.91	5.42	39
New York	8,115,690	673.05	6.64	17.4
San Diego	1,272,148	519.04	4.01	29.56
San José, CA	910,528	383.51	2.86	28.88

First, GSS's point is well-supported by the table: the variance in crime rates, by any of the above measures, is gigantic.

Also different types of crime vary differently. San Diego's murder rate is almost a tenth Baltimore's, but the rape rate is slightly higher. The murder rate generally follows the overall crime rate better, but is not a particularly close proxy. Among the top 100 cities by population, the correlation is 72%. Correlation between rape and overall crime among the top 100: 49%; rape/murder correlation: 31%.

Part of the problem is that we're talking about events per 100,000. With 72 rapes in Salt Lake City in 2005, the city beat out Baltimore on that scale-but what does that say about the odds that any one person will be raped in either city? If there had been 26 fewer rapes in SLC, then the rankings would be reversed.

Then there are aggregation problems. There are parts of Baltimore where I would not dare to tread. But the same could be said of every city in the entire country. The statement “around here, things go from rich neighborhood to poor neighborhood in just a block or two” has been made regarding every city I've ever lived in (which is many). This only makes it more difficult to work out what exactly the crime rates mean. If we have one city where the crappy parts are extra-crappy but the city center is average, it will look worse on the endless stream of Safest City stats than a city with an average crappy part and an average city center. But nobody in the city center, walking home from the Borders & Noble, would notice a difference.

LA County did us the favor of fragmenting things into over 80 submunicipalities. For example, the two highest crime-per-100,000 resident cities are Vernon, CA (pop: 94, crimes: 48) and City of Industry, CA (pop: 840, crimes: 140). Without the endless averaging of high- and low-crime areas you have a clear picture that that Vernon, CA, which seems to be a one block wide and five block long stretch just South of LA proper,¹is a bad neighborhood, without all the averaging of good neighborhoods getting in the way.

The summary: we'd like to read the stats above as a probability, so that when the FBI says that Detroit has a 2.4% crime rate and New York a 0.7% rate, that those are your odds of suffering a crime over a year. But there are too many complications beyond the simple numbers, especially for the very rare events like murder and rape. What neighborhood you're in, where you're walking at night, and with whom you're associating will all have a bigger effect on your odds of being raped or murdered than where your city ranks on a somewhat arbitrary unidimensional scale.

Bibliography

Edward L Glaeser, Bruce Sacerdote, and Jose A Scheinkman.

Crime and social interactions.
The Quarterly Journal of Economics, 111 (2): 507-48, May 1996.

@ARTICLE{gss:crime,
AUTHOR={Glaeser, Edward L and Sacerdote, Bruce and Scheinkman, Jose A},
TITLE={Crime and Social Interactions},
JOURNAL={The Quarterly Journal of Economics},
YEAR=1996,
VOLUME=111,
NUMBER=2,
PAGES={507-48},
MONTH={May}
}

Footnotes

... proper,¹

By which I mean La Ciudad del Rio de Nuestra Señora la Reina de los Angeles de Porciúncula. If I had my way, the city would be referred to as Nuestra Señora, which is hipper in so many ways.

[PDF version]

In all these columns of alleged pontification, I have given you almost no grandiose predictions about the future. There was the loom, the printing press, the internal combustion engine, electricity, the digital computer. What is next to completely revolutionize how human civilization looks?

Solar power.

Or, more specifically, the gathering of ambient energy into useful form. This is not a new idea. Millennia ago, people worked out that their bodies produce heat, so if they put on a blanket, then they can retain that heat and put it to useful purpose. The water wheel went along similar lines: hey, there's energy in that water flow, and it could be put to good use. A hundred years later, that water wheel turned into the Three Gorges D*m.

Or if you'd like to be a little more technical about it, there is the Seebeck effect: if there is a temperature differential between two sides of a system, then current can be produced from that differential.

So what's the revolution? Why am I talking about solar power instead of more water wheels or wind farms? Because light is everywhere power-sucking devices can be found. Your solar calculator from high school didn't need batteries, wires, or petroleum. It just sucked in energy from the world, and converted it into a useful form. You carried it around, and it ran itself. When all our appliances, houses, and transportation are capable of that self-powering trick, that will be a revolution.

Your laptop is not too far from that right now: you can already buy solar panels that will power your laptop that are about twice as big as your laptop. With a not-insane amount of work, we could get those solar panels down to the size of the back of your laptop screen. And forget laptops: the real victory will be when your car and house take in as much energy as they put out.

Figure 1: A square meter of solar panel could produce about 150-250 watts of energy. Black dots indicate the surface area one would need to meet all expected energy needs in 2010. source

A square meter of the earth is beaten with about 1000-1500 watts of solar energy all day long--and thanks to greenhouse gasses, there's only more watts to be had. For comparison, my fridge is sucking down a maximum of 3 kWh per day = a constant rate of 125 watts. You can check your laptop's power supply, but I'm guessing it's somewhere around 50 watts--but it won't need to be plugged in anyway. A space heater runs at around 1500W. So you can see that the typical house's energy needs are likely smaller on average than the solar energy hitting the roof.

The Honda EV Plus (PDF) uses about 500 watt-hours per mile--and that's 1999 figures from the DoE's Idaho National Laboratories; we can only presume that they're doing even better now. So mean demand is about 500 watts, and the 2 m² of car-top is warming up with 3000W of energy.

