Deadweight Loss of Christmas

Reader JC pointed me to this fun article about the deadweight loss of Christmas (but it can be extended to gift giving in general). Gift giving is economically interesting because it would always be efficient just to give people cash -- instead we take on all this added burden of finding items, buying them, and then giving them to other people. The best gifts are indulgences that you would really like, but would never buy yourself (too extravagant!) Knowing what this item is requires you to know the gift recipient very well. Giving cash instead is an admission that you are really not very close to this person. Perhaps this is why elderly relatives give lousy gifts more often than money.

God is biological

I very much enjoyed this Edge article detailing the vagaries of religious experience (by Daniel Gilbert). It is certainly true that our brains are wired to perceive things in a particular way, and given that method of perception, it is easy to feel the presence of some divinity. Some people may like to believe that religion is irrational, or that people are only religious because their community is, or that people only go to church for the community, but I believe that religious experience is biological and religion is the rational response to those emotions. The emotions themselves are "lies" in that they do not represent reality, but that does not make them any less real nor does it make the natural response to them any less sensible.

Is God nothing more than an attempt to explain order and good fortune by those who do not understand the mathematics of chance, the principles of self-organizing systems, or the psychology of the human mind? When the study I just described was accepted for publication, I recall asking one of my collaborators, who is a deeply religious man, how he felt about having demonstrated that people can misattribute the products of their own minds to powerful external agents. He said, "I feel fine. After all, God doesn't want us to confuse our miracles with his."

That's fair enough. Science rules out the most cartoonish versions of God by debunking specific claims about ancient civilizations in North America or the creation ex nihilo of human life. But it cannot tell us whether there is a force or entity or idea beyond our ken that deserves to be known as God. What we can say is that the universe is a complex place, that events within it often seem to turn out for the best, and that neither of these facts requires an explanation beyond our own skins.

Similarly, I think people's inherent disgust towards economics comes from the biology of our minds and how we naturally think about individuals, groups, and motivation.

Why do they hate us

Sooner or later, any student of economics starts to wonder why the profession is so deeply reviled, and why comments perfectly acceptable within the classroom are verboten outside of it. Certainly I know of no other social science that gets hate mail with the venom that the poor old rational, forward looking utility maximizer does.

I think Arnold nails it here:

We need our type M [empathetic] brains, but in moderation. Without a type M brain, one is socially underdeveloped. In extreme cases, someone with a weak type M brain will be described by Asperger's Syndrome or autism. On the other hand, as Bloom suggests, there are many cases in which we over-use our type M brains. For example, social psychologists have long noted the fundamental attribution error, in which we see people's actions as derived from their motives or dispositions when in fact the actions result from context.

Economics is an attempt to use a type C [analytic] brain to understand market processes in impersonal terms. We do not assess one person's motives as better than another's. We assume that everyone is out for their own gain, and we try to predict what will happen when people trade on that basis.

There is no surer way to upset people than assume *everyone* (not just Republicans) is out for their own gain and then think systematically about the outcomes.

Complements and Substitutes

This excellent post details the observed changes in music sales due to P2P downloads. Remember -- although downloading an mp3 is clearly a substitute to buying an album, it is also a complement since you may try a song online and then go and buy the album. Often, it is difficult to tell whether two goods are complements or substitutes, there are elements of both.

It seems that the complement and substitute effect is segmented in music downloads:

First is the differential impact of file-sharing on an artist depending on their existing popularity. According to Blackburn who investigates this issue the ‘bottom’ 3/4 of artists sell more as a consequence of file-sharing while the top 1/4 sell less.

So, popular songs and artists get reduced sales because of downloads, while obscure artists get higher sales. This makes sense if you imagine someone hearing a song on the radio (popular) and then downloading it instead of buying the album (substitution) compared to someone who has heard about an artist from a friend (obscure) and then downloads some songs to see if they like them (complementary).

The current music business is built around hits -- this represents a dramatic change in how people consumer music. (Thanks to boing boing and marginal revolution)

Capital Formation

One thing that's become clear -- whether it's in donating money to poor countries or poor people -- is that straight transfers of wealth do not alleviate poverty. Poor people, and poor countries, lack the capital or institutions neccessary to generate and build their own wealth. This may not be there fault, but that does not change what needs to happen to make them wealthier.

