Friday, March 31, 2017

The Economics of Careless Employees and Misplaced Orders

I witnessed a scene recently that made me uncomfortable, but it inspired quite a lot of thought. Here’s what happened. I ordered sushi at a local place and went to pick it up. When I got my order, the girl who handed it to me called off the items I had ordered. The last item was “tekka-don”, tuna over rice. I had actually ordered “sake-don”, salmon over rice, and I said so. The owner, who is also the sushi chef, looked annoyed and started making my order. The girl apologized, “I’m sorry.” The owners said, “No ‘sorry.’ You pay.” As in, he was going to make her pay for the wrong order, presumably unless someone else ordered it in the next hour or so. It seemed really unfair. It was certainly uncomfortable and cast a pall over the entire restaurant.

So I felt really sorry for this poor girl, who made an honest mistake. At first I felt bad and thought, geez, I should just pay for the tekka don. But I remembered specifying over the phone, “Sake-don. It’s salmon over rice.” The two sound similar over the phone, especially if you are working in a busy kitchen. That’s why I explained what the item actually was after saying its name. There’s quite a lot of employee turnover at this place, and I’ve had to explain my order to a lot of new employees. It wasn’t my fault. The girl really did screw up because she wasn't being very attentive. Still, I thought the owner, not the employee, should eat the cost of the occasional misheard order.

Then I thought about all those stupid “outrage” stories that show up on my Facebook feed, where some supposed injustice happens over a trivial infraction. If you dig into these stories, you often find that the infraction that triggered the outrageous response was just the straw that broke the camel’s back. In other words, maybe this was the third or fourth wrong order. Sushi is expensive. Time spent wasted on a $15 menu item is time not spent making another $15 menu item. That’s lost revenue. This guy is always moving when I’m there to pick up my order, so wasting his time is a big deal. Plus there is the cost of the fish that gets wasted. (Economics quiz: Am I double-counting here to add the lost revenue to the wasted fish?) A sushi chef with employees has to somehow make sure they are making as few mistakes as possible. Sometimes that means being very blunt and punitive with employees. They are handling valuable merchandise, so they need to show appropriate care.

I doubt that he ever charged her anyway. Maybe he said it to scare her, or maybe he intended to make her pay but thought the better of it. I’m guessing she got to the end of her shift and just left. He didn’t actually pull her aside and ring her up. Or maybe he did. Or maybe he actually made some kind of deduction on her pay stub. But this potentially runs afoul of some sort of labor law, and maybe he thought the better of creating a paper trail proving he violated such a law. At any rate, I think someone in his situation can’t just say, “Oh, that’s okay” when a careless employee costs him $15. He has to make sure that those correctable errors get corrected, as much as is feasible. She’s still working there, and she double-checks my order every time now. As unfair and humiliating as the treatment seemed, she decided to keep her job. Whatever "mistreatment" she had to endure, she apparently decided that the job was worth it.

Is it even legal to charge an employee for a misplaced order? Should it be? Shouldn’t I, as a libertarian, oppose any such labor laws restricting this practice? Is there an implied contract between employer and employee that forbids such a punishment? What is the “common law” that rules here? If she were to sue over the violation of such an implied contract, how would that case be adjudicated? And is the existing common law correct? I don’t know the answers to any of the legal questions, but these were some stray thoughts that came into my head. If you came here looking for moral clarity, I don’t have any to offer. But I’m quite certain that my initial reaction of “That’s completely unfair!” was mistaken. Or at the very least, it was far too simple. 

Health Insurance Should Be More Like Auto and Life Insurance

Health insurance would be a hell of a lot more affordable and the market would be a lot more competitive if its policies had some features that are common to auto and life insurance.

Longer Policy Terms

I have a life insurance policy whose term is measured in decades. It will pay my wife about three years’ worth of my annual salary if I die during that term. They cannot cancel the policy or change my premiums if my health status changes and the likelihood of a payout suddenly increases dramatically. My premium is locked in for the term. This works fine, because the premium already has integrated into it the chance that I will get sicker and die at some point during the policy term. Since my policy is priced based on my all-cause mortality risk at the beginning of the term, if I suddenly get cancer my insurer says, “It’s fine, I planned for this. You’re covered, buddy!” They might secretly wish I would cancel my policy or forget to collect, but the only reason they have customers in the first place is that they actually pay out as promised when their policyholders die. They certainly don’t want a reputation of weaseling out of their contractual obligations.

We’re talking about an insurance policy here with a huge payout (six figures), a very long policy term, and premiums at just over $20 per pay period. In other words, it costs me just over $500 annually, easily affordable for a middle class family. A catastrophic health plan that does the same would probably have a higher frequency (major health episodes are considerably more frequent than actual deaths) but lower severity (the average surgery is probably closer to four or five figures, not six). The premium, which is based on the expected cost (frequency of a claim x average severity of a claim, plus operational expenses), could be higher or lower than for a life policy, but should be in a similar range. The example of life insurance suggests that catastrophic health insurance with long policy terms should be affordable. Such insurance policies would not be budget-straining disasters like existing health “insurance” policies, which cover a lot of elective and routine expenses.

Liabilities Don’t Transfer To A New Insurance Policy

If I maim someone with my car today, my current auto insurance policy owns that liability. If the guy I maimed has a series of surgeries related to his injuries for the next ten years, my insurer still owns that liability forever (at least until his expenses exceeds the limits of liability on my auto policy). If I shop around next year and switch insurance companies, that liability does not follow me. My new policy will cover future maimings that occur during the policy period, but not past maimings. I will be charged slightly more because I now have a bad driving history, which is predictive of future accidents. But it will be nowhere near the cost of paying my victim’s medical bills. This is how health insurance should work. It’s absolutely crazy that it doesn’t actually work this way. If I get a diagnosis for a chronic disease or a specialist decides I need an expensive surgery, the liability for the related costs follow me if I switch to anther insurer next year. If people are dragging their existing liabilities around with them, insurers will be hesitant about insuring them and try to find any reason to say “No.” The adverse selection problem looms large in the health insurance market not because of some inherent market failure unique to health insurance, but because liabilities that have already been incurred follow people to their new insurer.