And hey, where is a great deal of the energy in driving the car's motor going? That's right: heat. Add some tricks to use the heat differential between the top of the hood and the bottom of the hood to reclaim electricity (that Seebeck effect again), and you've got an even more robust self-sufficient system.

Reality

The first is cost. Those nifty solar panels for the laptop will cost you $250, so they're not going to make sense to anybody but total hippies and those who are frequently off-grid. Putting a solar array on your house's roof will still be in the ballpark of $40,000, which will pay for itself in electricity saved and/or sold to the grid in, oh, a decade.

But burning dinosaurs is not going to work forever. As China and India start buying SUVs, oil in the USA and Europe is going to become more expensive, and that means people who were once on the fence will be buying more solar. Expect gradual reductions in prices as a result. The offset, though, is that silicon is getting expensive, due to increasing demand for electronic toys.

The other problem is in efficiency. The 3000 watts of power in the sunlight hitting the roof of your car still needs to be converted into useful electric power, and that conversion is still inefficient. One firm recently announced that it got its solar panels up to 22% efficiency. For solar panels, this is amazing, but to the rest of the energy world, this is ho-hum. Other forms of energy extraction typically get up to around 80% efficiency.

But I read that not to mean that solar power is hopeless, but that there's a lot of room for improvement. When a solar panel is twice as efficient and costs half as much per square whatever, then you're down to $50 for the solar collector on the back of your laptop screen--that's the price of a new battery.

8 December addendum: Silly me--the future arrived the day before I wrote this: the DoE announced on 5 December that one of its contractors had achieved 40.7% efficiency by stacking several types of photovoltaic cell on top of one another. It's still more than twice as expensive than the half-as-efficient versions, but we'll see where it goes.

So, back to pontification: what will the world look like in thirty years? It won't have wires, because we'll have moderately-sized electricity-generating gadgets to complement our ever-expanding array of electricity-consuming gadgets. The top of your car and house will have solar panels that just sit there and store up charge for your air conditioner. The whole greenhouse thing won't be an issue at all, except in terms of dealing with our predecessors. We won't be importing energy from remote locales, but just pulling it in from around us.

[PDF version]

The question for the day: when should you count transfers among third parties as part of your taxable income? Here are two examples.

• Your pal gives $1,000 to Amnesty International in your name. Gifts are counted as income; since this is a gift to you with a fair market value of $1,000, does this count as income to you?

• Instead of giving you a rent check, your tenant sends the rent directly to CitiMortgage, who apply it to the mortage on the house where your tenant is living. You never see the cash, but pay a smaller mortgage. Does it count as income to you?

To the intuition of most of the folks I've spoken with, the gift donation should not count as income, and the sidelong rent payment should be. So that's an easy consensus, but the next question is why one third-party transfer should count and the other shouldn't. Both are a transfer from one third party to another that benefits you, and at that level, are equivalent. The fact that one is a gift is irrelevant: if Grandma slipped a $1,000 check into your birthday card, you would have to claim it like any other income. Amnesty is a charity, but that just means that after you claim the $1,000 gift as income, you can deduct it as charitable giving. I mean no offense to the many people who have tried, but I have not yet seen a reasonable explanation as to why we should treat one of these cases as income but not the other.

Defining income is hard. A great deal of title 26 of the US Code is about questions like these. When your employer pays your health insurance for you, is it income? What if they reimburse you for it after you pay for it? Since you sometimes declare your income tax over a year after you earned it, other problems can arise: ¿If you live in Maryland but work in DC, to whom do you pay state income taxes? Hint: only one of these areas has Congressional representation.

We put the Service in Internal Revenue Service

The first, IRS representative #2504624, decided that a mortgage counts as rental expenses. At this point I'm torn. Even I know this is false, but is it rude to call her on her made-up interpretation of tax law?

Her: As you can see from this publication, tenants paying rental expenses count as income.

Me: It also says here that you can deduct the full value of rental expenses, so would that mean that a person could deduct their full mortgage?

Her: No. You can never deduct your full mortgage.

Me: But you declared that it's a rental expense, and those are deductible.

Her: Mortgages can't be deducted. They don't count as rental expenses.

Me: So if it's not a rental expense, then it's not income when a tenant pays.

Her: Yes, it is income. When a tenant pays rental expenses, then it's income.

This went on for a while, as I politely pressed her for a consistent definition of rental expenses, or of income. She eventually hung up on me.

Which is why I'm bucking my normal habit of using only initials and am printing her full name here. That's right, IRS Representative #2504624, every time anybody searches for your name, the first hit will be this post about how you rudely treated a taxpayer after giving him blatantly false, made-up advice.

The second try gave similar results, albeit much more politely:

Him: This counts as income under the doctrine of constructive receipt. Let me transfer you to somebody else who will explain that to you so I don't have to talk to you anymore.

While on hold, I looked up this doctrine. Constructive receipt is about the timing of income. If you get a paycheck on 20 December, but don't deposit it until 2 January, it still counts as income as of 20 December, because there was nothing keeping you from receiving it then. But this doesn't apply to either of the above cases, because there's a whole lot keeping you from receiving money from either Amnesty or CitiMortgage.

The conversation with the third person went about the same, but he had the grace, wit, and courtesy to admit that he had neither the text of 26 CFR nor the wherewithal to interpret it, and wrote out an email inquiry that was to be replied to within 48 hours. [You can't directly email the IRS's service desk--you have to phone in and ask the operator to type out an email for you.] Naturally, I never got a response.