The standard economic position on wealth transfers is that it ought to be done in cash -- after all, an individual can spend the cash on whatever they like, and since they know what they like better than anyone else, you get the most utility by simply giving them money and then letting them spend it as they choose.

In practise, this has been a political non-starter, individuals support giving money to the poor but also have very clear ideas on what the poor (country or person) then can legitimately spend the money on. Milk -- OK, 40s -- not so much.

If the problem is a fundamental lack of capital, or the institutions that enable capital formation, then this political instinct is right and the economic position wrong.

We still have numerous special programs for food, medical care, housing, child care, and the like. Indeed, the pure general-purpose cash programs have become very small relative to everything else. From an economist's standpoint, this is problematic. We generally believe that the most efficient way to help people is to give them a direct cash transfer, because they know better than us what their needs are and how they should allocate their resources. But the public, I think, believes that the poor have demonstrated that they do not make good choices on their own, and that we should give them the services we believe they need rather than allowing them to purchase them on their own. The voters, I believe, are basically paternalistic toward the poor and this has shaped the policies we have adopted.

In general I do not agree with paternalism, but if you accept that poverty reveals an inability to make sound choices, then alleviating poverty must include teaching people how to make better choices.

I would recommend reading the entire article -- it's very good. (Thanks to marginal revolution for the pointer).

Price competition on iTunes

Apple is likely to introduce differentiated pricing on the iTunes music store. Instead of offering everything for 99 cents, some songs will cost more, and others less.

Joel Spolsky argues that the labels are clamouring for this so they can signal to the market what's good and what's bad, and use this signalling ability to negotiate better deals with artists.

Now, the reason the music recording industry wants different prices has nothing to do with making a premium on the best songs. What they really want is a system they can manipulate to send signals about what songs are worth, and thus what songs you should buy. I assure you that when really bad songs come out, as long as they're new and the recording industry wants to promote those songs, they'll charge the full $2.49 or whatever it is to send a fake signal that the songs are better than they really are. It's the same reason we've had to put up with crappy radio for the last few decades: the music industry promotes what they want to promote, whether it's good or bad, and the main reason they want to promote something is because that's a bargaining chip they can use in their negotiations with artists.

I don't buy the signalling story. Labels make editorial decisions about what songs they think are good all the time by deciding who to sign, how much to invest in artists and bands, and how heavily to promote various albums. I can see how variable pricing may increase this, but I cannot see the impact being large. Moreover, the bargaining power an established label has over an unknown artist is huge, I don't see how iTunes has changed that, and I also can't see how variable pricing (or anything) could possibly increase it further.

Let me put forward another idea: the labels think they can charge more money for songs and not impact how many of those songs people will buy, thus increasing their profit. I'm guessing that Apple gets a flat fee per download and everything above that is gravy for the labels. I'm also guessing that a few songs vastly outsell the others, and that this number probably will not go down much if the price goes from $1 to $1.29, After all, people who buy on iTunes are paying $1 instead of downloading the song for free off some P2P service, so its a safe bet to assume they are fairly price insensitive.

If Apple keeps 50cents on every song, increasing the price from $1 to $1.29 increases the labels profits by about 60% on maybe 80% of the volume sold of iTMS. Stretched across 600M downloads, that's an extra ~$150M the labels reckoned they've left on the table so far in profit (not revenue). Those are big big numbers.

Personally, I like the idea of price competition on iTMS. In particular, I'm interested in unknown artists using it to build a new marketing and distribution channel -- something that will erode the power of the labels. I would like to see them offer songs for free as part of podcast -- iTunes New Music Thursday only plays tiny song clips and is therefore far inferior to KEXP's excellent podcasts. I'm also interest in seeing budget labels come up and fight the big guys. Remember -- in an efficient market the price should be close to the marginal cost, and for an mp3 online that's pretty close to zero. Flat fixed pricing kept it at 99cents, but it's not clear whether price competition will move the average price up or down.

(Thanks to WC for the link!)

View from the front

I very much enjoyed this letter from the front. It was forwarded to be by a buddy, and I don't know if it's real or not, but it seems perfectly credible to me.

What's most interesting is how nothing trains you in how to engage with the enemy than engagement with the enemy. I was speaking to a friend of mine who is peripherally involved with new defense systems, and the stuff rolling out of labs now is lightyears ahead of what we had in 2000.

