Chocolate and Gold Coins

Monday, February 28, 2005

Choosing Your Budget

Andrew Hughes of Anyletter has an interesting proposal to allow people to voice their preference for how their tax dollars should be spent. Under his proposal, if you want more of your taxes spent on education and less on defense, you can specify that when you submit your taxes, and your tax dollars will be allocated according to your preference. That sounds like a nice idea, and I’m sure others have kicked it around, but my first reaction was that it sounded like a funny story I remember hearing. Here is my best recollection of the story, (I doubt it was true):

The Governor had a way with voters that even his opponents had to grudgingly admire.

Once while on the campaign trail, a man came up to the Governor and told him that he opposed the new program (whatever it was). He said he was a God-fearing man and he was upset to the point of illness that his tax dollars were going to be spent on something he so morally opposed.

The Governor looked the man in the eye with an expression of sincere compassion.

“I understand your feelings and respect them 100%. I’ll tell you what I’m going to do for you. You write down what you just told me in a letter. When you mail in your taxes, attach the letter and address it directly to me. I will personally see to it that your money is spent on something else.”

From the look in the citizen’s eyes, I could tell that the Governor had won another voter. And from the look in the Governor’s eyes after we left that citizen, I could tell that he wasn’t going to spend sleepless nights worrying about how exactly he was going to spend that concerned citizen’s taxes.

Suppose that 40% of the people want more social spending, 40% want more defense spending, and 20% think the government should decide. Then the social spenders and the defense spenders will more or less cancel each other out and the 20% of the budget that is uncommitted will cover any gaps left by the rest. The budget people won’t lose sleep about where to find the money. Enough money will be liquid to spread it to where the budget people would have put it anyway.

Now suppose that 1% think that 1% of the budget should go into preventing vegetable abuse and the rest of the country thinks that is ridiculous. The vegetable lovers can force the rest of the nation to support their cause by devoting 100% of their taxes to their pet project. They don’t really think that all of the budget should go to protect vegetables, but they will free-ride on everyone else’s defense and social spending to get an overall budget that reflects their preferences. In a way, we would be replacing tyranny of the majority with tyranny of the minority.

However, the main issue I have with this proposal is that it would not address the fundamental problem with government spending: we don’t have a plan B. In the free market, if I don’t like the information the Washington Post provides, I can always buy the New York Times. However, if I don’t like the information the CIA provides (and who does?), then I cannot opt to spend my taxes on CIA2. We can hope the government reforms CIA1, but CIA1 is the only choice we have, except for not having a CIA altogether. Free markets duplicate organizations so that if one becomes dysfunctional, we can shift to a more efficient version. We never get that choice with the government. So while I kind of like the idea of having some choice about how my tax dollar should be spent, unless I actually get some choices, all I have is Hobson’s choice.

Stuck Working on Saturday Evening, Mumbai

"Sniff," she sniffed into her handkerchief. "Why are you standing over me? Sit down." This was a friend, and I wasn't standing over her. I was leaning on the door frame of her tiny office.

The room was airless, and bloody silent. The stale smell meant the air conditioner hadn't been switched on for a while. Muffled music pumped away from speakers outside.

"My glasses broke, "she said, squinting at a laptop. "Just like that. One glass just popped out and landed on the table." She half-smiled and sniffled.

"You not well?"

"Just sick. But I have so much work to do." Her eyes were half open now, slowly giving in to the misery of her situation. "Calling up people, handling complaints about the trainers, the helpers in the restrooms, taking care of promotions. I wish I had your job."

"Be careful what you wish for. Pakistan's [the national cricket team] coming next week and there's a lot of work happening. By the way, do you get overtime?"

It was 7:30 pm on a Saturday evening; her smile said: a) what do you think, b) I wish, c) the thought hadn't crossed my mind. "The guy at the front desk is reception and marketing. He works 14 hours a day. But he gets paid for it as well."

"So when is your next day off?"

"Today was supposed to be off, but I had to come in. I have to remind him [the boss] that I'm entitled to a day off every week." She was dressed in a neat salwar-khameez, ready to go somewhere, but not just yet. "I wouldn't mind moving to Dubai. I love it there. The standard of living is so much better.

This dialog comes from a wonderful post by Rahul Bhatia, a sports journalist based in Mumbai. The lady in the office works at an upscale gym.

I asked Rahul why she puts up with the treatment. I could guess the answer. She’s paid reasonably well for a desirable position, and there are plenty of people in India to fill any position. She could find another position with more regular hours, but it wouldn’t pay as well. In India, her salary might be considered very good, but in Mumbai, where the cost of living is outrageous, she needs every rupee just to cover the basics of rent, (especially rent), and other necessities.