If you have very long-term and hard-to-cancel policies, this should rarely be a problem. Changing health insurers should be a once-or-twice-in-a-lifetime event, not an annual shopping experience. But when it does happen, your new insurer is only insuring for new changes to your health status, unrelated to past diagnoses. Your previous insurer owns the liability for every expense already incurred.*

Once again, this kind of policy is affordable for most households. I pay around $8 per pay-period for the medical liability portion of my auto insurance (slightly more for the other coverages I get), just shy of $200 per year.  A catastrophic health insurance policy would likely be higher in claims frequency, so the premium would surely be higher than this. But so what? Conservatively multiply by ten and you still get something that’s quite a bit more affordable than the average existing health policy.

I discuss this topic in greater detail here.  

Deductibles and Coverage Exclusions

Health “insurance” policies have been trending toward higher deductibles in recent years, so this is something that’s actually working right at the moment. A deductible is basically an announcement to your insurer that “I’m not going to bug you for the small stuff. I’m only going to use my policy if something big and financially destructive happens.” Coverage exclusions are another way of doing this, but unfortunately these are explicitly illegal in the health insurance market. You can’t buy a policy that excludes, say, routine doctors checkups, birth and neonatal care, or inexpensive medications (although a high enough deductible can act as a coverage exclusion for some of these). There are laws that mandate “You must buy this coverage if you buy health insurance; you may not opt out.” You should be able to buy a plan that excludes everything that is routine, low-cost, or elective, but still promises to pay for large bank-breaking health events. If voters want to subsidize childbirth or prescription purchases or some other form of non-catastrophic health care, they should do it on budget with actual tax dollars and an explicit government program. They shouldn’t do it off-budget in a round-about way by hobbling health insurance markets.**

Residual Markets

Auto insurance premiums are based on the risk being insured. If you are a young male with a DUI and several recent accidents, you will pay a great deal more than a middle aged woman with a great driving record. Risk is quantified and priced. There are a few people for whom the expected cost of an auto policy is unaffordable. A bad combination of factors can put annual premiums in the $5,000+ range. We want these people to carry liability insurance, because they are a serious risk to other drivers. But with premiums so high, we run the risk that some of them will drive without insurance and cause uninsured accidents. There are usually residual market mechanisms to handle these high-risk drivers. They are a small segment of the population. It depends on exactly how you count them, but at the very most it’s in the 10% of population range. Auto insurance is regulated separately by each state, and each state has its own mechanism for these very bad risks. Sometimes a risk is just assigned to a random insurer (assignment is based on market share) and the state says, “Charge him exactly this rate, and eat the loss if he has a claim.” Sometimes a state creates a special risk pool, and the profits or losses from the pool are shared based on market share or some special formula. The state of Maryland runs its own auto insurance company, which serves a lot of high-risk insureds. Here we have the hand of government, but it is a small addition to a private market with competitive prices and sophisticated risk-pricing. That would work just as well for a market in health insurance: allow a humming free market that will work for 90% of the population along with a tiny bit of government assistance for the very few who aren’t served well. It could involve assigning risks to random insurers, subsidizing the purchase of insurance through a general fund, creating special subsidized risk pools, or something I haven’t even thought about. There are many tools to work with here. We don’t have to hobble 90% of the private market to serve those rare exceptional people who it doesn’t work for.

Health Insurance Isn’t Special

I’m writing this post to make the point that health insurance is fixable, and the policy features that would fix it are already out there in the insurance marketplace. We already have insurance policies with extremely long terms and very large six- and seven-figure payouts. We already have insurance policies that cover medical expenses based on when the liability is incurred, rather than when the bills are paid. And it’s all pretty affordable. Both the auto and life insurance markets involve sophisticated risk-pricing. There are residual markets for extremely high risks with unaffordable premiums. We wouldn’t have the death-spirals we see in today’s health insurance pools, where adverse selection drives premiums through the roof as all the good risks leave. We wouldn’t have the issue of health insurers not wanting you as a customer. Risk pricing solves these problems.

* In property and casualty insurance, we sometimes talk about “incurred” vs “paid” claims or “accident year” vs “calendar year.” The idea is that we have a concept for when the liability arises, such as an automobile accident or a house fire; we have a separate concept for describing when the payments are made for that liability. For example, an injury was incurred in December 2010, but payments were made to cover the injured party’s surgeries in 2012, 2013, and 2015. The liability was “incurred” in “accident year” 2010. But claims were “paid” in “calendar years” 2012, 2013, and 2015. The insurer will cover those expenses regardless of which year they are paid in, even if the at-fault driver jumps to another insurer. This is a useful concept , and discussions of healthcare policy desperately need it.

**For example, a $1,000 deductible on your auto physical damage coverage means that you will pay the first $1,000 of any claim, and the insurer will pay the remainder. For all those minor scrapes and door dings that cost less than $1,000 to repair, you just eat the cost. If you hit a large animal and your car is a total loss, your insurer will pay you the value of your car minus $1,000. This allows for a huge savings in administrative costs because the insurer isn't using its claims teams to settle piddly $50 or $100 repairs. It also gets people used to paying out of pocket for the small stuff, which is a good habit.

Thursday, March 30, 2017

Existential Nihilism At Work

You’re an accomplished surgeon with a long career. Then someone published a paper proving, via randomized controlled trials and placebo surgeries, that what you’ve been doing for the past twenty years is not helpful. In fact, it’s more likely harmful.