While America's response to terrorism was to fight it over there, I beleive Europe's is going to involve spying on local populations of unassimilated immigrants. I would look for their urban surveillance technology to become commonplace, while America will build battlefield telemetry systems right from the pages of science fiction novels.

Anyway, here's the letter in full:

Hello to all my fellow gunners, military buffs, veterans and interested guys. A couple of weekends ago I got to spend time with my son Bill, who was on his first leave since returning from Iraq. He is well (a little thin), and already bored. He will be returning to Iraq for a second tour in early '06 and has already re-enlisted early for 4 more years. He loves the Marine Corps and is actually looking forward to returning to Iraq.

Bill spent 7 months at "Camp Blue Diamond" in Ramadi. Aka: Fort Apache. He saw and did a lot and the following is what he told me about weapons, equipment, tactics and other miscellaneous info which may be of interest to you. Nothing is by any means classified. No politics here, just a Marine with a bird's eye view's opinions:

1) The M-16 rifle : Thumbs down. Chronic jamming problems with the talcum powder like sand over there. The sand is everywhere. Bill says you feel filthy 2 minutes after coming out of the shower. The M-4 carbine version is more popular because it's lighter and shorter, but it has jamming problems also.

They like the ability to mount the various optical gunsights and weapons lights on the picattiny rails, but the weapon itself is not great in a desert environment. They all hate the 5.56mm (.223) round. Poor penetration on the cinderblock structure common over there and even torso hits cant be reliably counted on to put the enemy down. Fun fact: Random autopsies on dead insurgents shows a high level of opiate use.

2) The M243 SAW (squad assault weapon): .223 cal. Drum fed light machine gun. Big thumbs down. Universally considered a piece of crap. Chronic jamming problems, most of which require partial disassembly. (that's fun in the middle of a firefight).

3) The M9 Beretta 9mm: Mixed bag. Good gun, performs well in desert environment; but they all hate the 9mm cartridge. The use of handguns for self-defense is actually fairly common. Same old story on the 9mm: Bad guys hit multiple times and still in the fight.

4) Mossberg 12ga. Military shotgun: Works well, used frequently for clearing houses to good effect.

5) The M240 Machine Gun: 7.62 Nato (.308) cal. belt fed machine gun, developed to replace the old M-60 (what a beautiful weapon that was!!). Thumbs up. Accurate, reliable, and the 7.62 round puts 'em down. Originally developed as a vehicle mounted weapon, more and more are being dismounted and taken into the field by infantry. The 7.62 round chews up the structure over there.

6) The M2 .50 cal heavy machine gun: Thumbs way, way up. "Ma deuce" is still worth her considerable weight in gold. The ultimate fight stopper, puts their dicks in the dirt every time. The most coveted weapon in-theater.

7) The .45 pistol: Thumbs up. Still the best pistol round out there. Everybody authorized to carry a sidearm is trying to get their hands on one. With few exceptions, can reliably be expected to put 'em down with a torso hit. The special ops guys (who are doing most of the pistol work) use the HK military model and supposedly love it. The old government model .45's are being re-issued en masse.

8) The M-14: Thumbs up. They are being re-issued in bulk, mostly in a modified version to special ops guys. Modifications include lightweight Kevlar stocks and low power red dot or ACOG sights. Very reliable in the sandy environment, and they love the 7.62 round.

9) The Barrett .50 cal sniper rifle: Thumbs way up. Spectacular range and accuracy and hits like a freight train. Used frequently to take out vehicle suicide bombers ( we actually stop a lot of them) and barricaded enemy. Definitely here to stay.

10) The M24 sniper rifle: Thumbs up. Mostly in .308 but some in 300 win mag. Heavily modified Remington 700's. Great performance. Snipers have been used heavily to great effect. Rumor has it that a marine sniper on his third tour in Anbar province has actually exceeded Carlos Hathcock's record for confirmed kills with OVER 100.

11) The new body armor: Thumbs up. Relatively light at approx. 6 lbs. and can reliably be expected to soak up small shrapnel and even will stop an AK-47 round. The bad news: Hot as crap to wear, almost unbearable in the summer heat (which averages over 120 degrees). Also, the enemy now goes for head shots whenever possible. All the crap about the "old" body armor making our guys vulnerable to the IED's was a non-starter. The IED explosions are enormous and body armor doesn't make any difference at all in most cases.