It really isn’t any different in New York City, Los Angeles, or Washington D.C. People go there attracted by the high salaries and discover that money doesn’t go very far. Some places my wife interviewed with in Washington, D.C. openly admitted that 80 hour work weeks were not uncommon. At least they were up front about it. And some people will work like that. Leisure is postponed until partnership or until retirement.

Rahul goes on in his piece to explain his own experience with an unreasonable boss. In the short term he put up with the extra hours and cancelled leave. In the long term, he found better employment. And someday this lady will move on as well. But for now, she puts up with it.

Thanks go to Rahul Bhatia for kindly explaining the background to his post. I found Rahul’s post via Amit Varma.

Saturday, February 26, 2005

Optimal Exorcisms

William Butterfield of Corner Solution has a wonderful tongue-in-cheek take on a bizarre story about the rise in demand for exorcists from the L.A. Times. The section in the L.A. Times article that caught my eye was:

Only a small percentage of those in distress are judged to be in need of an exorcism, and learning how to tell the difference between demonic possession and other psychological or physical traumas is the main goal of the priestly students taking the course at the Regina Apostolorum.

"When you're dealing with a reality like the devil," said 39-year-old Father Clement Machado of Canada, "you can't just learn the theoretical. You need the pragmatic experience…. It's such uncharted territory."

I don’t doubt that it would be very difficult to tell the difference between a demonic possession and mental illness. It would take someone very wise to be able to tell the difference. Is the Catholic Church helping psychiatrics around the world so that they don’t misdiagnose demonic possession as mental illness?

William Butterfield has own interpretation for why demand for exorcism is rising: the demand for individualized prayer services.

Prayer is a service that adds value in its "production" and churches that have been able to better supply more abundant levels of personalized prayer have outperformed their more "liberal" or "traditional" competitors.

Take for example the generally more liberal and declining Episcopalian church. They pray out of a "Book of Common Prayer" which adds little individual value because, as the title indicates, nobody owns the prayer that is produced. Even the Catholic Church has lost a lot of ground to evangelical Protestants, in part because they have limited the supply of prayer to priests. Evangelicals don't do this, and they tend to pray much more often for each other and much more openly about individualized concerns. Praying openly prevents "prayer free-riding" so you can verify whether or not others are in fact praying for you.

Read his post.

I am concerned that exorcism appears to be a zero-sum game, (these little devils have to find someone to torment) and demons seem to be endogenous to the Catholic Religion. If that is the case, exorcism is essentially rent-seeking.

Of course, from an expected utility viewpoint, there might be benefits to spreading the demonic possession around: if we are risk-averse, it is better to be possessed for an hour for certain than to have a one in 10000 chance of being possessed for 10000 hours. But exorcism is a costly procedure. Therefore, there should be an optimal time that a possessed person should wait before he or she is exorcised. This would be a difficult calculation to make—perhaps more difficult than determining the difference between mental illness and demonic possession.

It just goes to show how important quality cost-benefit analysis is in even the most unlikely applications.

Buying Property in Bulk part 2

I thought about my previous post on Buying Property in Bulk and decided that I did not entirely like the 10% punishment mechanism that I outlined. I thought about how that game would proceed and I realized that I was wrong that it had the virtue of forcing people to reveal their true valuations for their property. In practice, people would discuss among themselves what markup each would ask for. If most said “I think I will ask for 10% more than my estimated house price,” then others will think “if I ask for less than 10%, I will be giving away money, and if I ask for more than 10%, I might get punished.” Therefore, a rather arbitrary number will become the focal point of the game, (a focal point is a strategy in a game that is important for no other reason than because everybody thinks its important).

Also, I did not like the fact that 10% of the players had to be “punished,” albeit mildly. I think most people would say that everybody ought to get the same markup regardless of their own valuations. So I propose another mechanism: the 90% consent mechanism.

The 90% consent mechanism

The 90% consent mechanism would proceed as follows:

  1. The real estate developer would go around to homes and propose the mechanism for acquiring their land en lieu of acquiring via eminent domain. He hopes the people agree.
  2. An independent home price estimator estimates the price of each home.
  3. The real estate developer announces the markup that he will be willing to pay. Everybody gets the same markup.
  4. All of the homeowners then vote to approve or disapprove the resulting deal. Ninety percent or more must support the deal for the homeowners to collectively approve the deal.

A variant of this game would be to have a third party broker the deal between the homeowners and all possible real estate developers. The land would be auctioned off to the highest bidder conditional on the approval of the homeowners. Given the sales price and the estimated valuations, we can figure out the markups. Then 90% would have to approve the deal, as before.

The virtue of the 90% mechanism is that it respects private property rights in the sense that a small minority of the homeowners can disapprove the deal if they feel that their rights are violated. The 90% rule also force the real estate developer to pay a fair market value for the real estate, because certainly more than 10% will disapprove if they feel that the real estate developer is low-balling the price. In addition, this mechanism is fair since everyone gets the same markup.