You’re an excellent teacher beloved by the vast majority of your students. Then somebody publishes an iron-clad study showing that teacher quality does not matter to life outcomes. You could have been phoning it in the whole time and your students would have been no worse off. In fact, most of your students don’t remember a single factoid you taught them, just that you were “a pretty cool teacher.”

You've been an employee for twenty years at a government agency that rehabilitates ex-convicts after they emerge from prison. A very carefully controlled trial finds that the "rehabilitation" you've been running is completely useless and has no effect on recidivism rates or future employment or lifetime earnings or anything other measure of "successful rehabilitation."

I’m a property and casualty actuary. I run big predictive models that measure the risk of an auto policy holder, given things like age, prior accidents, credit history, etc. The statistics for this are sophisticated and always getting more sophisticated. Sometimes I’m hit with the thought that this is all a big arms race with no net social value. Sure, I convince myself, if we make the price high for high-risk people, they might forego driving altogether. If insurance pricing gets these people off the road, that’s a good thing. But it’s likely this is a small effect, or that those people just drive anyway but do so without insurance. Or here’s another justification: If we don’t price for relative risk, we can very suddenly bring on a lot of very bad risks without knowing it. Rapid growth is the biggest cause of insurer insolvencies, and an insolvency means some people don’t get the money they were promised. So maybe we’re creating net social benefit by guarding against this kind of social cost? But again I find myself saying “Meh.” If my employer were to go under, someone else would simply take their market share. At any rate a fairly crude form of predictive model could guard against this kind of insolvency risk, provided you don’t have one or two insurers who are light-years ahead of their competitors. Insurers can make their predictive analytics more and more sophisticated in order to outdo each other. In this arms race, my model identifies a population that is overcharged by the market, so my company offers them a discount and we add that population to our market share. Competitors lose. A competitor’s model identifies a risky population and surcharges them accordingly; our model fails to identify them as a high-risk population and so we take them on at a price that’s too low. We lose. Perhaps we'd all be better off if we called a cease-fire and stopped experimenting with clever ways to improve predictive analytics. Maybe all the resources that get dumped into this arms-race are a dead-weight loss from the viewpoint of society as a whole.

I worry about these kinds of things that nullify a person’s social contribution. We like to believe that we’re not just “making money,” but actually providing something of social value to the world. I don’t know a good way to guard against this. Even if you actually build something physical, it doesn’t guarantee that you’ve created real value. I imagine this exchange:

Person 1: “Look, I built a house! And an electric car!”

Person 2: “Yeah, but the house-building was based on an artificial demand created by bad macroeconomic policy. Your house sits empty. And demand for the electric car is based on a subsidy that has since expired. With the subsidy gone, we can see demand for such cars isn’t real.”

Basically, it doesn't take that many people to make all the "stuff" we have, so most of the value added comes from "services." Maybe 3% of the population grows all the food, and another 10% or so make widgets and gadgets, cars and homes. The rest of us have to find some useful way to add value to the lives of our fellow creatures. Some of these schemes really do create value, and some are nice tries but turn out to be useless in the end. Sometimes a nice try isn't wasteful. Nobody would have known it wouldn't pan out until someone tried it, right? Still, it can be maddening to think you've wasted your time, even an entire career, on such a failed project.

I don’t have any great advice or deep thoughts here, just sharing a thought that I’m guessing others have had. Try to do the best you can, and make sure you’re happy doing it. 

Coda: If this is a depressing thought, don't despair. There is low-hanging fruit. I think people have a lot of untapped opportunity to make their personal lives better. Make your spouse and children happy, do more useful stuff around the house, be pleasant to your friends and co-workers, improve your personal health, acquire healthy habits and stop the unhealthy ones, take up a hobby, etc. There is a lot of "value" to add in this much-overlooked realm. Maybe you think of all those service jobs as just bullshit make-work to occupy the 85% of us who aren't making physical stuff. That's fine. Take a job, any job, even if it's a bullshit job, and think of it as a way to finance your "real" project of creating a happy home. That's what I've told people who have hobbled their own careers because they wanted the most perfect most meaningful job in existence. I think it's probably good advice. 

People Skimp On Medicine When They Pay Out of Pocket? Good!

I’d like to see healthcare policy move in the direction where customers face a larger share of the costs of their healthcare and third-party payers a smaller share. Everyone should have catastrophic coverage to cover very expensive surgeries and diagnoses for costly long-term medical conditions, but should pay out of pocket for routine doctor’s appointments and the occasional prescription.  

Some people object to this by saying that individuals might skimp on appropriate healthcare when faced directly with the bill. I suppose the rationale goes something like: having a third party pay pre-commits the individual to fill that prescription, or make that appointment with the specialist. When they skimp, they just create larger health costs down the line. There might be some limited cases where this kind of inappropriate skimping happens, but most skimping will likely be socially optimal and will not create a much larger long-term cost. Contrary to popular belief, people just don't get any healthier when you throw lots of free medicine at them. This suggests that those extra screenings and doctor visits that people get (when their use of healthcare is subsidized by third parties) don't actually help, at least on net.

Consider an old man who, based on the best possible assessment of his health, is near the end of his life. Say he has an equal chance of dying in each of the next five years. (The probability of his death is uniformly distributed over the next five years. He expects to live another 2.5 years. Not that the details matter, but I'm specifying my exact meaning for statistics buffs.) He’s considering getting an elective hip replacement to improve his mobility for his remaining years. Alternatively, he could forego the surgery and bequeath an additional $20,000 to his children and grandchildren. I want this man to directly face the costs and benefits of this decision and choose for himself. The “third-party payments all around” people want to shield him from the cost of his surgery. In either system the dilemma is the same: use scarce resources on a man who will likely die soon or save those resources for the next generation. It’s not obvious to me that we do this man a favor by shielding him from the cost of his decision.