12) Night Vision and Infrared Equipment: Thumbs way up. Spectacular performance. Our guys see in the dark and own the night, period. Very little enemy action after evening prayers. More and more enemy being whacked at night during movement by our hunter-killer teams. We've all seen the videos.

13) Lights: Thumbs up. Most of the weapon mounted and personal lights are Surefire's, and the troops love 'em. Invaluable for night urban operations. Bill carried a $34 Surefire G2 on a neck lanyard and loved it.

I cant help but notice that most of the good fighting weapons and ordnance are 50 or more years old!!!!!!!!! With all our technology, it's the WWII and Vietnam era weapons that everybody wants!!!! The infantry fighting is frequent, up close and brutal. No quarter is given or shown.

Bad guy weapons:

1) Mostly AK47's . The entire country is an arsenal. Works better in the desert than the M16 and the .308 Russian round kills reliably.

PKM belt fed light machine guns are also common and effective. Luckily, the enemy mostly shoots like crap. Undisciplined "spray and pray" type fire. However, they are seeing more and more precision weapons, especially sniper rifles.

(Iran, again) Fun fact: Captured enemy have apparently marveled at the marksmanship of our guys and how hard they fight. They are apparently told in Jihad school that the Americans rely solely on technology, and can be easily beaten in close quarters combat for their lack of toughness. Let's just say they know better now.

2) The RPG: Probably the infantry weapon most feared by our guys. Simple, reliable and as common as dogcrap. The enemy responded to our up-armored humvees by aiming at the windshields, often at point blank range. Still killing a lot of our guys.

3) The IED: The biggest killer of all. Can be anything from old Soviet anti-armor mines to jury rigged artillery shells. A lot found in Bill's area were in abandoned cars. The enemy would take 2 or 3 155mm artillery shells and wire them together.

Most were detonated by cell phone, and the explosions are enormous. You're not safe in any vehicle, even an M1 tank. Driving is by far the most dangerous thing our guys do over there.

Lately, they are much more sophisticated "shape charges" (Iranian) specifically designed to penetrate armor. Fact: Most of the ready made IED's are supplied by Iran, who is also providing terrorists (Hezbollah types) to train the insurgents in their use and tactics.

That's why the attacks have been so deadly lately. Their concealment methods are ingenious, the latest being shape charges in Styrofoam containers spray painted to look like the cinderblocks that litter all Iraqi roads. We find about 40% before they detonate, and the bomb disposal guys are unsung heroes of this war.

4) Mortars and rockets: Very prevalent. The soviet era 122mm rockets (with an 18km range) are becoming more prevalent. One of Bill's NCO's lost a leg to one. These weapons cause a lot of damage "inside the wire".

Bill's base was hit almost daily his entire time there by mortar and rocket fire, often at night to disrupt sleep patterns and cause fatigue (It did). More of a psychological weapon than anything else. The enemy mortar teams would jump out of vehicles, fire a few rounds, and then haul ass in a matter of seconds.

5) Bad guy technology: Simple yet effective. Most communication is by cell and satellite phones, and also by email on laptops. They use handheld GPS units for navigation and "Google earth" for overhead views of our positions.

Their weapons are good, if not fancy, and prevalent. Their explosives and bomb technology is TOP OF THE LINE. Night vision is rare. They are very careless with their equipment and the captured GPS units and laptops are treasure troves of Intel when captured.

Who are the bad guys?:

Most of the carnage is caused by the Zarqawi Al Qaeda group. They operate mostly in Anbar province (Fallujah and Ramadi). These are mostly "foreigners", non-Iraqi Sunni Arab Jihadists from all over the Muslim world (and Europe).

Most enter Iraq through Syria (with, of course, the knowledge and complicity of the Syrian govt.) , and then travel down the "rat line" which is the trail of towns along the Euphrates River that we've been hitting hard for the last few months. Some are virtually untrained young Jihadists that often end up as suicide bombers or in "sacrifice squads".

Most, however, are hard core terrorists from all the usual suspects (Al Qaeda, Hezbollah, Hamas etc.) These are the guys running around murdering civilians en masse and cutting heads off.

The Chechens (many of whom are Caucasian), are supposedly the most ruthless and the best fighters. (they have been fighting the Russians for years). In the Baghdad area and south, most of the insurgents are Iranian inspired (and led) Iraqi Shiites.