I like the version of the mechanism in which there is a broker. Maybe I should be the broker since I thought up the mechanism. I would charge a very small brokerage fee, perhaps 1% of sales. If the deal is more than a billion dollars, I will only charge 0.5%, (I’m not greedy).

Friday, February 25, 2005

Buying Property in Bulk

I am interested in the Supreme Court case Velo vs. The City of New Haven, Connecticut, (link via Cafe Hayek). The controversy surrounding this case centers on the right of a municipality to use eminent domain to condemn private property for the purpose of reselling the land to a private real estate developer. According to the Fifth Amendment to the U.S. Constitution, governments can seize private property but they must pay just compensation and they are only entitled to seize property if it is to be used for public purposes. However, there is already precedent for local governments seizing land for the purpose of clearing blight, which, broadly interpreted, might mean seizing land that is more valuable as cleared land than in its current state. This definition of “blight” might include 10% to 25% of the land within 10 miles of the U.S. Capitol, for example, so this is a somewhat awesome prospect. If you live in an older home, the government might decide they want it. Your property rights are null in the eyes of the government.

This issue has caused considerable consternation in the blogosphere, from libertarians to progressives. For blogs that have posted on it include Cafe Hayek, Crooked Timber, Coyoteblog, to name a few. No one seems very comfortable with government just seizing land in this way. A large part of this unease is that there seems to be many people whose property was seized that did not receive what they considered just compensation. Just compensation is subjective; some people would not sell their house for 200% of its estimated value because of sentimental reasons. On the other hand, some people in this situation might exaggerate their losses.

In defense of eminent domain

Why do real estate developers need the government to get land, land that the government takes by force? It certainly sounds terrible. However, if you want to have stadiums and big buildings conveniently located in the city center, there might not be any other way than to at least threaten homeowners with eminent domain. The problem is that acquiring large amounts of land by voluntary negotiation will lead almost certainly to politics and a breakdown in negotiations. There is a terrible monopoly situation associate with collective agreement: any homeowner can nix the deal by just being either stubborn or greedy or both.

Suppose, for example, that a real estate developer has his eye on about 500 properties covering maybe one square mile. Now suppose that this developer would be willing to pay up to 20% more than the estimated value of the properties to acquire the land. If just one person is obnoxious and insists on double the estimated value, then maybe she gets it, and everyone else gets 19.8% of her estimated value. But if one person gets away with it, then everyone will want a special side deal and the whole purchase will collapse.

The game I outlined above has a strong similarity to the classic “tragedy of the commons” in which individual rationality leads to collective insanity. The real estate developer only cares about the average price of the 500 homes. Each homeowner only cares about the price of her home. If a homeowner asks for an extra 10% more for her home, and all homes are similar in value, then the average home price goes up only 0.02%. So everyone thinks, “No one will notice if I ask for a little more.” If a few conscientious homeowners “do the right thing” and lower their asking price to save the deal, it won’t help much.

Another factor to consider is that many people are in deep denial about the value of their home. If one were to visit the various open houses on any weekend, one would encounter maybe one home in ten that has been on the market for months and is overpriced. Why don’t they drop the price? They will eventually, but they are convinced that the right buyer will come and see the hidden charms in the home that the homeowner sees. These people are going to be tough to negotiate with.

I have heard of an example of 14 homeowners voluntarily selling their homes to a real estate developer. I consider 500 homeowners voluntarily selling their homes to be a fairy tale.

The 10% punishment mechanism for acquiring land in bulk

A mechanism is a redesign for a game that leads to a desirable outcome. In the above game, the outcome was undesirable because one obnoxious person could destroy a deal worth maybe $200 million. We want the mechanism to produce an outcome that:
  1. gives a high probability of yielding a successful negotiation when the benefits to the real estate developer exceeds the sum of the reservation prices of the property owners
  2. yields mutual benefits to homeowners and the real estate developer
  3. gives as many homeowners as possible their desired price.

The mechanism I propose I call the “10% punishment mechanism” because 90% get what they ask for and 10% are “punished” for asking for too much. In the first stage of the mechanism, the real estate developer notifies the homeowners that he wants to buy their land and if they refuse to deal with him, they will go to the government. Faced with the prospect of getting only “fair value” instead of probably 5% to 10% above fair value, probably everyone will agree, but one never knows. Let us assume that people are rational and they agree to the mechanism. Then, whatever happens, these homeowners are committed to selling the home at the price that the mechanism produces.