In fact, we can imagine a society of a million such old men in a million such roughly-similar families. It’s possible that each one strongly prefers the bequest to the surgery. Say they all value the surgery at $10,000 but value the bequest at the full $20,000. In the third-party payment world where they are shielded from the cost, they will all get the surgery (as long as their out-of-pocket costs are less than the $10,000). More plausibly, imagine a world where they all have different preferences.  Some prefer the bequest, but some prefer the surgery (valuing it at, say, $30,000). In a world of first-party payments for elective surgeries, they can all get their way.

I think there are a lot of other examples of people seeking health care where the cost exceeds the benefit, and much of this can be blamed on the third-party payer nature of our system. The mother who takes her kid to the doctor every time the kid gets a cold (perhaps insisting on antibiotics, which are useless against viruses). The terminal cancer patient who opts for extremely expensive yet speculative Hail Mary treatments at the end of his life. The family that opts for an expensive orthodic helmet for their infant, not because of medical necessity but rather because the threshold for treatment changed in recent years (but enough about me). The old man who opts for aggressive prostate cancer treatment over an elevated PSA score. There is quite a lot of waste here. It’s always hard to identify medicine that is completely useless, but many of these things have extremely low value given the cost. If the patients directly faced these costs, they’d forego a lot of unnecessary treatments. And that would be a good thing. Sure, you could find the occasional sob story of someone who has foregone a recommended cancer screening and dies because his cancer isn't treated in time. But you have to balance that with all the unnecessary anxiety for all the false positive screens, all the treatments for cancers that would never have been a problem, and all the unnecessary treatments that degrade quality of life without affecting survival rates. 

Some people muddy the waters here by talking about “affordability”. That is a different issue entirely. It’s true that some medicine is very expensive and also has a large and easily measurable benefit. For a fraction of the population, this medicine might genuinely be “unaffordable,” as in their income cannot cover the costs of these procedures no matter how they finance it. For these kinds of cases, some kind of third-party payment (be it private insurance, government insurance, or some kind of charity) will have to step in to cover the cost. But if we’re talking about most people, most of the time, facing medical decisions that arise over the course of a typical life, affordability isn’t an issue. A typical household can easily afford insurance for sudden catastrophic costs and can afford to save money over a lifetime to finance the occasional surgery or end-of-life treatment. Let’s have a market-based insurance and healthcare system that works for the typical person, and perhaps tack on government support and charity for the hard cases where “affordability” becomes an issue.

Afterthought: I think that private insurance can solve the problem of people skimping on medicine in ways that produce large long-term costs. (“I could have paid an extra $5 for the medicine that wouldn't have destroyed my liver. Now I need to shell out $100,000 for a new liver, plus related care. Oops!”) If insurance policies are written for much longer coverage terms, or are sold in combination with a life insurance policy, the company will have an incentive to keep you healthy, using the best analytics and medical information available. Such a company will shell out $100 for a doctor’s visit or routine screening if it will save more than $100 in future health costs. It is sometimes implied that the insurers have an incentive to just say “no” to any and all claims just to save money. Obviously this isn’t true if “saving” a dollar today means losing five dollars tomorrow. Private insurers with very long policy terms will pay for some preventative care, but only if it’s worth the cost. And of course people can always shell out some of their own money to augment private insurance if they want preventative care that doesn’t pay for itself. (If you want medicine that will make you even healthier than your insurer's "profit-maximizing" health level, you can still buy it.)

At any rate, let's be clear which problem we're trying to solve and adopt a policy to fix that specific problem. If it's "affordability", let's admit this is only a problem for a subset of the population and specifically address them. If it's an irrational tendency to skimp on medicine, let's subsidize specific treatments that people skimp on, or allow a more robust market for health insurance with longer policy terms so that my scenario in the previous paragraph will work. If the "problem" is that people are just uncomfortable paying out of pocket and would rather pay a larger amount through a third party, let's not placate them with public policy. If the problem is that people are "buying" too much unnecessary medicine of low value, make them face the actual price and that problem will solve itself.

Saturday, March 25, 2017

My Elevator Pitch for Drug Legalization


Okay, here’s the basic idea. We don’t need to prohibit drugs because harmful drugs have a built-in deterrent. A vast majority of people won’t use these substances regardless of their legal status because they are deterred by the built-in risks. Legal penalties obviously don't hit the people who don’t use, but are gratuitous and cruel to those individuals who use anyway and get caught. Also, many substances are straight-up benign, despite their nasty reputations. The voting public and their government representatives are very bad at discriminating dangerous from benign substances. We know that the demand for mind-altering drugs is low (at any rate saturated) because some are readily and legally available and almost nobody seems interested in using them. If drug prohibition has little or no deterrent effect, the jig is up. Legalization won’t lead to a significant increase in usage, so there is no reason not to.

Assuming you do want to deter drug use anyway, there are far more sensible ways to do it that don’t create a black market and that don’t initiate violent confrontations between law enforcement and “criminals.” A tax on drugs and user-licensing can provide a general deterrence, subsidies for treatment can help vulnerable individuals, and if necessary restrictions on advertisement and age restrictions can actually be implemented in a legal regime. Some of these options are difficult or impossible under a prohibition regime, but are obvious and easy to implement under legalization.

The most important reason to legalize drugs is the moral reason. Fundamentally, people own their bodies. The government does not own you or the contents of your brain or blood-stream and has no right to dictate their contents. The point here isn’t to play an all-powerful moral trump card, just to state where the presumption lies. You can overcome a moral presumption, even a very strong one. But you’d better have a damn good reason for it. Do you have one in this case?

Excuse me.