The Iranian Shiia have been very adept at infiltrating the Iraqi local govt.'s, the police forces and the Army. The have had a massive spy and agitator network there since the Iran-Iraq war in the early 80's. Most of the Saddam loyalists were killed, captured or gave up long ago.

Bad Guy Tactics:

When they are engaged on an infantry level they get their asses kicked every time. Brave, but stupid. Suicidal Banzai-type charges were very common earlier in the war and still occur.

They will literally sacrifice 8-10 man teams in suicide squads by sending them screaming and firing Ak's and RPG's directly at our bases just to probe the defenses. They get mowed down like grass every time.

(see the M2 and M240 above). Bill's base was hit like this often. When engaged, they have a tendency to flee to the same building, probably for what they think will be a glorious last stand.

Instead, we call in air and that's the end of that more often than not. These hole-ups are referred to as Alpha Whiskey Romeo's (Allah's Waiting Room). We have the laser guided ground-air thing down to a science.

The fast mover's, mostly Marine F-18's, are taking an ever increasing toll on the enemy. When caught out in the open, the helicopter gunships and AC-130 Spectre gunships cut them to ribbons with cannon and rocket fire, especially at night.

Interestingly, artillery is hardly used at all. Fun fact: The enemy death toll is supposedly between 45-50 thousand. That is why we're seeing less and less infantry attacks and more IED, suicide bomber crap. The new strategy is simple: attrition.

The insurgent tactic most frustrating is their use of civilian non-combatants as cover. They know we do all we can to avoid civilian casualties and therefore schools, hospitals and (especially) Mosques are locations where they meet, stage for attacks, cache weapons and ammo and flee to when engaged.

They have absolutely no regard whatsoever for civilian casualties. They will terrorize locals and murder without hesitation anyone believed to be sympathetic to the Americans or the new Iraqi govt. Kidnapping of family members (especially children) is common to influence people they are trying to influence but cant reach, such as local govt. officials, clerics, tribal leaders, etc.).

The first thing our guys are told is "don't get captured". They know that if captured they will be tortured and beheaded on the internet. Zarqawi openly offers bounties for anyone who brings him a live American serviceman.

This motivates the criminal element who otherwise don't give a crap about the war. A lot of the beheading victims were actually kidnapped by common criminals and sold to Zarqawi. As such, for our guys, every fight is to the death. Surrender is not an option.

The Iraqi's are a mixed bag. Some fight well, others aren't worth a crap. Most do okay with American support. Finding leaders is hard, but they are getting better. It is widely viewed that Zarqawi's use of suicide bombers, en masse, against the civilian population was a serious tactical mistake.

Many Iraqi's were galvanized and the caliber of recruits in the Army and the police forces went up, along with their motivation. It also led to an exponential increase in good intel because the Iraqi's are sick of the insurgent attacks against civilians. The Kurds are solidly pro-American and fearless fighters.

According to Bill, morale among our guys is very high. They not only believe they are winning, but that they are winning decisively. They are stunned and dismayed by what they see in the American press, whom they almost universally view as against them.

The embedded reporters are despised and distrusted. They are inflicting casualties at a rate of 20-1 and then see crap like "Are we losing in Iraq" on TV and the print media. For the most part, they are satisfied with their equipment, food and leadership.

Bottom line though, and they all say this, there are not enough guys there to drive the final stake through the heart of the insurgency, primarily because there aren't enough troops in-theater to shut down the borders with Iran and Syria. The Iranians and the Syrians just cant stand the thought of Iraq being an American ally (with, of course, permanent US bases there).

Wine in a tube

As I've written before, the traditional way to buy wine is too difficult. FIrstly, you never know what the stuff in the bottle will taste like. The labels are hard to understand, and the usual descriptors: "lush", "jammy", "earthy" etc, simply are not that helpful. Secondly, a bad cork will skunk the wine, or more likely, will change the flavor enough that you won't really love it but will drink it anyway. And nothing makes you feel more stupid that drinking skunked wine and not knowing any better. Thirdly, the 750ml bottle is useless -- it is precisely enough for 3 ppl at one meal and I rarely dine in trios.

This is all slowly being fixed. The emergence of single-varietal, international style wines (New Zealand Sauvingnon Blancs, Australian Shirz, Californian Chardonnay) means that if you pick a grape type, you'll have a better sense of what's inside. Screwtops are replacing corks. And we're seeing good wine come in boxes, so you can pour out a glass or two at a time, and the remainder stays good. Wine in boxes carries a stigma, so I liked seeing this wine in a tube.