The second stage of the mechanism is the home price estimation. There are firms that can estimate home prices based on recent sales. If a homeowner objects to the estimated price, he or she can re-estimate it at the homeowner’s expense. The third stage is for each homeowner to submit his or her own home desired price. An independent evaluator orders these bids on the ratio to the homeowner’s price to the estimator’s price. The mechanism rule is that real estate developer must pay the homeowner’s price for the lowest 90% of bids, but the highest 10% are punished and get only the estimator’s price. I would amend the punishment rule to not punish anyone who is within 5% of the average bid, so if everyone bids 12% above the estimated value of the property, no one will be punished.

The real estate developer then looks at the total price and decides if it exceeds his reservation price for the property. If it does exceed his reservation price, the deal falls apart. Otherwise, the real estate developer signs the deal and we have a sale.

The 10% punishment rule would be extremely effective in discouraging greed on the part property owners. They might ask for 5% over the estimated price, because the mechanism guarantees them at least the estimator’s price in any case. However, asking for 10% might be like throwing away a bird in your hand to chase after two in a bush. The government would have to make it illegal for homeowners to pay other homeowners to “overbid.”

If some real estate developer came to my family with the 10% punishment mechanism, I think I would be comfortable with it. I’m not so attached to my home that I put a valuation for it that is in excess of the market. I might even make a nice profit off of the deal. However, it would make much more sense to try to acquire those junky homes down the road.

Beware of Blog Statistics

Beware: 96.293% of all statistics cited on blogs are just made up. Remember, you read it here first.

Wednesday, February 23, 2005

Robber Barons Get Some Respect

Sometimes while searching the web, you find some interesting things. One site I found today is very interesting indeed. Coyoteblog is the name of the blog and a small business owner named Warren Meyer runs it. I found several very well written articles on his blog. One that I admired, because I learned something, was his post In Praise of "Robber Barons". One capitalist he writes about is Cornelius Vanderbilt:

In many ways, Vanderbilt was the Southwest Airlines of his day, and, just like with Southwest today, towns begged for him to serve them because they knew he would bring down rates. In fact, there is actually another parallel with Southwest Airlines. In the early days of Southwest, most of the airline industry was regulated such that new entrants competing at lower prices were pretty much excluded by government rules. Southwest got around these rules by flying only in Texas, where interstate rules did not apply. Their success in Texas was a large reason for the eventual demise of government regulation that effectively protected fat and inefficient incumbent airlines, with drastically lower [fares] the result.

When Vanderbilt first entered the steamship business, most routes were given as exclusive charters to protected monopoly companies, most run by men with friends in the state government. Vanderbilt took on the constitutionality of these government enforced monopolies and, with the help of Daniel Webster, won their case in the Supreme Court. Within a decade, the horrible experiment with government monopoly charters was mostly over, much to the benefit of everyone. While private monopolies have always proved themselves to be unstable and last only as long as the company provides top value to customers, publicly enforced monopolies can survive for years, despite any amount of corruption and incompetence. Vanderbilt, by helping to kill these publicly enforced monopolies, did more than perhaps any other man in US history to help defeat entrenched monopolies, yet today most would call him a monopolist.

Read the full thing.

He also has a nice post on the Supreme Court case Velo vs. the City of New London, CT. I will have more to say about that case in a day or two.

Tuesday, February 22, 2005

Compulsory Participation Advertising

I had an idea for online advertising that I thought I might share with others (the 20 some odd people who happen upon my blog each day). I do not know much about on-line advertising, but not knowing about something rarely stops me from writing about it. I became interested in the subject while reading Arnold Kling’s blog post on the Death of Newspapers, his Tech Central Station post on The News of My Death, and his article on news “clubs”. I thought that maybe there was another model of on-line advertising that on-line content providers were not pursuing, and I wondered why.

Three methods of paying for content

There are currently three methods that on-line content providers use to provide their revenue: fee for service, passive advertisement, and free registration. The New York Times charges a fee to view their content. People like me who refuse to pay for content miss out even though the marginal cost of another reader is nearly zero. Tech Central Station uses passive advertisements. I never read them. Their advertisers are hoping there are many readers who would like to read Tech Central Station and who, unlike me, might happen by chance to be interested in one of their advertisements. The Washington Post forces readers to register to view their content. This demographic information enables the Washington Post to know a little about who I am and what things I might like to buy. This is a step up from passive advertisement because they force me to reveal something about me to get their content. But the registration model is still very similar to the passive advertisement model because they are not really requiring me to view their advertisements.

There is an important point about trying to raise money for your on-line content through advertisement: it has to cause you to buy something you wouldn’t ordinarily buy to work. If their ad just causes you to buy something at that site that you would have bought anyway, they really haven’t sold you anything. If you are forced to buy something to read the content, and they gave you too many choices of advertisement that you could read, you would simply search for something that you we already interested in buying and buy it via that site. The advertisers would quickly wise up that they would not be adding any sales.