It might take me slightly longer than an average elevator ride to recite all this. I think that’s okay. I could instead make the pitch be any one or any two of the above three paragraphs. As the links imply, I can defend any of these statements in much greater detail. That is my preference: to anticipate objections and respond to them. That’s how my mind works. I think it's a healthy habit. But it makes concision difficult. That is my great frustration. I feel like I can fully justify this argument, but to do so takes a much longer article or lecture than any skeptic is willing to read or hear. You may read the above as three separate attempts at concision.

Tuesday, March 21, 2017

Judging the Founding Fathers

It’s fashionable to bash the founding fathers for their moral failings, and I think this is a mistake. It would be a mistake to deify these men, too, so I understand the temptation to push back against the fairy tale telling of American history. But I think it’s wrong to dismiss them as moral monsters for doing things that are now universally regarded as wrong.

The easiest criticism of the founders is that they owned slaves (many of them did, anyway). Isn’t all that talk of equality and independence hypocritical if they were a bunch of slave-owners? Of course it is, but here’s the thing: the moral march had to start somewhere. In their time, the notion that all white, land-owning men were equal was a novel idea. There had to be a first generation to reject the notion that the hereditary aristocracy were above everyone else. This had to get started somewhere, and it is completely unrealistic to expect it to have happened in one jump. We needed time to pass for sensibilities to change, for one generation’s prejudices to literally die out and be replaced by something new.

I think there are several factors that exonerate the founding fathers. For one, slavery was not yet universally regarded as wrong. It’s harder to denounce something in an environment where all your neighbors are doing it. It’s harder in that environment to even notice that something is wrong. For another thing, most of these men were deeply conflicted about the slavery issue. Jefferson and Washington owned slaves while taking strong anti-slavery stances (belatedly for Washington). Washington’s will granted freedom to all the slaves he owned, which was more than most slave-holders did (including Jefferson, who did not bequeath freedom to his slaves after his own death). For moral change to happen, the first step was for the people taking part in a great evil to feel deeply conflicted about it. Clearly, from the letters and diary entries we have, many of these men were so conflicted. Finally, how should I say this, “One war at a time, fellas.” It would have been hard, perhaps impossible, to fight a war for independence if they had alienated several of the slave-holding states.

One could also discuss the mistreatment of the Indians as a moral failing of the founders. I won't say much on this. Many of the founders wanted peace but thought it would be impossible to restrain all the homesteaders who would squat on land claimed by Indians. (Washington wanted peace, but this was his exact reservation about achieving it, according to the telling in His Excellency: George Washington.) The narrative of a united America "deciding" to subvert a united population of Indians is probably wrong and not very descriptive (until Andrew Jackson made Indian removal explicit American policy with his Trail of Tears). A more accurate narrative is that rogue squatters encroached on Indian land, repeatedly inciting violent conflicts and recriminations.

If I resist these contrarian narratives of the founders that denounce them as monsters, it's not for the sake of those dead men. It's more for the sake of the denouncers. These people are imagining that it's much easier to be morally upright than it actually is. They seem to be assuming that they would have behaved differently, morally, if faced with objectionable social conventions. They seem to think they would have abandoned their own livelihoods in pursuit of a moral principle. It's lovely to strive for such an ideal, but it's unrealistic to think people will actually behave this way. (They are indulging in morality porn.) Such unrealistic expectations can be dangerous if they lead us to think that evil is easier to notice and fight than it actually is. Evil doesn't manifest itself as mustached men rubbing their hands together and cackling insanely. Evil looks like your smiling, hard-working, church-going neighbor, kind to his family, always gentle in his temperament, who happens to own another human being. Or replace "own another human being" with "eats meat" or "supports drug prohibition" or "supports redistribution of wealth" or "shares misinformation on Facebook" or something else that makes you squirm a little. Don't take the easy way out and think you're already way ahead of the curve. Something in your every day life that you take for granted will be denounced as evil in some future generation. All this is cliche, "the indifference of good men" and all that. Just be wary that evil in plain sight is sometimes hard to spot, and even harder to act on once spotted.

For a cynical telling of the American Founders story, see this recent Econtalk with Bruce Bueno de Mesquita. Not that I am competent to judge his arguments, but I don’t quite buy it. His (de Mesquita's) telling of the Washington narrative was that Washington simply wanted to protect his vast land holdings, which the British government would have re-appropriated. I don't know. There were too many times that Washington gave up power and showed restraint. He could have been the "king of America," but turned down executive power on several occasions. If his political life was entirely in pursuit of material ends, risking his life in a violent revolution doesn't really make sense. It seems he could have had a less rich but still very comfortable existence as a British subject. And he could have used his powers to acquire a lot more wealth if that was his primary pursuit. 

Wednesday, March 15, 2017

The Complacent Class by Tyler Cowen

I recently finished reading The Complacent Class by Tyler Cowen. It’s an interesting book that covers a lot of ground, but one of the things I found most interesting is a response to criticism of one of Cowen’s previous books.

In The Great Stagnation, Cowen argues that income growth has stagnated since about the 1970s, a claim that I (and I'm in good company here) find pretty implausible. I the early half of the 20th century, we went from indoor plumbing being a luxury to it being a necessity. We saw automobiles, refrigerators, televisions, and other appliances completely penetrate the market, approaching ownership by 100% of households in most cases. We saw massive growth in the 3-4% per year range (as in, you could expect your wage to grow at 3 or 4% per year on average over these decades). By some time in the 70s, the story goes, the low-hanging fruit had been plucked at growth slowed. It’s been at about 1-2% per year since. (Some even claim that wage growth has stopped completely for the middle class, but I think this uses implausibly pessimistic assumptions and ignores a lot of relevant facts.)