It's also interesting that the robust market in generic wines is also creating a robust market in obscure wines.

When languages die

What is the right attitude to have when faced with a language dying?

The main value of a language comes from lots of other people speaking it. The more people who speak a language, the more valuable it becomes, but I do not think this means that the world will gradually be reduced to a single language because there are countervailing forces as well.

Firstly, I there is some value in having a language be very obscure. It lets you can speak in public to your friends and family without other people understanding what you are saying. Secondly, some language may be tied to past works that are useful -- although no one speaks ancient greek or latin any more, a few people still study it to translate old texts.

I do *not* beleive that languages have instrinsic value because they encapsulate some special thought or idea that can only be expressed in that language and will be lost forever without it. While a *precise* idea may only exist in one language, I'm sure there are plenty of close-enough substitutes that we'll make do. And even if those close-enough substitutes aren't all that close, in this world of terrorism, global warming, and burning cars, I'm not sure we will notice.

2Blowhards dismiss regret at dying languages as a "romantic fantasy", and I agree with them, but I also have some sympathy towards "romantic fantasies". Romantic fantasies appeal to a very human part of our nature, they make us feel better about ourselves, superior to others in terms fo sensitivity, insight, and knowledge. And while a language is not some rare, beautiful rainforest beetle, we can certainly pretend that the two are similar on some metaphysical level, especially since many of the dying languages come from places well stocked with the aforementioned beetles.

The call to force a dying languages final speakers to not abandon that language is wrong. It imposes the cost of the maintaining that language on those individuals, for benefits that are either thinly dispersed or entirely in the romantic imagination of the person trying to "save" the language.

Incentives and torture

Marginal Revolution argues that making torture illegal will set the price of torture sufficiently high to curb government power while still enabling them to get critical information when neccessary.

Here is where economics can make a contribution. By making torture illegal we are raising the price of torture but we are not raising the price to infinity. If the President or the head of the CIA thinks that torture is required to stop the ticking time bomb then they ought to approve it knowing full well that they face possible prosecution. Only if the price of torture is very high can we expect that it will be used only in the most absolutely urgent of circumstances.

I do not agree with this assessment of what economics would suggest.

Suppose the government captured a terrorist whom they strongly suspected had smuggled a small nuclear bomb into the US and set it up to detonate automatically. The terrorist will not say where the bomb is. In Marginal Revolution's world, torturing the terrorist would be illegal, but the government would do it anyway because no jury would send anyone to prison under those circumstances.

I don't think it's so clear. It may be better for the politicians involved to go to some remote town unlikely to be nuked, say anywhere but NYC and DC, and let the nuke go off. In this situation they have zero chance of dying from terrorism and run zero risk of being sent to prison by a journey. Arguing that "torture is illegal and we did not know for sure if we had the right guy" is a bulletproof defense against the charge of not torturing someone when you ought to (not that mandatory torture is any kind of law).

To date, I have not seen people being very understand towards making tough decisions under incomplete information. I have also seen public support for the government grow after a terrorist attack, and shrink when the terrorist attacks stop happening and fade into memory. Given these incentives, a smart government would hide and wait in a ticking bomb scenario, not break the law.

And if not under time pressure, they will render suspects to third parties to torture (thus reducing the cost of torturing others to zero).

Selection and healthcare

Paul Krugman argues that private insurance markets in healthcare do not work because private companies work hard to screen out unhealthy applicants and only sell coverage to healthy applicants. This is called "adverse selection". By the same token, healthy people will shun insurance (because they don't need it), decreasing the quality of the applicant pool further.

Arnold Kling argues that the adverse selection argument, while logical, does not describe what is happening in health insurance markets. (Or, it may be a factor, but it is swamped out by other more important factors). Arnold links to this paper.

The uninsured in the US end up in emergency rooms. My wife's ER is filled with 1) people who are genuinely having emergencies (heart attacks, strokes, accidents, etc) and 2) people who are uninsured and use the ER as their primary source of healthcare. The folks who use the ER as their primary source of healthcare are generally irresponsible with their lives. They eat unhealthy foods, are often very overweight, have higher unemployment, and don't brush their teeth (a low cost, simple way to improve one's health). The irresponsibility that leads to these behaviors also makes them not try and buy health insurance. Irresponsible people are often unhealthy and uninsured not because they are unhealthy, but because they are irresponsible. Responsible people are healthy and insured because buying insurance, like staying healthy, is something responsible people do.

