Quick links

Reports claim UAE's property sector set for soft landing. This made me laugh:

“By 2009, we estimate there will be a total of 77,000 units targeting high-income occupants, while the projected total demand for these units is just 36,100 for the same year. On that basis, we expect the occupancy level in the high-end apartment segment to fall below 50 per cent and thus make investor objectives increasingly difficult to achieve

Clay Shirky wonders why Second Life is a dud, while World of Warcraft, and other games, rule.

If, on the other hand, we don't start off by lumping Second Life with Warcraft as virtual worlds, a very different question emerges: why do virtual game worlds outperform non-game worlds in their adoption? This pattern is quite stable over time -- it well predates Second Live and World of Warcraft, as with Everquest (1999) quickly dwarfing the combined populations of Alphaworld and Black Sun (later Blaxxun) despite the significant lead times of those virtual worlds. What is it about games that would make them a better fit for virtual environments than non-games?

If I can hack through the turgid prose, I think the answer to Clay's question is: games have a point, virtual worlds without a point don't. Does Clay agree? Not sure -- prose remains too turgid -- but his next paragraph talks about "magic circles" so I'm guessing "no".

Finally, nice article about how Verizon rejected the iPhone, due to unreasonable demands by his Steveness.

Among other things, Apple wanted a percentage of the monthly cellphone fees, say over how and where iPhones could be sold and control of the relationship with iPhone customers, said Jim Gerace, a Verizon Wireless vice president. "We said no. We have nothing bad to say about the Apple iPhone. We just couldn't reach a deal that was mutually beneficial."

I'm bummed, as I'm a Verizon customer, but clearly partnering with Apple means doing things Steve's way.

Useful

Finally, cell phones with a useful feature.

Milton Friedman Day

Happy You Day, Uncle Miltie.

Healthcare costs

I'm confused by how more emphasis on "preventative care" is supposed to reduce overall, long run healthcare expenditure. In fact, I'm not sure how "preventative care" can do anything other than increase healthcare expenditure.

Malcolm Gladwell repeats the conventional wisdom about the efficiency merits of preventative healthcare in this New Yorker piece, "Million Dollar Murray." It chronicles the life of a homeless man in Reno named Murray, who was a chronic alcoholic, and lead a lifestyle so unhealthy, that he racked up $1M in medical fees in ERs until he finally died.

Gladwell's description of substance abusers who go repeatedly to the ER accurately reflects my wife's experiences in an inner-city ER in Boston -- there they would refer to them as "frequent fliers" and they refer to a small number of indigent substance abusers who use up a disproportionate amount of ER time and resources. Malcolm states that it would be cheaper for the state to simply make Murray a ward -- put him in a home under constant supervision -- than it was to keep patching him up in an ER and sending him out into the world, just for him to self destruct again.

Brad DeLong sets the context for why this does not make sense with a great piece on what's driving long run healthcare costs.

One of our best graduate students here at Berkeley--Marit Rehavi--just came by with a truly depressing thought. No matter which subtribe of economists you think is correct in the intellectual health-care wars, the world is moving in directions that make the favored policies of both factions less likely to work in the future.

On health care issues, you see, economists divide into two subtribes depending on whether they think the big problem with America's health system today is adverse selection or moral hazard--two terms from the insurance industry.

Those economists on the left tend to think that the real big problem with American health care is adverse selection: Those who know they are healthy and likely to stay that way skimp on purchasing insurance... Ultimately, this line of thought goes, single-payer national health insurance is the best option, for the administrative and bureaucratic inefficiencies introduced are vastly outweighed by the reduction in the gaming the system that goes on under our current plan where profits are made by those insurance companies that are best able to avoid covering the sick.

Those economists on the right tend to think that the real big problem with American health care is moral hazard: that patients soak up scarce and valuable doctor and nurse time even when there is no benefit to the visit, and that doctors use up vast resources conducting tests and procedures that do patients very little good...

The prescription of the right-wing subtribe of economists is to create hard incentives: regulate the insurance market so that the only policies allowable are high-deductible and fixed-reimbursement polices that make doctors feel in their purses the costs of the procedures they recommend, and that make patients feel in their purses the costs of the health professionals' time that they pointlessly soak up...

The prescription of the left-wing subtribe of economists is nearly the opposite: it is to soften incentives as a side effect of eliminating opportunities for moral hazard by recognizing that the market for health care financing simply does not work very well, and cannot be made to work very well. If the left-wing diagnosis is correct, the prescription would do a lot of good. Nobody likes going to the doctor or undergoing invasive and usually painful costly medical procedures...