I checked 26 CFR myself and learned an interesting factoid: it doesn't actually define income, beyond the basic `income is money you receive' definition that does not to justice to any of the above.

The root of the problem

There are the no-brainer cases--if somebody hands you cash, then it's income--but what if you loaned them fifty bucks that they paid back the next month? Is that $50 income for them in month one and $50 income for you in month two? Nothing is consumed and relatively little value is added, but it's ambiguous whether there's income. The law also considers things like large gifts to be income. Remember when Oprah Winfrey gave her audience members cars, and they then each got a $7,000 tax obligation with the gift? The idea here is that any item that you receive is equivalent to its fair market value. But this opens the door for massive ambiguity: that backrub has a fair market value, after all.

The tax code is a mess because the problem of defining income is fundamentally unsolvable, because it starts with a fundamentally unsolvable question--¿Where does value come from?--and then adds on top another fundamentally unsolvable classification--¿What portion of value should be taxed?

The IRS only makes things more difficult by refusing to acknowledge that the income tax is a tax on value. But it remains in denial, both in order to sound smart and for political reasons (The VAT is unpopular because Europeans do it, and the IRS doesn't want to admit that the income tax is a botched VAT). If we could use the word value, then the Amnesty-CitiMortgage conundrum is easy: the gift contribution adds a small amount of value to your life, while a $1,000 mortgage payment adds $1,000 in value. As the IRS's service representatives demonstrated, when you can't use the V word, you're stuck making up ad hoc stories about rental expenses and constructive receipt that don't quite work.

Solutions

Another, much more effective alternative: the consumption tax. It has some æsthetic appeal: we aren't bothered by the rich for making lots of money, we're bothered by how they buy big yachts and overpriced shoes. We want to encourage savings, which is why there are so many exceptions in the income tax for savings like 401(k) plans (i.e., retirment plans conforming with 26 CFR 1.401(k).). By the simplified equation Income - Savings = Consumption, the current tax code makes you calculate income--already hard, as above--and then excruciatingly subtract every element that could somehow count as savings. The consumption tax just has you total up consumption, by billing you at point of sale like any other sales tax.

The consumption tax also reconciles the Amnesty-CitiMortgage problem. First, we would decide whether either of the above counts as consumption or not right off the bat. Instead of the situation we have now, where we tax your income and then if you contribute to Amnesty then you get to deduct that portion of income (under a number of caveats), you would instead pay tax when you give money to CitiMortgage (depending on how you wanna count buying a house), and then not pay tax when giving to Amnesty.

Second, all those issues about who who is the final recipient just evaporate: tax is paid by the person making the outlay. Oprah pays taxes on the car when she bought them. There's the social problem of whether the tenants should pay the landlord's taxes, but that isn't complicated by the accounting issues.

Sure, there are still questions of how one defines consumption--like whether your house is consumption or an investment. But once we have an arbitrary decision on that question, the accounting is much easier.

We like progressive taxes, where poor folk pay a lower percentage than rich folk. There's intuition behind this, that economists can readily formalize: a dollar to a poor person that buys a loaf of bread is worth much more--has much higher value--than a dollar to a rich kid who uses it to buy a portion of jewellery or other useless items. In formal terms, there is a diminishing marginal value to income, which is evidenced by risk-averse behavior, especially as shown by those who are well past the survival level. A progressive tax on cash terms approximates a flat tax on value terms. McCaffery proposes fixing this via a refund on the taxes paid on the first $20,000 in spending. If the tax rate is 5%, everybody just gets handed $1,000. Those who consumed less than $20,000 are now making a small profit on the tax system, and thus pay a negative rate; those who spent $20,000 last year are paying 0% taxes, and the yacht buyers are paying 4.999%.

So, the consumption tax really is a simplification of the tax scheme, because it takes taxes at the door, replacing the problem of defining income minus savings with the simpler problem of defining cash purchases for consumption. It encourages savings and discourages yacht purchasing. The only problem is that there are several industries built from the ground up around avoiding income taxes. Lindblom explains in his Market as Prison essay Jstor link that the market is the perfect system for preventing change, because no matter the change, somebody will resist it because they are optimized to make money the way things are now. So when you have a massive system like the income tax, no matter how fundamentally screwed up it is, there will always be a chorus of defenders.

So we're stuck with the tax law we have, that attempts to codify the answer to two impossible-to-answer questions. We'll get tax laws that simplify the situation a bit, and tax laws that complicate it a bit, but as long as the law requires a definition of value and a definition of what value is to be taxed or untaxed, the law will remain a mess.

@article{lindblom:prison,
title = "The Market as Prison",
author = "Charles E Lindblom",
journal ="The Journal of Politics",
volume= 44, number= 2, month =may,
year= 1982, pages= "324-336" }

@book{mccaffery:tax,
author = "Edward J McCaffery",
title = "Fair not Flat: How to Make the Tax System Better and Simpler",
year = 2002,
publisher = "University of Chicago Press" }

Relevant previous entries:
The one about value, accounting, and economics

[PDF version]

First, you'll have to do some research, because it's hard to find out what's in those little pills to begin with, because the label on your prescription of Drugacil won't tell you what's in it. You'll probably have to ask your favorite search engine for Drugacil prescribing information. On the first or second page, you'll find the list of inactive ingredients.