If the adverse selection story were true, we would expect healthy people to not buy health insurance. In fact, they are the people who do. We would also expect unhealthy people to actively seek out health insurance, and we find that they do not.

Will be posting on Jane Galt

I'll be posting on both winterspeak and Asymmetrical Information for the next few weeks. I'm going to see how group blogging works, and see if I can focus winterspeak on tech, while using asymmetrical info for more pure econ stuff.

Jane Galt

I had the pleasure of meeting Jane Galt in NYC last week. Very nice, and long overdue.

Lessig on the UN's attempt to hijack the internet

Lawrence Lessig nails the impetus behind the UN trying to take over the Internet:

The largest cause of this rift is European distrust of the United States. It’s not particularly related to the Internet. The Europeans are eager to stand up to the Americans, and that I think has been produced by the last five years of U.S. foreign policy. It’s not really a cyberlaw problem.

Perhaps now that France is burning they will focus on topics more pressing than DNS governance.

Housing bubble on WBUR

A WBUR program this morning on rising home inventory and slowing sales cycles. Key note -- anticipation of a bubble is encouraging marginal owners to sell and marginal buyers to wait.

Year-on-year declines in MA

This excellent Calculated Risk post details how some parts of MA have experienced year-on-year price declines, and how people are leaving CA because they cannot afford a house there. My wife and I have decided to leave MA, but have not decided where to go next. The cost of housing was a factor -- let's face it, if you're going to pay through the nose for housing you might as well get better weather and better food.

In any care, we are an example of a marginal buyer who is now a non-buyer for sure, although we'll remain in the state for several more months. There may be a lag between when people decide to exit the market and when they physically do.

I would also add that one of the most obviously bubble-like features of the current real estate run up is the yawning gap between rents and prices. The families described leaving CA for KS in the NYTimes article were leaving because homes were expensive to buy not expensive to rent. Rents have been flat to declining for the past 5 years and certainly in CA and MA people can comfortably rent places they could never afford to buy. Mind you, friends that bought in 2002 (when I thought prices were too high) have done extremely well, so what do I know?

Microsoft gets AJAX fever

As the VC dollars pour into Web2.0 companies, Web2.0 companies are snapped up for modest (yet huge) sums by big companies, and google continues to amaze people with just what's possible on the web, Microsoft gets AJAX fever in a big way and offers to put WindowsOS and Microsoft Office functionality online. How they will charge for any of this is totally unclear. But welcome to the second great Internet boom--it'll be a great time to be online.

Economist covers

I just recieved the most recent issue of the economist. It's cover looks like this:

Given that Paris has been rioting for 7 days now, I was expecting a picture a little closer to this:
except, you know, about Paris.

Simpler email

Jonathon from the ChicagoBoyz longs for simpler, text based email. Good call. I think plaintext is indispensible in applications far beyond email.

No kidding indeed

I mail ordered some brisket, pork chop, and sausage from Kreuz. The brisket was hands down the best I've ever had. Sausage was great (top 5). Pork chop was utterly delicious but not transcendental. Great BBQ sets a very high bar. (Order your own here).

Update It looks like it was good for Tyler, too.

Is the party over?

This excellent report details the changes in the housing market in California. In particular, I liked the line

In any case, if the housing shortage story were true, we would see it in rents first and housing prices second. Instead, rental rates have been functionally flat for almost five years now, certainly not indicative of a housing shortage. Many bulls respond that the rental markets cannot be used as a basis for discussing housing since there is an intrinsic value to owning that we callous economists can’t possibly fathom. I agree that there is an intrinsic value, but has it increased by $200,000 in 3 years?

From an expectations perspective, I know many people who bought houses because they thought prices were going to appreciate and if they waited they would not be able to afford a house next year. This expectation of rising prices increased demand for ownership, increasing prices even more. I don't think that people expect prices to keep rising any more -- the paper in DC last week was filled with people saying "now that I bought at the top of the market, what do I do?" -- and it's pretty easy for the marginal buyer to decide that renting for a few more years is just fine.