However, there is potentially an interesting game that could be played between advertiser and the reader. Matching buyers and sellers could be more efficient if buyers put forth a little effort. Maybe you did not think that you really needed anything the advertisers were selling, but you might play along with the game for a bit to get the content, if it is really good content.

Compulsory advertisements

Suppose that the on-line content provider monitors your page views of content and page views of advertisements. If the ratio of content to advertisements is too high, the content provider might announce that you will have to click on one of the advertisements. You might think, “Fine, I’ll just pretend to read their ads.” However, you might not click on the ads randomly. You might chose the one that might be the most entertaining, in part because you might be a little interested in the product. Maybe you click on a health club because you need to lose weight. That click brings up a host of other pop-up windows for similar products and services. Maybe one of those actually catches your eye: “Hey there’s a piece of exercise equipment that I could use.” Now they have sold you something you would not ordinarily buy, because you didn’t know it existed, but you helped find it. The point is that compulsory participation in viewing advertisements might make for a better match between the potential customer and the potential seller

The idea behind compulsory participation advertising is that while they would force you to view their advertisements you get some choice. Allowing you a bit of choice in which advertisements you view will help the content provider to match you up with a product that you would like but didn’t know you needed. They will not give you too many choices, however, because they only want to sell you things you did not know you needed and not things you already buy. It is potentially a very interesting game, and one that could be valuable to both consumers and producers.

Free Food: Why Do Americans Love It?

If one were to take a box of week-old donuts—so stale that you would feel bad about feeding them to your pet—and place them on a tray and leave it in near the coffee maker in any office in America, those donuts will be devoured in just a few hours. Why does that happen? These people are not underfed (quite the opposite). These people wouldn’t pay even 5 cents for those donuts. These people might be making 6 figures and can afford gourmet donuts for 10 dollars apiece. Why would they even give these inferior goods a second look?

If they were using the donuts for bird feed or for creative sculptures or for paperweights, it might make some rational sense. After all, free stuff is free, and you can always throw it away later. But these people are eating this junk. This food might be free, but it isn’t costless. Extra calories either have to be burned with exercise or they add on to the flab around your waist. Why would people want to risk obesity for something so unappetizing?

My guess is that most people just don’t think about food in a way that is even remotely rational. They treat food as if the only cost associated with it is the monetary cost. This would make sense if we were 20 pounds underweight and desperately searching for food. But if you are already 20 or 50 or even 200 pounds overweight, the monetary cost of food is less important than the opportunity cost of food. The opportunity cost is simply that one will have to forgo some other food with that many calories or gain weight. It makes no sense to forgo a good meal to eat someone else’s garbage.

I have to admit to this insanity in my past. I used to love free food. But I’ve had a lot of time to consider this and other things while riding my exercise bike. Maybe I think too much.

Sunday, February 20, 2005

Happy Birthday, Dad

I saw that the date today is February 20th and I remembered that today was a great American’s birthday, but I couldn’t recall whose. Was it George Washington’s birthday, or Abraham Lincoln’s? Then it hit me: "Oh it’s my father’s birthday, and I forgot to send a card." It happens each year.

My father certainly qualifies as a great American. He fought with distinction during WWII. He did cutting-edge scientific research on boundary layer behavior and heat ablation for the infant space program. He created numerous inventions for the various companies and organizations that employed him. And when he came home from a long day’s work, we worked several more hours at home creating gadgets for improving our quality of life. He invented one of the very first automatic sprinkler systems more than fifty years ago. He never profited from it, he made it just for our home.

Anyway, I just wanted to show my appreciation to this great American, my Dear Old Dad (DOD). And Dad, I wonder what the Post Office did with your card?

Lottery Technology

I was reading a post by Prof. Richard Posner on the Becker-Posner blog when I came to the following paragraph:

Young people find it strange that such a large fraction of overall medical expenses is incurred in the last few months of life—that is, by people who are dying. (Last-year-of-life medical care accounts for 26 percent of Medicare expenditures and 22 percent of all medical expenditures. PubMed. ) Having nothing to look forward to, why are they willing to spend so much on a meager extension of life?

The link in the above quote shows that medical expenses in 1996 for the last year of life averaged $37,500. When I saw this, I was shocked for a moment. Was this a non-convexity? ... Lottery technology? I gasped at the implications.

Minnesota economics

If the reference to lottery technology means nothing to you, then you are an ordinary human being. Even most economists have never heard of the term. However, the people associated with the University of Minnesota Department of Economics in the 1990’s would instantly know what my reference was.