There are two that are very common: gelatin (the coating of gel-caps), and magnesium stearate (the base for Smarties-type pills). Both can be made from either animal or vegetable.

Next step: call the manufacturer, and ask them the source of these items. If you actually try this with a specific drug, please leave your results in the comments, as a favor to future search engine users.

In my own haphazard research, responses about ingredient queries have included pig fat, tallow from cow fat, and our euphemism for the day: “bovine material”.

Pig fat is an especially good choice, because it offends a maximal number of people. Vegetarians, Muslims, Buddhists, Jews--close to every religion that is not Christianity--forbids eating pigs.

Now, if you take a quick walk down the non-drug aisles of your supermarket, you'll find little Ks and CrCs and circle-Us on the great majority of products, indicating that the manufacturer has made a sincere effort to ensure that the product is kosher. The reasoning is econ 101: ethics are a valuable facet of a consumer good, and people will pay more for a good they consider to be ethical, clean, or any of a number of other interrelated concepts. At the extreme, there are a host of people (many of whom are not Jews) who simply will not purchase an item that is not kosher--for those of you in micro class, they have lexicographic preferences with ethics as the leading term.

Why are drugs different?

Figure One: An extensive form game: DrugCo versus the consumer.

We'll start the figure, which is the (extensive form) game played by the drug company and the consumer. The drug company moves first, and determines whether to mix in a bit of pig's blood with every batch of drugs or to use a veg source. Then, the consumer chooses to buy or not buy the drug. Regardless of the drug company choice, the consumer needs the drug to lead a healthy life, so in both the left and right cases, the consumer will choose to consume the drug, although in the case where it contains pig's blood, the consumer will be miserable about it.

The drug company know this, and can therefore ignore the Don't consume choices in both branches of the tree. If I were doing this in front of an undergrad class, I'd cross out the Don't consume nodes with a marker--feel free to do the same on your monitor--leaving a simple pruned-down tree: if the drug company uses pig's blood, it saves .001 cents; if it doesn't, it loses that. So, the outcome will be that DrugCo puts pig's blood in its drugs despite the consumer's preferences, and the consumer buys.

There are several reasons why we get this outcome with drugs but not food. First, the cost of compromising one's ethics is fixed--let us call it -100 utils, but the value of consuming a drug is much higher than for food. Maybe a cupcake is worth 5 utils, but being free from physical suffering is worth 1,000. Micro students, you can just say that drug demand is inelastic.

Two counterpoints to this. First, most drugs are not a matter of life or death. What is it worth to take a drug that allows you to ignore a certain pain, to be less depressed, or to go to dialysis fewer times a year? Such things may or may not be worth more than 100 utils.

Second, in the case of an inelastic life-or-death choice, forcing a person into the tradeoff is insidious. DrugCo is telling the consumer you must choose between your ethics or religion, or your life. We don't even need to drag out Goodwin's law on this one. Every religion I know of has stories of past persecutions that fall along exactly this line: in the land of Wherever, the Powers that Be hated our people, and persecuted them; our people had to choose between continuing to practice our faith, or be killed. Some chose to die, others suffered the humiliation and survived. But regardless, the people who forced us into making the choice were evil.

DrugCo is different only in that its actions are ostensibly not out of spite, just disinterest. But the lack of interest in some ways makes it even more insidious. When persecutors force a person to choose between his or her beliefs and life, at least the persecutors were doing it out of equal passion and conviction. The drug companies are doing it to save fractions of a cent per pill. If our ethical beliefs are based on the goal of avoiding things that cause significant pain upon others for minimal gain, DrugCo's forcing a person into the your-beliefs-or-your-life choice is worse than that of persecutors of old, because the perceived gain is so much smaller.

The second reason we see drugs that tread over ethical beliefs, while food does not, is that medicine is given a semi-sacred status: ethics is expected to take a backseat. Jewish law dictates that it is against the law to comply with the law if it risks one's health. Other traditions have similar medical exemptions.

But the medical exemption is malleable. It's downright touching to see people with ambulatory disabilities at a religious service that requires frequent standing and sitting: many will try their darndest to stand. If you're not one for religious services, you see the same sort of dedication at sporting events at the singing of the national anthem. If a drug leads to increased comfort but is not life-saving, does the medical exemption to a religion apply? Some stand at the service and some don't; some fast on some days and some don't; some feel that they should take their synthetic heroin despite its bovine materials and others do without.

Here in the modern USA, the medical exemption to ethical restrictions applies to an even greater extent, because of how hopelessly lacking the USA is in ethical restrictions. Regardless of whether the basic thesis is true, many have claimed that medicine has replaced religion in modern societies, and there's certainly a good deal of evidence indicating as much.

The odds are very good that DrugCo's rank and file were raised in a Christian tradition. Funny thing about Christianity: it is the only religion I can think of that doesn't have dietary restrictions Your Jews, Hindus, Buddhists, Muslims, and Voodooists all recognize the power of consumption, and thus place ethics-based restrictions upon what a person may consume. Sorry, I don't count the rule of eating fish on Friday. I don't think even the Christians who observe this see it as much more than custom.