On a similar note, someone I know had a $100K interest free loan for housing as part of a compensation package involving a move to California (in return for 10 years with the firm). Initially I thought this was a pretty good deal, but now that I think about it, I'm not sure I want to buy real estate in California no matter what financing I was offered. Would you buy something that you think would decrease in value ~30% even if you could borrow money to do it at 0% interest?

Uncomfortable truths about taxes

This silly Slate article argues that Bush's tax reform proposal is a cunning plan to hurt Blue-staters.

Basically, the AMT (Alternative Minimum Tax) is a high tax with few deductions designed to tax rich people with lots of deducations who would otherwise escape paying their "fair" share. The AMT was not inflation indexed, so it is now biting lots of folks who don't consider themselves rich and don't want to pay that much tax. Personally, I think the AMT is a better tax system than what exists now in many ways, but its seems to be the consensus that the AMT will be phased out, and the $1.2T it would have collected otherwise over the next 10 years be gathered in other ways.

And guess what -- this money will be collected from people at risk of paying the AMT anyway -- rich people. And guess what again -- this money will be raised by reducing the deductions people can take, particularly the state income tax deduction and the mortgage deduction.

It just so turns out that a mortgage deduction capped at $200K-$300K won't have much impact on poor people who live in the Midwest and the South (where housing is easy to build and cheap) and will zap the rich people who live in East and West coast (where housing is illegal to build and expensive). But all that an increase in housing tax does is create a one time transfer of value from the current owners to the government. Future owners, anticipating higher tax rates, will be willing to pay less for a house, which means that sale prices will be lower and this will fully capture the transfer in value from current homeowners to the government.

If there is a single group in the US undeserving of sympathy, it has got to be rich homeowners in the East and West coast. These folks have enjoyed 50%-100%+ increases in the value of their homes over the past 5 years and now enjoy properties worth of half a million dollars, in Boston at least, and more in San Francisco and New York. This wealth was no more earned than a scion's bequest, so why it cannot be taxed the bejeesus out of, I don't know.

Before getting involved in "red state vs blue state" nonsense, you should consider the purpose of federal taxation -- to move money from rich states to poor states. If money wasn't moving between states, why do taxes need to be Federal? And if money is moving between states, why shouldn't it move from rich to poor (do you want it moving from poor to rich?). And rich states currently happen vote Democrat.

Key quotes:

Then there's red-state myopia. Connie Mack, the Republican ex-senator who is co-chairman of the tax advisory panel, is a classic sufferer. When asked by the New York Times Magazine whether limiting the deduction could "hurt the middle class and discourage people from buying, say, a $500,000 house?" he responded: "It depends on how you define middle class. I don't think that there would be a large percentage of middle-income families that would have a $500,000 house." Mack has obviously never spent much time in Staten Island, N.Y., where Vito Fossella, one of the few remaining Republican members of Congress in the Northeast, has already come out against the panel's ideas. In the high-population, high-income states—the states that, by the way, produce a disproportionate share of federal income taxes—plenty of middle-class people live in $500,000 homes.

Ummm, no. From a federal standpoint there are no middle class families living in $500K houses. If you live in a $500K home and are surrounded by people who live in a $500K home and think you are middle class you are wrong -- you are, in fact, rich and you live in a rich neighbourhood and you will be taxed.

Convoluted Islamic dresscodes

The Quran instructs Muslims to "dress modestly, so as to not attract attention to the body". A very reasonable instruction. From this you get the flowing, loose dress common in Muslim countries -- such as the shalwar in Pakistan and the dish dash in Arabia. An added bonus is that these garments are also much better to stay cool in than the shorts and t-shirts westerners wear when they travel to hot climates.

However, wearing a hijab in a region where hijabs are very rare (say, McLean VA) is not "dressing modestly, so as to not attract attention to the body". In fact, I can't think of a better way to draw attention to one's body than by dressing in something deeply unusual and parading around. So while the form of dress may remain the same, the instruction is no longer being obeyed. Muslims would do better by dressing in modest version of local attire so they blend in and do not call attention to themselves, or their bodies.

People like to dress up though. This article on hijab chic details how traditional muslim dress, in bright colors and logos, is being made for fashionable muslim women. A clear case of obeying the letter of the law, and not the spirit, but obeying both would have you dressed in a long skirt and long sleeve shirt -- which Nordstrom also stocks. The clerics unhappy with this turn of events should note that their recommendation is not modest either, in that it draws attention and stands out.