During the 1990’s in Minnesota, the Deparment of Economics was dominated by the theories of Prof. Edward Prescott, who won the Nobel Prize in economics just last year. Prof. Prescott was famous for real business cycles, and for furthering the theory on rational expectations and dynamic general equilibrium. But he had other pet ideas as well. One of them was the lottery technology. Like many ideas of brilliant academics, it was an idea that was both brilliant and daft at the same time. It was brilliant because it nicely transformed a nasty economic model into a nice one in which a bunch of theorems would apply. It was daft because a lottery in the way that Prof. Prescott envisioned it would be nothing you would ever see in a real marketplace (a small detail in the world of economic theory). I'm not saying that Prof. Prescott is daft; I'm saying that the idea of a lottery technology is academic. But I always wondered if someone could find a practical application for this idea.

What is a lottery technology? It is a coin-flip. It is a device that can produce a random number. The lottery technology enables us to take chances. However, we would not use it for entertainment, we would use it to solve a fundamental economic problem. An example will illustrate the idea.

Mrs. Kenny’s trip to Europe

Suppose in the near future, end of life medical expenses grows to $100,000 in today’s dollars. Medicine finds many new futile ways of extending life a few agonizing weeks. Then much of the elderly’s wealth will be tied up in the last few weeks of life. Some people might think that they would rather have the $100,000 in cash and then die a quick painless death. However, if you die, what good would the money do you?

Mrs. Kenny is in her 80’s and does not expect to live more than 5 extra years. She can still walk around, but her strength is beginning to fade. She would dearly love to take a trip to Europe with a senior tour group, but she fears that if she does not go soon, it will be too late. The trip to Europe will cost $10,000 and she does not have that money.

Luckily for Mrs. Kenny, the Libertarians have swept into government and have completely deregulated the FDA. Now all drugs are legal including the new little black pill: the lottery pill. In fact, Medicare and Social Security will pay her to take the little black pill. Medicare and Social Security owe Mrs. Kenny approximately $200,000 in future benefits, including $100,000 in last-year-of-life benefits. They are willing to give her some of that now, if she would just take the little black pill.

Mrs. Kenny orders the pill. She has to take it at the Medicare office, in view of witnesses. They give her the pill. She looks a the small round black pill with the number “0.05” on it. Ninety-five times out of a hundred, this pill just has sugar in it. In that case, she will receive $10,000, enough to pay for the trip to Europe she dreams of. But that other five times out of a hundred greatly troubles Mrs. Kenny. She trembles as she places the pill in her mouth. “Is it worth it?” she wonders. She takes the pill and drinks some water. Her heart pounds. She begins to feel faint. “It’s happening. Oh, no, now I will never know who will be the next American Idol.” She closes her eyes for what will surely be the last time.

Then, miraculously, her eyes open. She takes a deep breath of relief. “I won! I won the lottery! I’m going to Europe!”

Friday, February 18, 2005

Secure Credit Cards

I had to purchase something on-line the other day with my credit card. Of course, I always worry that some cyber-thief will abscond with my number and then go on a shopping spree with my credit. It occurred to me that the risks associated with credit cards are entirely avoidable. With a little modification of the system, it would be impossible for cyber-thieves to steal your number and use it for obtaining anything of value.

Numerical signature

The idea is to replace the written signature, which cannot be produced on-line anyway, with a numerical signature. A “signature” would be a 12-digit number that only you and your credit card company would know. You would be given maybe 10,000 signature numbers and after each transaction, that number would be invalid. Since the signature numbers are one-time-use, a thief wouldn’t be able to use it even if he was able to monitor your on-line transactions and steal your numbers. The thief would have to guess one of the 9,999 valid signature numbers out of 1 trillion possibilities.

How would you keep track of your signature numbers? I think you would need a palm-pilot-type device that would store these numbers. It would then load a number and immediately invalidate it for any future transaction. Even better would be a device that could store the credit card number and the current signature number on the magnetic strip of the credit card. This would enhance the security of any credit card transaction.

Encouraging technology adoption with patents

This change seems so obvious that it begs the question: “Why haven’t the credit card companies thought of something like this?” Probably they have thought about this and discovered that there was no way to patent it. Therefore, it would be a lot of work for no increase in profits. The benefits would go to society not to any individual firm. Firms can be indifferent to crime that affects all firms in an industry equally because they just write it off as a business expense. So don’t expect firms to innovate to fight crime unless government issues a patent to a particular firm or a regulation on all firms.

One way to use patents to innovatively produce anti-theft technology is to hold a contest. The government announces a contest to all firms to devise the best protection system against credit card fraud. Firms submit proposals. In each firm’s proposal will be a description of the technology and a proposed rental rate for other firms to use the technology if the given firm wins the patent. Each proposal will be evaluated for potential effectiveness and for cost (to other firms). If none of the proposals seem worthwhile, the contest ends with no winner and the status quo. If there are acceptable proposals, a winner is selected by a panel of Ph.D. economists (who I assert must be paid extremely handsomely for this important work). The winner gets the patent and is bound by the rental rate that they submitted in the proposal. All other firms would be compelled to adopt the technology after a specified transition period.