The response to Cowen’s stagnation argument is that official income and growth statistics miss a lot of the picture. Official inflation numbers overstate inflation, which has the effect of pushing up past wages when we put them in current dollar terms. (If past wages are overstated, then total growth in wages is understated.) Technology improves the quality of various products, so it’s hard to compare a “phone” from the 80s to a “phone” today (or a TV or a washing machine or an automobile). Some products were not widely available or didn’t even exist in the 80s. How do you measure “inflation” on computers and cell phones (oops, I mean smart phones)? Houses have gotten bigger, food at the grocery store comes in wider varieties, etc. Also, the internet. Some of these new items dominate how we spend our leisure time. We literally could not have purchased them in previous decades. In short, “stagnation my butt.”

Cowen responds to this response by trying to measure the value people objectively place on things like smartphones and the internet. He points to studies of the elasticity of demand for internet service; when the price goes up, people cancel their subscription. If these things were so valuable, you'd expect demand to be much less elastic than it apparently is. Presumably something similar happens with smart phones. He also does a simple calculation to check the overall plausibility of the “unmeasured growth” claims. He points out that if the pre-70s growth rates had continued, today’s median income would be in the $90,000/year range, as opposed to the $50,000/year range we actually see. So are the anti-stagnationists actually saying that we’re willing to pay $40,000/year for all these technological improvements? (Smart phones, the internet, laptops, etc.) Admittedly this sounds implausibly high. It’s hard to imagine someone literally forking over $40,000 for internet and a smart-phone plan.

My response is to say, “What was economic growth supposed to look like?” The early part of the century saw an enormous build-up of “stuff.” Massive amounts of steel and copper and energy were required to make all those cars and the plumbing infrastructure and the household appliances. Supposedly continuing on the pre-70s trajectory would have made median household incomes grow from $50k/year to $90k/year; let’s round up to $100k and call it a “doubling” for shorthand. So, were we supposed to double the amount of steel and energy and cloth we used? Were we supposed to have twice as many clothes and cars and washing machines as we had in the 70s? Was the sheer tonnage supposed to have doubled? Some anti-stagnationists (I’m thinking Matt Ridley’s book The Rational Optimist, though I don’t have any one passage in mind) like to argue that recent growth has been about doing more with less, not simply having more stuff. We turn the same amount of cotton and wool into nicer clothes with fewer manufacturing imperfections. We make a car of similar size and structural integrity out of less steel; its lighter engine delivers more power using less fuel. It’s not obvious to me how this would affect national income statistics. If you make more cars out of the same amount of steel, does rising GDP totally capture this? If those cars last twice as long as older 70s-era cars, they essentially have double the value to their users. But they aren’t going to double in price, because everyone else is selling cars like that now (price is a function of supply as well as demand).

Cowen conjures the image of a median household earning $90k a year deciding whether or not to fork over almost half of it for internet, a smart phone and maybe a couple of other devices. We’re supposed to scoff at the implausibility of it, but I think that’s more or less the decision American consumers have made for themselves. It didn’t happen all at once, but incrementally we scaled back parts of our economy as the internet and devices have made leisure more readily available. People who partake of these new options (which is most of us) spend a very large portion of their leisure time on them. Many of these services are free, at least at the margin. I can use Youtube, Instagram, Facebook, Twitter, and Google as much as I want without incurring any extra charge beyond the monthly cable/internet bill. And I can watch as many movies as I like on Netflix and similar services once the monthly fee is paid. We are better connected to our fellow creatures, we have more entertainment options than ever before, and we have all the knowledge of humankind at our fingertips (if there’s an ungated link), mostly for free. It’s misdirection to fixate on the amount of money spent on these services; these are extremely important parts of our economy as measured by the time people spend on them.

Contra Tyler Cowen, I think Mr. Ninety-K-a-year would soon get bored of his pre-70s technology and shell out enormous sums trying to replicate what we have today, and mostly failing to do so. If we managed to get him a smart phone and a home internet connection, he’d scale back his work hours and spend more of his time on leisure. “Pre-1970s work hours are for chumps! I’m spending more time at home, and more ‘work’ hours screwing around on the internet!” (Average annual hours worked fell by about 100 hours/year since 1970, from ~1900/year to ~1800/year. I’m not sure Cowen addresses this rise in leisure hours in his books, but it seems like an overlooked point. My apologies if he did address it and I missed it.)

I can imagine some material innovations that would be enormously enriching. Nuclear fusion, or something else that brought us nearly unlimited cheap energy. Faster air travel, or automated cars, or modernized computerized rail transport, would make it easier to visit people and places at great distances more cheaply. Cowen discusses these potential improvements and bemoans their failure to materialize. But a question interrupts this daydream: “To what end?” Cheaper energy would be welcome in the third world, where lack of cheap energy is a real killer. But to the American middle class? Our biggest household energy use is climate control. Is it that big a pain to throw on some socks and a sweater if your house is inadequately heated? Or to remove layers in the summer?  Skype and Google Hangouts aren’t perfect substitutes for a real-space visit, but couldn’t better virtual reality eventually substitute for faster travel? It’s easier to move bits than atoms across the globe. No doubt we’d find new uses for all that cheap energy. I don’t want to suggest that it would simply lighten the load of our current biggest energy hogs (climate control and transportation). But it’s hard to imagine what “sustained growth” of the pre-1970s type looks like. Our demand for sheer “tonnage of stuff” has been nearly satiated. We’ll probably keep getting better and faster computers and devices. We’ll get better communications technology and entertainment options. These changes will come gradually and will not be reflected in national income statistics, but once they happen nobody will seriously want to return to a previous decade’s technology. Leisure will increasingly look more attractive than work at the margin (or entirely for some people!).  We’ll see working hours for the median worker fall, and we’ll see a relatively few mega-productive workers from the entrepreneur/hacker culture creating enormous amounts of value, most of which doesn’t get captured in GDP (because much of it will be given to the consumer for free).

