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June 01, 2004
Brad DeLong writes,
now the Kerry campaign has dusted off and brought forward a very clever idea from Brandeis's Stuart Altman...Have the government take its task of social insurance seriously, and reinsure private insurers and HMOs: construct a 'premium rebate' pool to pay annual health-care bills over $50,000.
In effect, the government would offer catastrophic (re-)insurance. This would reduce the incentive for health insurance companies to play Old Maid with high-risk applicants for insurance and also, by lowering the cost of health insurance, make health insurance more attractive to consumers.
I think that something like Altman's proposal is needed to make mandatory health insurance (which I favor) work. That is, just as with automobile insurance, the government has to step in to subsidize coverage for the highest-risk applicants.
For Discussion. DeLong argues that this is an idea that Republicans should "steal" from Democrats. Would economists of both parties tend to support it?
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David Ignatius is pro:
The best plan I've seen for doing the politically impossible comes from an energy economist named Philip Verleger.
...Verleger favors what he calls a "prospective gasoline tax," which would allow the country four years to get ready to do the right thing. Congress would enact a stiff tax of $2 per gallon, to take effect in January 2009, with further increases of another dollar in each of the following three years. To cushion the blow, the Treasury would borrow against the expected tax revenue to buy back the public's gas guzzlers (defined as vehicles getting fewer than 25 miles a gallon) at their 2004 value.
Bruce Bartlett is con:
The idea that a higher gasoline tax will help our energy situation is ludicrous. All European countries have far higher gasoline taxes and they are just as vulnerable to increases in the price of oil as we are.
I think that Bartlett is right to think in terms of a world oil market. In that context, if we raise our gas tax, then our consumers will pay a higher price for gas, our demand will fall, and the world price of oil will decline a bit. But the goal of "insulating" the U.S. from the world oil market is a chimera.
I also think that Verleger is wrong to suggest that the only side-effect of a rise in the gas tax would be lower values for low-mileage cars. Assumptions about the price of gasoline have affected the way that companies have set up logistics operations, the way that individuals have made location choices, and so forth.
Verlerger's ultimate goal of a $5 hike in gasoline taxes may be excessive. At that point, the economy's overall choice between gasoline and other fuels becomes really distorted. For example, people will choose to fly more (consuming more jet fuel) for short trips.
However, I do think that if politically the choice comes down to either a higher gas tax or new comman-and-control style regulations, such as CAFE standards for fuel economy, then a higher gas tax is less distortionary. It also reduces adjustment costs to have the increase take effect on a deferred, gradual basis.
For Discussion. Which occupations would be particularly affected by a high gasoline tax?
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May 31, 2004
Randall Parker sent a link to a cross-country comparison of GDP per capita and the percent of the population with verbal IQ's above 106. The equation fit very well, which led me to wonder how such a model could explain the low income of Communist countries. The article includes this note.
We can reduce some of the scatter by noting that 12 of the 81 countries have their GDPs skewed by special circumstance. Their inclusion in the analysis obscures the relation between GDP and IQ. China's absurdly low GDP, for example, has nothing to do with IQ and everything to do with fidelity to a failed economic system. Likewise Cuba. I eliminated them both.
The author lists other countries that are excluded from the analysis. So in the overall model to explain living standards, the fraction of the population with high verbal IQ is not the only variable. Whether a country has a capitalist or Communist system also matters.
For Discussion. What other cross-country comparisons might raise doubts about the strength of the relationship between IQ and living standards?
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May 28, 2004
William Baumol compares the innovation strategies and results of large firms with those of small entrepreneurial firms.
most private sector expenditure on research and development is attributable to very large corporations. These corporations are prime employers of scientists and engineers, personnel characteristically highly educated and technically erudite. But, despite this concentration of knowledge, talent, and expenditure in these major enterprises, an examination of the list of revolutionary technological breakthroughs since the onset of the Industrial Revolution suggests that they were contributed in overwhelming proportion by independent inventors and small, newly founded enterprises, not by major firms. Finally, and intriguingly, a review of the biographies of the most celebrated of these innovators shows, in a surprising share of these cases, a most remarkable absence of rigorous technical training and, in many cases, little education at all.
He goes on to suggest that education and organization support incremental innovation but inhibit radical innovation. Both types of innovation are needed. Thus, the economy benefits both from small firms founded by entrepreneurs lacking training in conventional approaches as well as from large firms that focus on education and training.
I find this topic fascinating, so that if you're like me you will want to read the entire article.
For Discussion. What factors inhibit large firms from developing and implementing radical innovations?
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May 27, 2004
If interest rates are the measure of monetary policy, then we have already seen a strong tightening.
For example, since late March, the yield on the 10-year Treasury note -- a critical interest rate since it's the basis for mortgage rates -- has jumped a full percentage point.
That sentence appears right next to a chart showing that the Federal Reserve has kept its interest rate unchanged for the past year. The job of monetary tightening is being undertaken instead by what Wall Street economist Edward Yardeni calls "bond market vigilantes."
This is hardly the first time that the market has changed monetary policy ahead of the Fed. The central bank had fallen behind a loosening trend back when I wrote Can Greenspan Steer?