Above is my proposal. I will only charge 50 cents per card as the rental rate for using my technology (I’m not greedy).

Thursday, February 17, 2005

Karen Cleveland Replies

This post is an update of my Habitat for Market Failure post.
Recently, I wrote to Karen Cleveland, director of Habitat for Humanity of Northern Virginia.
Here is my letter to her:

Hello Ms. Cleveland
I read about the plight of Mrs. James in the Washington Post and I have to say that I am very disappointed with Habitat for Humanities role in this whole situation. I can understand why you would not want Mrs. James to sell the home and profit from the windfall she received so easily, but why wouldn't Habitat for Humanity at least co-sign a small home equity loan for Mrs. James so that she could make needed repairs on her home and so that she could pay this year’s taxes? It is absolute rubbish to claim that the restrictive covenant reduces the value of the home. It just means that Habitat for Humanity is a co-owner of the home during the covenant period and maybe your organization should be paying part of the property tax.

Karen Cleveland graciously wrote back:

Thank you for your interest in Habitat and Kesha's story. Actually we did give Kesha a Home Equity loan recently and we [are] working with the craftsmen to fix her leak and the wall. Often times the whole story does not make it into the paper or onto the news clips. We would never abandon our homeowners at a time of need.

First off, I owe Habitat for Humanity an apology for the following statement:

…Mrs. James is not going to be wealthy because of a small home equity loan to pay for the leak in her living room and her $5000 tax bill. It is a sad example of how a charity can be oddly indifferent to the suffering that their rules have brought upon the very people they claim to want to aid.

Apparently, Habitat for Humanity will help their owners with a home equity loan. This is very commendable, and it is heartening to know that the charity is committed to helping the owners even after they buy the home. However, it also provides a motive for Habitat for Humanity to misrepresent the plight of their homeowners. I will have more to say about this point later.

The quote above raises more questions. Karen Cleveland says: “Often times the whole story does not make it into the paper or onto the news clips.” Does this mean that the reporter chose not to report the whole story or Mrs. Cleveland chose not to tell it? I wrote to Annie Gowen for her side of the story. Annie Gowen was aware of the loan to Mrs. James but she might have been misled about its significance. Bottom line, if a journalist doesn’t ask the right questions, he or she will not get the full story. I will have something more to say about this in the section “Annie Gowen replies”.

The fact that Habitat for Humanity can and will approve a home equity loan for their homeowners completely invalidates any claim that the restrictive covenant on the home makes it difficult for these homeowners to pay their taxes. There would be no reason why the Mrs. James could not borrow sufficiently to meet all of her future obligations. Of course, it may be that Habitat for Humanity would not like to do that for a whole range of internal reasons. The point is, faced with the reality that their homeowner will go bankrupt if Habitat for Humanity does not assist, they would probably decide to swallow their misgivings and approve such a loan.

Here is a quick calculation. From the article, Mrs. James’ monthly mortgage is $375. The remaining real estate tax and homeowner’s insurance is $954-$375=$579 per month. How this $579 splits between real estate tax and insurance is hard to tell but my guess is that her home is assessed at about $450,000. The tax rate in Alexandria is 0.995%, which would work out to be about $375 per month. This leaves $204 per month for homeowner’s insurance, which seems reasonable. If she took out a home equity loan for $107,000 at 7% (a little high) she would be able to pay all $954 per month for the remaining 15 years. This yields a net profit to Mrs. James of roughly $340,000. Obviously, Habitat for Humanity would not want to make owning her home that easy, but they have no reason not to let her borrow $20,000 to help pay her taxes. Cutting Mrs. James’ taxes in half would effectively put another $20,000 into her pocket. Do you think Mrs. James’ deserves this extra windfall? I don’t.

Why is Habitat for Humanity lobbying for real estate tax abatement when it is unnecessary? It would seem foolish on their part because they risk engendering bitterness of the general community. But charities are greedy. They live off of other people’s money (OPM) or in Habitat for Humanity’s case, other people’s sweat (OPS). So if they see an opportunity to leverage their charitable OPM to get some public OPM, it is very tempting. Reducing real estate taxes helps relieve Habitat for Humanity of their continuing burden of helping these homeowners, a burden Karen Cleveland alluded to. And the fact that they think that they are altruistic ironically absolves them of any guilt associated with greedily coveting the public money pot. It seems ridiculous to ask society to help these homeowners when they stand to make a small fortune from their “gift” homes.

The disturbing aspect of their lobbying is that it might be the tip an iceberg. Habitat for Humanity may soon discover that they can leverage their standing in the community to push through their political objectives. They might want their homes zoned for low-income use for all eternity. This would certainly not be in the public’s interest, but it is easy to see it would be in Habitat for Humanity’s interest.