All food restrictions that I know of are centered around consuming of animals, but beyond that, there's no real pattern. For example, as far as I understand it, food can not be both kosher and halal at the same time: to be halal, the slaughterer must speak the Name of God when killing the animal; to be kosher, the slaughterer must be an appropriately-trained Jew, and Jewish law forbids speaking the Name of God. Meanwhile, Sihks feel that both kosher and halal slaughering techniques are inhumane, and therefore don't touch kosher or halal meats. Some folks (including some percentage of Christians) consider alcohol consumption to be unethical, but others (including some percentage of Christians) have laws that alcohol must be consumed on some occasions.

But back my overgeneralizations: I think that the average US citizen has difficulty comprehending the idea of the dietary restrictions common to most of the world's population, and tend to discount them; this is partly an offshoot of how the Christian tradition is the only one with no dietary restrictions. It's hard to explain any ethical restriction to somebody who doesn't buy the basic premise that some sort of action should be grounded in ethics. People who don't comprehend religious observance regarding food will advocate still more strongly that medical need--or even convenience--trumps religious dicta.

The doctor who originally prescribed to me a drug made from bovine materials, the esteemed Dr. LZ of Baltimore, MD, has a South Asian background, and is herself vegetarian. Hi, Dr. Z! Thanks for reading! However, she had put limited thought into the source of gelatin and magnesium stearate, being that she'd been distracted by things like memorizing the Latin name for every part of the human body. I asked her whether she would inform other vegetarian patients of the fact that their drugs are not vegetarian, and she said she wouldn't: their health is more important.

Whether Dr. Z is doing the Right Thing is an unanswerable question, rooted in another unanswerable question: is an action unethical if it is committed with complete ignorance of its lack of ethics? There's a cliché about how ignorance of the law is no excuse under the law, but some religions forgive sins made out of ignorance--but some don't. I'm not even going to pretend to have an answer here.

But Dr. Z is clearly demonstrating a belief in the medical exemption to ethics. It makes sense that she'd place focus and priority on the medical, because she chose medicine for her life's work, and spent several years memorizing the Latin names for every part of the body. The same will hold for most of the decisionmakers at DrugCo. Getting back to the question of why food manufacturers care about kosher certification and drug makers don't, the consumer choosing a food is basically doing it alone; the consumer choosing a drug has a legion of medical authorities inserting their opinions. This is how it should be, because drug choice involve specialized knowledge and has potential consequences that are not relevant to the choice of cake batter. But it is hard to unbundle the amoral factual information with opinion on the medical exemption question. Hey, at the extreme, Christian Scientists are often required by law to accept a medical exemption to their religious beliefs.

Having an agent makes feedback difficult. The cake batter company can directly ask consumers--the people holding wallets--what their preferences are regarding ingredients. But DrugCo does not care about what consumers want: they care about what doctors choose for their patients. The game regarding cake batter is an infinite back-and-forth, where the company chooses its ingredients, consumers choose to buy or not buy, the company responds to that choice, et cetera. For drugs, the loop is one way: DrugCo chooses its ingredients, and gets only limited and filtered feedback regarding whether the consumer at the other end is happy or not.

In this respect, those annoying consumer-targeted ads about how people should ask their doctor for Pillizene are good, because it indicates that DrugCo wants patients as well as doctors to like the drug.

But it is of limited good news, because of the information problem. The US Food and Drug Administration requires that consumers be informed of what's in their food in a clear, standardized label, but has no such requirements at all for what's in their drugs or booze. I have no idea how the FDA reconciles the several standards, but that's the law, and it's a simple fact that it is much more difficult to ascertain whether a drug follows a person's dietary restrictions than a food.

And, of course, DrugCo wants it that way, because knowledge in the hands of consumers can only reduce demand. So does everybody else: those labels are a constant battle between information revelation and information hiding. E.g., the European Union has the amusing compromise that food manufacturers must list all ingredients, but may do so in an encoded form.

Summary paragraph. I think it is unethical that drug companies are putting boiled pig bones in their drugs: it gains them little benefit at the cost of distress for those with certain ethical beliefs, like adherents to almost every known religion. Some of our most powerful stories, both fiction and real human history, are about people who force others to choose between their religion and their life--and the person forcing the choice is never cast as very nice.

On a less subjective note, there are systematic reasons for why this is the case with drugs, but not with food. People are expected to compromise their beliefs for the sake of improved health. Information about how drugs are made is kept close to DrugCo's chest, while federal law requires that other manufacturers of comestibles reveal such information. Oh, and there's room on the market for both kosher and non-kosher cake batter, but the patent literature indicates that it is good and beneficial that drug manufacturers are typically monopolists, who can present a single take-it-or-leave-it option for drugs people may be dependent on to live. All of the above leads to a lack of the sort of feedback other healthy markets rely upon when they choose how to make products that make consumers happy. As long as a drug company knows that it can force consumers to eat boiled pig bones (and that doctors will back them up on it), it will continue to source ingredients from boiled pig bones.

[PDF version]

There are systematic reasons why health care in the USA, especially for the not-wealthy, is a lottery.

The system used to be built on insurance, which is a simple concept: if only 14.6 out of every 100,000 people is going to get hit by a car and thus potentially incur a hundred thousand dollars in medical bills, it is an entirely reasonable risk-sharing scheme for all 100,000 to pool their funds so the unlucky few can pay their bills. You don't need me to explain the concept of insurance.

But pretty much everybody is going to get old. In fact, those .015% who get hit by cars are doing us all a favor by dying young. The other 99.985% of the pool is going to grow old and eventually suffer any of the usual chronic conditions that your grandmother talks about every time you call her, and those conditions are pricey no matter what.