For Discussion. What factors account for the rise in long-term interest rates?
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May 26, 2004
Bruce Bartlett pointed to a Dallas Fed analysis of the causes and consequences of higher productivity. One of the sections, on the evolution of work, says
The United States will continue to move up the hierarchy of human talents as it becomes more productive. Fewer jobs at relatively lower pay will be available for those who offer employers only muscle power, manual dexterity or formulaic intelligence. Americans who want to prepare for the better jobs of the future will concentrate on developing their creativity, imagination, people skills and emotional intelligence.
The article cites data for 1992-2002 showing that large increase in jobs occurred in nursing, engineering, and design. Declines occurred in secretarial work, sewing machine operators, and farm workers.
For Discussion. If you had an 18-year old child, what career choice would you recommend?
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May 24, 2004
I summarize my thinking about the Strategic Petroleum Reserve in an essay.
I am not persuaded that the "convenience yield" of the SPR justifies its costs. However, even if it does, I believe it makes sense to have a rule that ties the amount of oil we hold in the SPR to the pattern of oil futures prices. In particular, we should keep less in the SPR when there is backwardation, and fill the SPR when oil futures prices show a pattern of expected increase. Filling the SPR during a period of backwardation, as we are doing now, serves to worsen what the market sees as a temporary price spike.
In contrast to governments, rational speculators buy low and sell high. This process stabilizes markets. Irrational speculators, who buy high and sell low, destabilize markets. That is the effect of the Strategic Petroleum Reserve -- as Karl Kraus once said of psychoanalysis, the SPR is the disease that it purports to cure.
Pundit Larry Kudlow listened to President Bush on this topic.
the former oil man suggested an interesting scenario. Should the future price of oil drop below the spot price (they are nearly equal now), it would make sense to hold back purchases and lower the oil cost by using futures. He called this an oil hedge. Traders call this backwardization [sic]. It's a rare president who understands this level of detail.
Apparently, the President is thinking about backwardation, also. But I am not sure why he believes that spot and futures prices are close, unless he is looking only at short-term futures prices. Long-term futures prices are clearly below spot prices.
For Discussion. If there were no Strategic Petroleum Reserve, would private sector incentives be sufficient to provide enough oil storage in case of a disruption in supplies?
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May 21, 2004
In my latest essay, I argue that the costs of wiretapping are going up, while the costs of alternative surveillance technologies are going down.
With ordinary phone service, wiretapping is nearly impossible to prevent. Regardless of what equipment the phone user employs, once an agency has access to the phone line, it can tap the conversation.
With VOIP, the opposite is true. The conversation is private unless the system that does voice-to-data translation is designed and implemented to be tappable. If a terrorist wants to avoid having a VOIP conversation tapped, all he has to do is disable the tapping mechanism on his converter or use a converter that was designed without tapping capabilities. My instinct is that it will be easy to hack around any scheme for tapping VOIP calls. The only people whose VOIP calls will be tappable will be people who choose voluntarily to use tappable systems. Terrorists are unlikely to fit that profile.
...the cost of intercepting electronic communications is increasing and will continue to rise. If the FBI starts trying to dictate the design of hardware and communications systems, the social cost of wiretapping goes up exponentially. Ultimately, a costly, futile pursuit of wiretapping capability will undermine public safety, not bolster it.
For Discussion. Is there a fair analogy between the FBI trying to preserve phone-tapping capability and the music companies trying to preserve their distribution model in the context of file-swapping?
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The International Economy Magazine collects twenty opinions on the issue of demographic change in one issue. For example, Michael Boskin writes,
The United States is in far better shape to deal with these issues than the bulk of the developed world. Our fertility rate is near replacement and we are less hostile to immigration than Europe or Japan. We will have two workers per retiree (down from the current three), whereas much of Europe will have only one, and a much higher median age. Europe and Japan start from a considerably lower per capita income, a far less flexible and dynamic economy, and (in Europe) much more bloated welfare states in which a majority of the voters may soon be net income recipients from the government rather than net taxpayers.
There are a number of interesting perspectives offered, but the theme that the U.S. faces relatively less severe changes is echoed by many.
For Discussion. Does the gradual nature of the aging of the population make it easier or more difficult to adjust to the challenges?
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Jeff Frankel speaks for the prosecution.
they will do anything for a few votes, even if their behavior is against the national economic and security interests and blatantly inconsistent with things they claim to stand for: small government, free trade, macroeconomic discipline, good neoclassical economics, and so forth. And they will favor political expediency even if it creates big trouble for themselves a few months or a few years down the road—hence the charge of incompetence.
Glenn Hubbard speaks for the defense.
President Bush has submitted a detailed budget blueprint to the Congress with a plan to reduce the budget deficit relative to GDP by half over the next five years. The President has also spoken often of the need to implement reforms of Social Security and Medicare that would improve the sustainability of those programs. By contrast, as of this writing, the President’s challenger has racked up an additional budget gap of at least $1 trillion—the excess of spending proposals over promised tax increases—over ten years, and he has offered no clues as to his thinking on the outlook for Social Security and Medicare.
For Discussion. What will be different about the economic policies and outcomes of a Kerry first term compared with a Bush second term?
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