I’ve rambled on for two-and-a-half pages about a small piece of Cowen’s book, which is not really central to his overall thesis. Do read The Complacent Class. There’s much in it I liked. I just don’t quite buy the notion (what follows is my completely unfair summary of his thesis) that we should have been taking big risks and living less comfortable, cozy lives in pursuit of space travel and faster airplanes and flying cars. Read Arnold Kling’s review here, my favorite so far.

Saturday, March 11, 2017

Viral "Outrageous Quote" and "Outrageous Paraphrase" Stories

Here’s the thing about Milo Yiannopoulos and Ben Carson and other people who get savaged for saying dumb or offensive things. I don’t know how mad I should be at these guys, because everyone says dumb and offensive things all the time. If a plain vanilla Democrat, or Republican, or moderate, were to sit down with me and carefully explain his worldview, this person would inevitably spew a lot of non-truths, half-truths, and morally outrageous ideas about the use of government power. Some of these statements would deeply offend my intelligence, and others would deeply offend my moral sensibilities. I should say "do"  instead of "would" because this kind of unserious garbage shows up on my Facebook feed all the time.

You want to confiscate the wealth of private citizens and use it to fund your half-baked, hare-brained social programs? I find your casual acceptance of theft morally offensive. The empirical record of social programs like the one you champion is probably weak and you’re probably woefully ignorant of it. These kinds of ideas are generally offensive to me on two counts.

You want to imprison people for buying and selling chemical substances that you disapprove of? I find your implicit assumption that the government owns our bodies extremely offensive. The historical record of drug prohibition is one of failure, despite paying enormous costs. Once again, a common idea is offensive to me on many levels.

I could multiply these examples many-fold. People are too flippant about important topics like immigration restrictions, foreign wars, economic "stimulus" programs, socialized medicine, socialized education, socialized retirement plans, and pretty much everything else the government does.

Everyone does this a little. Everyone carries around these half-assed ideas that they’ve never really thought about, but which are extremely offensive or idiotic when examined in the light of day. And everyone says speculative things that they don’t really believe while free-balling during a good bull-session. I’m not going to walk around in a constant state of outrage, denouncing people left and right for a normal human activity. I'm not going to speculate on what is Milo's real motive or what he really believes when he says something stupid, admits it was stupid, apologizes, and tells us he actually believes something completely opposite. I'm going to assume he's telling the truth. I'm no Milo fan, I just think everyone deserves the benefit of the doubt. I've caught myself saying things I don't actually believe and making arguments I don't find convincing in far-out bull-sessions. I reserve the right to repudiate these things afterwards, just as I reserve the right to indulge some wild speculation in the heat of the  moment. 

Friday, March 10, 2017

Suppose the Privacy Genie Is Out of the Bottle

Consider two axes that quantify the world we live in: weak vs strong privacy and permissive vs puritanical standards of judging people. If we have strong privacy, puritanical standards of judgment are acceptable because we can keep private all those things that we don’t want our neighbors to know about. If we have weak privacy, the puritanical standard would be intolerable because everyone would be judging every offhand comment you make and every behind-closed-doors action you take with other consenting adults. Puritanical standards require strong privacy. A permissive world allows for either strong or weak privacy. It’s nice to know you can keep a secret (strong privacy), but in a permissive world nobody’s judging you anyway.

But consider that the privacy genie might be out of the bottle. Perhaps everything you say is said within range of a microphone, speech-to-text software converts it to a text file and time-stamps and location-stamps everything that’s said, and your enemies can scour the record (or simply text-search your entire history of speech) for something incriminating. All these technologies already exist. The microphone is your smart phone, or possibly even someone else’s smartphone. Time- and location-stamping are simple enough, and speech-to-text software is already pretty sophisticated and getting better all the time. Perhaps some social justice warriors are trying to sick the vengeance of the internet on you for some dumb comment you made years ago. Or maybe someone is suing you and trying to cast you in a bad light. Or someone wants to blackmail you over all the cynical remarks you make about your employer. The ammunition is lying out there in the master log of every conversation you’ve ever had.

Or consider that someone hacks your Fitbit and sees a bunch of rapid wrist-motions followed by hand-washing and then a sudden decrease in heart-rate. We mostly assume that everyone does these things, but for some reason it’s incriminating for the whole world to know about a specific instance of it.

There is likely no way to stop these eventualities, other than going full Luddite and halting all technological progress. A few stop-gap privacy laws can forestall the inevitable, perhaps, but there’s no reasonable way to stop it. (Privacy laws, you say? I’ll just go on the dark web and buy your full spoken word record, logged with ubiquitous malware infecting most smartphones. You only use a closed-platform Apple phone, you say? What about all the people who sit near you? Can you vouch for their phones?) We can’t legislate our way out of this problem, but we can adopt cultural norms that make it easier to live with. We could adopt a norm that it’s sleazy to scour someone’s private life for incriminating quotes and statements. We can learn to cool our jets when an out-of-context quote upsets our delicate sensibilities. I imagine a conversation like the following:

Person 1: “Did you see what [disgraced celebrity] said! Isn’t that disgusting!”
Person 2: “People say stuff like that all the time. Here is data on 300 million people’s full speech history proving it. A proclivity to say such things doesn't meaningfully correlate with any kind of anti-social behavior, either. It's just dumb stuff people say during a good bull-session.”
Person 1: "Oh, it looks like your right. I should learn to chill the fuck out, huh?"
Person 2: "Let's look up your history while we're on here..."
Person 1: "No, no. I'll be good."
Person 2: "You'll stop bringing shit like this to me, then?"
Person 1: "I'll stop."