What does insurance mean in a world where almost everybody needs the big money to pay the bills? If everybody puts in $10,000 and has a 99% chance of needing $100,000, the books don't balance.

That gets the ball rolling, but for many reasons, health insurance is no longer about catastrophic events that incur massive bills, but about general access to the health care system.

In our world, it no longer makes sense to even call the insurance company an insurer, because everybody is making claims, and either those claims are more than what you paid in, or you're a sucker and should be taking better care of your kids. The insurer is simply a financial intermediary: you send money to them every month, they throw it all in a giant salad bowl, and then they pull money out of the salad bowl to pay doctors and hospitals.

On the upbeat side, if we think that people are too irresponsible to save for their later health needs, then a lifetime of insurance is a form of payment smoothing. And hey, sometimes people do suffer catastrophic medical events that really do look a lot like what insurance is meant to cover.

Also, the insurers do provide other services beside time and risk smoothing, such as collective bargaining. For every medical procedure, there is a limit that the insurance company will pay for that procedure. The larger insurance companies can keep that low thanks to the bulk of customers that they carry.

On the other hand, health insurers have proven to be pretty incompetent at the basic tasks of financial intermediation. I've got a pile over there of eleven separately-mailed statements from my insurance company regarding a surgery from a few months ago--plus the bills from the hospital, the doctor, the anæsthesiologist, and I'm afraid to look to check who else. If you've been to a hospital lately, then you no doubt have your own folder somewhere with a title like medical bills that I don't quite understand and I hope will go away. The insurance companies--i.e., the financial intermediaries--are seriously dropping the ball here, because simplification of complex information is up there among the main roles of an intermediary, and they are clearly not succeeding at that. According to one California study, 20% of health care spending goes towards billing and insurance paperwork.

The agency problem

The payer and the consumer are distinct entities, which is a simple recipe for overcharging, and it is inherent to the current structure of health insurance. You're a hospital or drug company, and most of your customers have health insurance. How do you set prices? You couldn't care less what the individual can pay, because they couldn't care less: they've got their fixed copayment and don't even know the cost beyond that. The insurance company, however, has a balance sheet of a few billion dollars, and has little control over whether a customer chooses to receive care or not. So you price to the insurance company, not the consumer.

This also leads to overconsumption of care. Overuse of fire insurance isn't a real problem, because nobody but a few fraudsters are going out of their way to burn down their homes. Seriously, moral hazard is not a major issue for catastrophic insurance, and I think it's silly that econ textbooks spend so much time on it. But for health care, we can't define when a treatment is for a catastrophic, unavoidable medical ailment and when it's an elective by the consumer. Some people ignore that little cough as just part of life, and some people make frequent visits and persist through increasingly expensive treatments trying to track down its cause. We're stuck with people who insist on the $5,000 MRI when two minutes with a stethoscope will do, because those people will see a bill for a thirty dollar copayment either way.

Further, there is an externality to pricing for the insurer rather than the consumer: because hospitals are pricing to insurance companies, those without insurance must pay insurance company prices for their health care. I.e., once most people have an intermediary paying their bills, those who don't can't keep up. To a great extent, this is the crux of the current mess, why you can't really step foot in a doctor's office without insurance anymore, and why we need to care that (as of last year) 15% of the US population doesn't have health insurance.

Incomplete markets, incomplete information

Economists describe this situation as the incomplete market problem. For a complex good like a telephone service, a mutual fund, or an insurance plan, there are a thousand variables that could go different ways, but only a handful of packages to choose from. That means that you have to accept a trade-off where a few hundred variables will be set the wrong way for your tastes no matter what you choose. There are various proofs about how the usual market-optimality can fail in an incomplete market.

Further, all contracts are incomplete, meaning that if you ask sufficiently detailed questions, you'll eventually find something that the contract doesn't mention. In the case of health insurance, you hit against that level of incomplete information very early. Say that you have a persistent goiter, and so seek a goiter-friendly intermediary. The glossy brochures don't say anything helpful, so you call the company:

You: I have a goiter, and may need surgery. Do you cover that?
Them: What's the six-digit procedure code for that?
You: How the expletive am I supposed to know that?
Them: Well, we have a list of six-digit procedure codes for every medical procedure. If you give me a procedure code, I can tell you how much you might have to pay.
You: Can I see that listing somewhere?
Them: No. We don't release that to consumers.
You: Why do you say you could tell me how much I might have to pay?
Them: We constantly revise the payment schedule, so any coverage I tell you about right now could be changed or eliminated tomorrow.

Outside of a broad notion of some plans offering better or lesser coverage, it's a total crapshoot as to whether a given plan covers what you need as an individual with a unique health situation.

Again, for any other financial intermediary this would be entirely unacceptable, but it is the norm in health care, to the point that there are zero health care providers who do any better. The mortgage market is a good example where things work, because a mortgage is a set of building blocks that fit together in standardized ways. The amortization schedule is not up for debate: it's the same for everybody, which is good because most people don't even know what an amortization schedule is, let alone how to compare several of them. If you get an adjustable-rate mortgage, there are about five variables that change from vendor to vendor and the rest is fixed. This is a trade-off between having complete markets and having transparency, and I would say a successful one, because a normal human with any of several dozen human-friendly mortgage calculators can process the few variables as chosen by various vendors and make an informed choice. There are no friendly cross-vendor health insurance calculators, because every step of the pricing the system is so far from transparent.