And now Marit Rehavi comes by with an additional reason to despair. For according to her reading, as America ages and as American society changes an increasing share of the increase in health care costs is going to be driven not by increases in adverse selection by insurers or by moral hazard driven by doctors ordering inappropriate and barely effective care, but by expensive chronic diseases and risk factors driven by long-term lifestyle choices. Nationalizing the health insurance sector won't diminish the costs in 2050 of treating the lung cancer that the twenty year-old staring smoking today will develop. Increasing copays won't reduce the costs of treating the diabetes that the five year-old today with a two-coke and three-twinkie-a-day habit will develop in 2045."

I recommend reading the whole thing (Brad ends with not really knowing what to do, and offhandedly suggesting a nanny state, that tells you to eat your vegetables and exercise more).

In the Murray example, I'm not sure what "preventative healthcare" means. Malcolm's policy prescriptions -- put him in a home, pay someone to watch him 24/7 -- aren't related to healthcare at all, they're related to targeting extremely generous social services to those who are honest to goodness truly incapable of looking after themselves in any way, and hoping that this won't encourage freeloaders to begin sponging off taxpayers (welfare systems invariably have some mix of the two).

And the type of preventative care recommended by Brad DeLong ("lose weight, exercise more, don't smoke, don't drink to excess, watch your fats, watch your sugars, eat your vegetables, et cetera") aren't really medicine either, they're just good public health. And I don't know if it's possible to improve on any of these measures -- Brad DeLong, for example, is smart, well informed, conscientious, and fat.

"Preventative medicine" should really be called "postponement medicine", because it does not prevent illness, eventually leading to death, it merely postpones that moment. Sooner or later, we're all going to be in massive system failure on a gurney somewhere with caring medical professionals spending hundreds of thousands of other people's dollars to keep us going for another minute or two. And God bless them for it. Preventative medicine, and healthy lifestyle habits, may determine whether this happens at age 55 or age 95, but that time will come to us all. And when that time comes, we will consume huge healthcare resources.

Let's take a step back from heroic, end-of-life treatment, and look at treatment of chronic conditions. The line between what is a killer condition, and a treatable, chronic condition, moves whenever there is an advance in healthcare technology. 50 years ago, if you had cardiac disease that lead to a heart attack, there was very little could be done for you. You would be told to rest, and shortly thereafter, you would die. If you have a heart attack today, doctors will insert a stent and put you on a barrage of medication that will significantly increase the quality of your life, if not the quantity. You will still die eventually, of course, but maybe of something else, and maybe not for many years. But shifting people from the "dead" category to the "alive, but needing constant care" category can only drive up costs. (This is not a bad thing. Health is a much better use of money than plasma TVs). Moving people from "dead" to "alive but needing constant care" is how medicine works. There is no magical end point where we live active, healthy lives because we did "preventative medicine" when we were younger, right up until the moment where we suddenly buy the farm, and do so so rapidly and unexpectedly that no medical professional has the opportunity to help.

Now suppose someone invented a pill that eliminated heart disease, and no one need ever die from a heart attack again. Giving this pill to people would be a wonderful example of "preventative medicine". But now that people were not dying of heart attacks, they would start dying of something else (maybe later) that we could *not* cure, and then we'd focus on developing a treatment to manage the condition (driving up costs) etc. The only factor gating our willingness to spend money seems to be availability of treatment. If we want to stop increases in healthcare expenditures, we need to stop coming up with new medical treatments.

Fortunately, this is easy to do. There is only one market on the Earth that offers profit for new medical treatments, and that is the US. It's 300M rich, somewhat elderly people, unconstrained by miserly government limits on what they can spend, provide the profit that drives global pharmaceutical R&D. If you kill the profit in this market, through universal health care, then the incentive to develop new drugs will drop, as will the arrival of new drugs and treatments themselves. As new medicines stop rolling into the market, spending will decrease.

A further note on consumption

Tyler also has this very good post on consumption.

Consumption data, even if sometimes misused by zealous libertarians, are not a means of dismissing the poverty problem, but they do put that problem in another light.

First, they show that income and wealth data overstate poverty and inequality problems. Second, a focus on income data leads one to conclude that the elderly require most of the assistance. A focus on consumption data lead one to conclude that helping parents with children is, in many cases, more important. That sounds right to me.

I would add, that almost anything spent on children is investment -- each child has a long (and hopefully) productive life in front of them, with many years to both 1) enjoy living and 2) contribute to society. Any dollar that goes into improving their health, skills, etc. will probably pay dividends for years.

One the other hand, spending on the elderly is just the opposite -- it's almost pure consumption. Every dollar spent on them has a much shorter time to yeild dividends, both to themselves and to others, The major government entitlement programs today (Social Security, Medicare) and focused entirely on the elderly, not on the very young.