This world of zero privacy might seem scary and creepy. But I would hope that sensibilities change to adapt to it. When someone claims that a quote is being taken out of context, the record is right there to prove it. (Then again, that's true today and the outraged crusaders don't care to add in the readily available, easily searchable context.) If someone says, "So what, people say stuff like that all the time," there would be an open record of millions of people to verify this claim. We could check whether a quote is truly representative of a person's thinking, or whether more frequent and more recent statements by the same person contradict it. Eventually we wouldn't even be tempted to check these things, because we'd realize there is a high base-rate for cynical or offensive language in private conversation and that it doesn't meaningfully correlate with a person's overall virtue. We'd learn to dismiss these "outrageous quote" stories (even "outrageous paraphrase" stories) because we know someone with bad intentions went fishing for dirt. Once that becomes a common understanding, those viral outrageous quote stories will stop happening. And then we can all move on with our lives. I'm not advocating for zero privacy or trying to get you to like it. I find it really creepy myself. Honestly I don't fully trust my fellow creatures to adopt the appropriate norms to deal with this world. But assuming the zero privacy world is inevitable, I want to strongly advocate for a "be less judgmental" norm.

Wednesday, March 1, 2017

Licensing Drug Users

In previous posts, I argued that you can simply tax drugs rather than prohibiting them. However severe you want the deterrent to be, a tax is strictly speaking a better policy than outright prohibition. Too many people are still using drugs, you say? Well, ramp up the tax and watch demand fall. (“They will just go to the black market like they do today?” Gee, it’s a good thing prohibition stops that from happening.)

I anticipated an objection to this argument. Perhaps prohibition doesn’t simply increase the cost per unit of the prohibited substance, same as a tax does. It throws up large fixed costs to acquiring the drugs in the first place. The user first needs to find a dealer. He needs to consider, categorically, whether it’s worth the legal risk and effort of finding a supplier. He needs to go to bumpin’ parties or shady parts of town to make his hookup. He can’t just waltz into the local convenience mart and buy some. So in this sense, prohibition achieves something that a taxation regime does not: the user faces a high fixed cost to drug use (in addition to a per-unit “tax” that prohibition achieves by making the drugs more expensive). But this fixed cost really only needs to be paid once (or only once in a while). It’s kind of like the “activation energy” for a chemical reaction. Once overcome, you’re good to go.

The answer to this objection: license drug users. Make them go to a few special classes before they can, say, use heroin. Once they have been thoroughly lectured about things like dosage, safety, and treatment of overdoses, they get a special card and can use drugs with impunity. Unlike the time wasted searching for an illegal dealer, the time spent in drug safety classes would actually have a social benefit. Users of potentially dangerous substances can learn how to avoid an overdose, which drugs to avoid in combination, which drugs to use with a “spotter” who can call for help if needed, which antidote to have on hand, etc. Age, illness, and multi-drug use are huge risk factors for overdose; informing users of these risks would be a lot more effective than a general deterrence policy.

The licensing regime would be better targeted than the current prohibition regime. It would hit poor, marginally employed drug users in a way that "illegal market search costs" don't. These people probably know a lot of other drug users and can easily find a source if they just ask a few people in their social network. These are the problematic drug users that drug policy should be trying to address. Middle- and upper-class, educated users with careers and families are less likely to develop bad habits because they have more to lose. Their lifestyle has a built-in deterrent considering that a problematic drug habit can destroy their career or tear apart their family. The current regime is probably prohibitive for these folks because they often don't have the "shady" criminal element in their social networks. In other words, the current regime (general drug prohibition) is targeted to the potential drug users who we don't really need to worry about and misses the people who are most likely to cause problems. I'm speaking entirely in relative terms, of course. Nobody is totally "safe" and nobody is 100% likely to have problems, but different populations surely face different degrees of risk here.

User licensing would be paternalistic in the extreme, but it’s infinitely more sensible than prohibition. It still achieves the result of getting rid of the black market, with all the associated problems of violence and adulterated drugs and unnecessary poisonings. (It would mostly get rid of the black market, anyway. If there were still a small residual illegal market, so what? That would still be a massive improvement.) It would surely decrease the overall number of overdoses assuming the drug classes gave relevant safety information; today drug buyers get no such help.

Incidentally, some economists have already had this idea. See Emily Skarbek’s piece at Econlog here and a research paper (gated) here. It’s a fine idea and needs to be expanded upon.

Don’t misunderstand me as saying that punitive taxes and user licensing are the best possible policy. I think something much closer to total laissez-faire would actually be preferable. If drug prohibition were repealed and user licensing and drug taxation implemented, I would probably start arguing for their gradual repeal. Maybe not all at once, but make the user licensing less and less onerous over time, and gradually reduce the drug tax to the ordinary rate of sales tax. But my speculation on optimum policy is neither here nor there. In this post, I’m merely pointing out that everything drug prohibition seeks to accomplish can be achieved more humanely in a regime of full legalization. A tax on legal drug is a continuously adjustable dial that can be used to “dial down” drug use if it’s a problem, and user licensing is a big fixed “barrier to entry” to potential new users. If the black market comes roaring back, you can dial down the taxes and make the licensing less onerous. Prohibition, on the other hand, is not an adjustable dial. It’s a hammer. You can’t simply dial it up or down if it’s not working right, and it guarantees that 100% of the market will be a black market (as opposed to a much smaller proportion as we see with cigarettes and alcohol). We can accomplish all the deterrent effects of drug prohibition without all the associated problems: black market violence, failed narco-states in Central and South America, blood-borne diseases in intravenous drug users, adulterated drugs, wildly and unpredictably fluctuating drug purity, wasted law enforcement resources, diminished respect for the rule of law, disruption of families due to prison time, harassed motorists and pedestrians, etc., etc., etc. These are sensible policy tweaks. We should implement them in the short term and consider scaling them down in the longer term.