For health insurance, you are alreadly guaranteed a limited range of choices because of the complexity of the system, but on top of that, pricing so lacks transparency and is so un-standardized that the concept of informed consumer choice among insurance plans is basically a myth.

The summary so far: (1) Health insurance is no longer about catastrophic events that happen to 0.015% of us. Thanks to the medical advances that let us live to a hundred and thanks to #2 and #3 below, a few hospital visits over what are now routine problems are more than what many people can afford. (2) Requiring an intermediary for all health care transactions induces a disconnect between the consumer and the payer, which creates an arbitrary mess with regards to who's paying what. (3) The intermediaries have demonstrated no real interest in producing transparency, so #2 aside, it is impossible to determine what a procedure will cost after the intermediary runs its internal pricing schemes.

I won't address #1 much below; the gist is that yes, health care is fundamentally expensive, and that won't change any time soon. But #2 and #3 create a disconnect between consumer and prices, that allows providers to raise prices almost without limit, and that's the sort of market failure that economists can readily address.

No intermediary

The goal of the HSA is to eliminate the intermediary (problem #2), and its users do wind up writing more personal checks. But it isn't any revolution, because the HSA still needs to be backed by an insurer who negotiates the prices you wind up paying, and who provides the catastrophic insurance for the day you get cancer and your capped-at-$2,850/year health savings account is exhausted after the third hospital visit.

In short, the HSA doesn't eliminate the intermediary, and that intermediary still goes through its still-not-transparent process of determining the prices you pay. So the HSA makes the consumer the payer in the sense of writing the checks (problem #2), but not in the sense of making the pricing system any more transparent (problem #3).

Single payer

For health care, the U.S. government is already the financial intermediary of last resort, because the system is committed to helping people who run out of money. Sorry, neoclassicists, but that's just the way it's gonna be in a reasonably well-to-do Democracy. There are laws that emergency rooms can not turn people away for lack of funds, but beyond the imminent-death situations, public health is a legitimate interest of government. So government is already a financial intermediary--a central one--and always will be. The question of single-payer health care is only of extent: should government provide intermediary services that are sufficiently complete that the average middle-class person would want to use that service, or should it remain the intermediary of last resort?

In some ways, government can be better at being an intermediary than private companies. First, having a single intermediary means that it has more negotiating power than multiple intermediaries.

But more to the point of this essay, the U.S. government is much better at solving the transparency problem than most private businesses. I know you're not used to statements that begin government is better than business at..., but businesses are in the habit of providing exactly as much information is legally required of them and no more, while government agencies that exist only to provide information and make allegedly objective decisions realize that their survival depends on the volume of information they can put out. Even the most hard-nosed neoclassicists acknowledge that government bureaucrats are very good at maximizing their goals while minimizing their costs--the problem with a bureaucracy is just in making sure their goals are what they should be. But transparency is consistently one of those goals throughout U.S. government.

You know how much people complained about the new Medicare drug pricing, and how it's too confusing? That debate was fabulous because it actually happened. We simply don't have enough information to have a similar debate for private insurance pricing, and even if we did, there's no reason to think that the private insurers would change anything after receiving feedback about a lack of transparency. Try sending a Freedom of Information Act request to a private insurer.

Also, it would bring us all great joy to see the Paperwork Reduction Act applied to the medical system. Private insurance companies do nothing but shuffle papers, they've have had a few decades to smooth out kinks in the paperwork system, and the above study is still finding 20% of medical costs wasted on filing papers. For comparison, the IRS, everybody's favorite bureaucracy that does nothing but shuffle papers, spent a little over 10% of its budget on processing forms: out of a $10.8 billion budget, $1.2 billion is spent on processing to take in $2,000 billion in taxes.

Because transparency has to be created before consumers can truly shop and choose, a more transparent system gives us good odds of eliminating the intermediary entirely for many situations. We'd have a public schedule of fees for procedures, and because government agencies are skinflints and have high bargaining power, the fees for many procedures would be down to a level where human beings can pay out of pocket, so after doing its bargaining, government may be able to step aside entirely and let consumers write the checks and decide what services to receive. That is, government intervention can bring us a long way to a functioning health care market.

This wouldn't eliminate private insurance. In countries that have a national health care system, those who want better treatment can pay extra for it on top of the well-established baseline payout, and there's no reason why you couldn't hire an insurance company to pay your well-established out-of-pocket payments for you. The point is not to eliminate different levels of service or catastrophic insurance, but to establish a baseline for pricing that is transparent and allows those without insurance or access to preferential treatment to still get basic care as they grow old and ill.

Could we regulate transparency into the private health care intermediaries? Maybe; we did it with mortgages. But the human body is much more complex than a loan, and the problem is not in establishing pricing guidelines, but the thousand-page list of prices itself. Why not just standardize the price list and be over with it? There's little difference between having a transparent price list administered by government or by a private corporation. Given the extent to which private companies have mucked up the job of being a financial intermediary to date, and the extent to which this is the one thing government is competent with, the usual we should default to private provision wherever physically possible arguments just aren't holding water here.

Summary paragraph

Conversely, governments are good at being intermediaries: they can collectively bargain like nobody else, those in the developed Democracies have a strong history of striving toward transparency, and those two points together already bring us a long way toward having a health care system where consumers can select their care based on the checks they will be writing--a real health care market.