I am not arguing that one should spend on the young and not on the old -- both investment and consumption are important just as both young people and old people are important. Nor am I arguing that government entitlement programs are the best way to help people. I'm just saying that dollars spent on the young can be classified as investment, and dollars spent on the old can be classifed as consumption.

Income inequality in NYTimes

Tyler Cowen has a great piece in the NYTimes on income inequality. He argues that most of the visible income inequality in the US is a result of the population getting older and more educated, as there is more variation in income as people become older and more educated

Much of the measured growth in income inequality has resulted from natural demographic trends. In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes.

Furthermore, more-educated groups show greater income inequality than less-educated groups. Uneducated people are more likely to be clustered in a tight range of relatively low incomes. But the educated will include a greater range of highly motivated breadwinners and relaxed bohemians, and a greater range of winning and losing investors. A result is a greater variety of incomes. Since the United States is growing older and also more educated, income inequality will naturally rise.

Thomas Lemieux, professor of economics at the University of British Columbia, estimates that these demographic effects account for about three-quarters of the observed rise in income inequality for men and 69 to 95 percent of the observed rise in income inequality for women (“Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?” The American Economic Review, June 2006). In other words, rising income inequality is not just a result of unfairness or bad public policy.

This is a different story from what I was taught at Chicago -- that rising income inequality was driven by technological change (the forklift put well paid, blue collar laborers out of business). There is a great interview of David Card (of "minimum wage does not increase unemployment fame") where he talks about why that story never made sense to him.

Like a lot of other ideas in economics, I think that “skill-biased technical change” can be pulled off the shelf and used to explain inequality in a very superficial way. John DiNardo (of the University of Michigan) and I were troubled by the fact that there are a lot of patterns and trends in the labor market that don't fit in very well with a skill-biased technical change explanation. We were motivated to embark on a Don Quixote mission, a noble cause that wasn't going to go anywhere [laughs].

One thing we pointed out, for example, is that women are lower skilled than men, if you take the fact that they have lower wages as evidence of their skill. The SBTC theory says that people with lower skills should have slower wage growth than people with higher skills. But over the 1980s, women did much better than men. It's also the case that over the 1990s, women's relative wages were fairly stable again. So there was a long period of stability of women's relative wages, then a period of convergence of women relative to men that ended in 1991-92, and then stability again. That's an important set of trends that SBTC doesn't address. SBTC might be consistent with it; it might not be, but the theory needs a lot of auxiliary hypotheses to work.

The same thing is true with respect to the black/white wage gaps. Blacks earn less than whites, and many people believe that the reason they do so is because they're less skilled. Nevertheless, during the 1980s, the black/white wage differential was stable. It didn't widen as people had predicted it might.

Another trend that didn't fit with the SBTC hypothesis concerns the relative wages of people with different bachelor's degrees. There are a couple of different data sets that collect starting salaries for newly minted B.A.s. What these data show is quite remarkable. Everyone knows that the average wage of young college graduates went up over the 1980s. It wasn't the case, however, that the gains were most pronounced in engineering or science. They were actually greater for graduates in the humanities, which doesn't seem consistent with the idea that there is increasing demand for technically proficient, computer-savvy people.

So while it's not clear why income inequality is growing in the US, it's also not clear why we should care. Tyler puts forth three arguments for not caring: 1) consumption inequality is not growing (in part, thanks to government transfer payments, 2) happiness inequality is not growing, and 3) philosophically, we should care about absolute welfare, not the envy-fueled game of relative welfare.

inequality of consumption — the difference between what the poor consume and what the rich consume — does not show a significant upward trend (Dirk Krueger and Fabrizio Perri, “Does Income Inequality Lead to Consumption Inequality?” The Review of Economic Studies, January 2006).

Studies of personal happiness, based on questionnaires and self-reporting, indicate that the inequality of happiness is not growing over time in the United States. Furthermore, the United States has an inequality of happiness roughly comparable to that of Sweden or Denmark, two nations with strongly egalitarian reputations. (See the symposium in Journal of Happiness Studies, December 2005.) American society offers good opportunities for people to be happy, even if not everyone becomes rich.

The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview?

To me, the most important inequality question centers around mobility: what happens to someone who is born poor, but is brilliant and hardworking -- can they get ahead? On the flip side, what happens to someone who is born rich, but is stupid and lazy -- do they fall behind?

Read more

My New Year's resolution is to read more books. I spend too much time in front of the computer, and on email. Albert Wenger pointed me to his new site -- Daily Lit which email books to you, a few pages at a time. Now I can spend all my time infront of a computer *and* read more books! Yay?

Slate on Dubai

Slate has a long series of posts on Dubai, calling it the weirdest city on the planet. Maybe I've become jaded by living there for so long, or maybe the author has never been to Riyadh, but I don't think Dubai is that weird -- it's just caught in an enormous, speculative bubble, with an unsophisticated investor class. Reality will reassert itself at some point.

The best way I can describe it is as follows: if you went into a Dubai furniture store 15+ years ago, you would see a large amount of very heavy, ornate, white laqured furniture, with carved flowers and other vegetal motifs, which were painted some pastel color. Often, these furniture pieces would also feature a built-in cassette player. Imagine taking the types of people who would buy something like that, and give them lots of money and building permits. Dubai is the result.

Slate asks:

There is profound wackiness afoot here. But I wonder: Is something more interesting happening, too? Because I can't help but find reason for hope in this crass spectacle. The cultures that produced Dubai and Las Vegas surely must have something in common. If the Arab world's starry-eyed dreams are just like ours—full of schlock, gluttony, and elaborate theme hotels—perhaps we can get along after all.

I'm not saying that out-of-control capitalism will defuse the clash of civilizations. But I'm eager to find out what it looks like when Islam gets mixed up with reckless expansion and tacky greed. These are the sorts of ambitions the West has no difficulty understanding.

But Dubai as it exists today was not born out of any Arab culture. It is a product of the Maktoum dynasty, which was provided the Emirate with competant, secular, technocratic rule since the 1940s, and been very clever at getting around the anti-commerce rules and regulations passed in the capitol, Abu Dhabi.

Slate ends the article on a bitter note:

"What do you think of Dubai so far?" the U.K. kid asked me, making small talk. I told him I was still making up my mind. "You grow to hate the locals," he said. I raised my eyebrows. "For one thing, they can't drive."

I smiled at this, as I must admit I'd seen my share of inventive maneuvers on Dubai's crowded roadways. But I fear I emboldened him to get nastier. Because now this little blond twit (with apple cheeks and wire-rim eyeglasses, wiping his snotty nose with his snowboarding mitten) unleashed some good old imperialist invective. "And they should really treat us with kindness and respect," he said, in his pipsqueak British accent. "They're rather cheeky. You know, if we went home tomorrow, this whole place would turn back to sand."

The UK kid is being rude, but is quite correct. Dubai has been built entirely by foreigners. Today, it is run entirely by foreigners. The generous welfare system has left the locals as rich, entitled, wards of the state, with the traditional skills, ambition, and character that such dependency has historically engendered. This dynamic queers the relationship between locals, and the expats that work there; creating envy and disgust.

When Iraq invaded Kuwait, all the foreigners left (but only a fraction of the locals). After Iraq had been driven back out, foreigners were hired back in at outrageous rates to do things like change lightbulbs, put toner cartridges in photocopiers, etc. There is probably a joke in there someone: "How many Emirati does it take to change a lightbulb?"

iPhone

Six months ago, a friend of mine who works at Apple told me that Steve Jobs was very very frustrated with his cell phone. 6 months later, the iPhone is born. It must be nice to have the world's best industrial design and technology department around to make stuff just for you.

The iPhone looks awesome. Up until now I've resisted fancy smartphones, trying to get the simplest device with the best reception and longest battery life that I could find. I haven't tried a real iPhone yet but I am sorely tempted. Telepocalypse lists the good, bad, and ugly.

One interesting twist on the iPhone story is the pricing and availability. The unit is extremely expensive -- $500+ -- and is only available on Cingular through an exclusive deal. I'm guessing that Cingular is paying Apple for the please of being an exclusive provider, and hoping that the phone will drive uptake and usage of its digital services (even though it does not seem to be compatible with Cingular's high speed data network). Currently smartphones are a tiny market, and wireless data usage has remained small. The iPhone may change that.

More buildings please

I'm currently back in Dubai for the New Year and Eid, and once again struck by the enormous amount of construction that's going on here. Entire towns, ski slopes, islands, mountains, lagoons, etc. are being built built. One single development alone will house 500,000 people. Dubai has a population of around 2-3M.

At the same time, Sharjah, which was once a distinct Emirate but now is essentially a low cost suburb of Dubai, has announced a price cap on rents of ~10% a year (note, inflation in the UAE is kind of high -- about 6% a year or more) which has essentially fixed rental prices in real terms. It seems that residents were getting fed up of 20%+annual rent hikes and agitated for relief.

It seems unimaginable that the demand for housing so outstrips supply that prices are being driven up by 20%+ a year, given the amount of contruction that is going on. I have to beleive that, as projects complete and come on the market, supply will rise dramatically and rents (and prices) will fall. Otherwise, I'd conclude that Dubai still does not have enough buildings and they need to make more.

(Note: Yes, the rent cap is just in Sharjah, but the real estate markets of the two are very closely linked -- they're like Manhattan and Brooklyn, or Boston and Cambridge, with lots of cross price elasticity)