[PDF version]

Dear reader, I have no idea who you are or what your financial situation may be, but let me share some simplified points of financial planning, that you may find useful on the off chance that you find yourself with a few bucks to invest.

The market

If that advice is too simple for ya, let me kick it up a level of complexity: put your expendable income into the S&P 500. It's a decent proxy for the entire stock market, and many a study has shown that on average, attempts to beat the market fall behind the market. That's because the sum of all these specialized strategies are the market--minus management bonuses and fees.

A pal beat my don't-think-about-it strategy via an “emerging markets” fund that leaves the USA entirely and invested in China and India. So bear in mind that when I say the S&P is the market, I mean one market in particular, and you may decide to instead put your cash in a worldwide fund or a fund focusing on one not-USA market. But unless you really know what you're doing, you're better off investing in a market-wide investment rather than one company.

How does investing in the S&P 500 compare with putting it all on red? Here's a list of numbers that I cut and pasted from Wikipedia:

So during this period, the S& P 500's annual returns averaged 12%, with large variance, and some years of loss.

You can buy the S&P 500 in a few ways. Lots of companies provide a mutual fund keyed to it, or keyed to some similarly broad list of stocks. There is a corporation, stock symbol SPY (pronounced `spiders'), whose sole purpose is to track the S&P 500 as closely as possible, and thus act as a single-stock equivalent of the S&P 500.

Debt

If you are expecting that the stock markets of the world are going to fail you in the near future, then a better alternative is to pay down your debts.

It's safe to assume that you, as a member of society, have some sort of debt. A regular reader, Ms BCOH of Baltimore, MD, would like you to know that she has no debt of any sort. U.S. consumer credit (every type of loan that isn't a mortgage, including credit cards, student loans, cars) totals about $2.5 trillion. For comparison, the total of global wealth is $97.9 trillion. I almost wrote an entire blog post on the question of what a total global wealth statistic means, and the implications for our concept of value and its change over time. But I scrapped it and leave it as an exercise for the reader.

From an accounting perspective, paying a debt has exactly the same effect as investing in a fixed-rate investment. If you have a loan for $x that bills you 5% interest, then every year you're flushing $ x×5% down the toilet. By paying off some portion of that, then you're holding on to a few dollars instead of sending them out to the ocean.

I get the impression that people generally understand this with credit card debt, and are very clear that paying off any balance will save them money. For other types of loans, including student loans and mortgages, many folks seem to take the monthly amount flushed as fixed. It ain't.

For student loans, if it's federally-backed--and most of them still are (PDF, thanks to Ms ABR of DC)--then there can be no prepayment penalty. For mortgages, the general standard is that you can pay off the mortgage principal early (with no fees); relatively shady dealers may charge you for the privilege.

Interest is always charged on the remaining principal for the loan, whatever that may be. So if you pay off D dollars on a loan with n% interest, then you will definitely be flushing D×n% less interest down the toilet every year, but how that looks depends on the type of loan. An amortized payment scheme has a fixed monthly payment, but the percentage that repays the loan and the percentage that's flushed down the interest toilet changes every month; if you make an early payment then the percentage that you don't lose goes down accordingly. Other payment schemes may also find ways to keep your payments constant, like just reducing the number of payments. But in all cases, when you sit down to do the math, you'll find that your overall interest payments are reducing by D×n% dollars a year.

I wrote a mortgage calculator to test the change given all sorts of odd strategies. This was fun because it always came out to a savings of D×n% dollars a year, no matter what trickery I tried in the payment scheme. Those situations where ten different things all turn out to be identical have to be the funnest part of mathematics.

So the payment is very much an investment in the sense that it will pay off whatever percent every year, but you may not actually receive (or fail to lose) that money until the mortgage comes to an end. As with any long-term investment, that means you're long-term better off, but your payments and cash on hand today may not change.

You have to read the fine print on your own debt (or give your loan sharks a call), but it's the norm that you can make an early payment of principal and save the corresponding interest. If you have money to invest and believe the stock market will be rickety in the near future, then that's an eminently sensible option.

If you think the stock market will have returns greater than 12%, and your debt has an interest rate under 12%, then the advice is the opposite of the above: don't pay your debt. Say you've got $100 to invest, a debt at 7%, and you believe the S&P 500 will return 12% in the near future. Then your options are to pay your debt, which means you don't lose $7 and are thus $7 up from the do-nothing option of just carrying debt and stuffing the money in your bra; or to invest the money, which means you lose $7 in interest, but make $12 from stocks, so you're $12 up from the do-nothing option.

Carrying debt to invest it elsewhere requires the businesslike attitude that you've gotta spend money to make money, and that there's nothing wrong with debt. There's just a bunch of accounts, some of which have negative balances and some of which have positive. In fact, if a business isn't in debt, then its accountants are probably doing something wrong.

We humans are uncomfortable with debt, and most of us feel awkward paying to borrow money so we can invest it elsewhere. I wrote this whole piece because many of you won't do the rational accountant's debt-cost versus alternative-return comparison--your student loan is oppressive, and you want it dead. Emotions are worth something, and for many, passing on a few hundred bucks a year from playing the market is worth an early freedom from debt. And hey, if you think most of the equity alternatives are going to tank in the near future, then you're not forgoing anything at all.