Annie Gowen replies

I wrote to Annie Gowen of the Washington Post.

Hi Annie Gowen
I was very interested in the piece you wrote on Monday involving Kesha James and her Habitat for Humanity home.
There was one really big question I had. Why didn't Habitat for Humanity co-sign a home equity loan so she could make necessary repairs on her home? I posed that question to Karen Cleveland, director of Habitat for Humanity of Northern Virginia.
She wrote back and said that this is exactly what they did.
She wrote that not everything gets reported in the media.
So why wasn't this reported in your article?
Did you think to ask this question?
This point is central to the general thesis of the article that rising home prices have hurt these Habitat for Humanity Homeowners. That is completely false if homeowner can tap into the equity of their homes, which clearly they can, if Habitat for Humanity chooses to help them. Mrs. James could borrow against the equity of her home for the next 15 years, easily pay the property tax, and still get an enormous windfall profit. In no way does she deserve another windfall profit in the form of tax abatement. Habitat for Humanity is clearly gaming the system in order to subsidize their operation at taxpayer expense.
This was not reported in your article, and it should have been.

Annie Gowen wrote back. She emphatically denied me permission to post her reply. Fine.

Here is my reply to the letter you cannot see:

That is a home equity loan. Habitat for Humanity is the lender. And like most lenders, they borrow the money from someone else. But clearly, Mrs. James stands to lose her home if she does not pay back the loan, so it is a classic home equity loan.

Annie Gowen wrote back. I cannot tell you what she said. I can tell you what she didn’t say: “Oh thank you for pointing this out to me. It didn’t occur to me to think of it that way.”

I don’t know for sure if Annie Gowen had an agenda with her article or she was being used. She seemed to be very sympathetic to Habitat for Humanity’s cause and presented the material in a less than objective way. However, I cannot say for sure if Annie Gowen purposefully hid the home equity loan from the story because it would undercut the thesis of the story or if she just did not think it was very relevant. In any case, the Washington Post article by Annie Gowen is shoddy journalism.

I am not a journalist, but I can guess how this story came about. Habitat for Humanity contacted the Washington Post, outlined the story, and asked if they would report it. Fair enough, people have the right to claim their story is newsworthy. But there is an interesting game here between the newspaper and the source. If the newspaper sends a reporter who is too objective, maybe you get a good story, but you also bite the hand that fed the story. If the newspaper sends a reporter who is sympathetic to the source, then the newspaper runs the risk of bias, but it also assures a stream of sources giving it news. Media bias exists. Of course, everyone plays this game, not just the liberal charities.

Wednesday, February 16, 2005

I Give You Lalu

Much of India is awakening from a long slumber. Industry is popping up many places to take advantage of the reforms set forth by current Prime Minister Manmohan Singh. Outsourcing is definitely not a bad word in India. They are tapping into the new possibilities unleashed by the Internet and now millions of Indians work very closely with Americans.

But sadly, parts of India have missed the development train at the station. These parts are mired in a classic poverty trap: they are poor because they think poor, and they think poor because they are poor. Consider the state of Bihar, just south of Nepal. The population is about 85 million and desperately poor. Bihar has been run by either Lalu Prasad Yadav or his wife Rabri Devi for most of the last 15 years. Across India, Lalu is so famous (or infamous) that everyone knows him as just Lalu (or Laloo). Lalu famously refuses to modernize his state, and he and his wife keep getting reelected.

Recently, that famous blogwala of India, Amit Varma, sat down for a chat with a man who knows Lalu. Here is Amit’s transcription of what that man had to say:

You know, Amit, there is one word that you should never mention in front of Lalu Prasad Yadav: development. If you even whisper "development" in front of him, he will give you one tight slap under your ear. He hates that word.

If someone says to him, "Laluji, let's build a road," Lalu will reply, "you build a road in your house if you want. No roads will be built in Bihar." Lalu is in power because Bihar isn't developed, and he knows it. It is in his interest to keep the people uneducated and poor.

So at villages, he will tell the people this: "So you want a road? Ok, I'll build a road. Then the big men will come from cities and build factories here, and they will take your land and they will exploit you and make you work and you will be like slaves. So tell me, do you want a road? If you want a road, I will build it."

And of course, all those people in the villages are uneducated, who know of industry only from hearsay and myth, so they say, "No roads. We don't want roads." And Lalu says, "Janta doesn't want roads. No roads."

Elsewhere, Amit reports that there is one booming industry in Bihar: kidnapping. The motive I understand but the profit is hard to see, but profit is relative I suppose. This story is profoundly sad, but perversely I am reminded of that old Henny Youngman joke. How would it go: “Everyone in Bihar has something to say about the kidnappers. Now, take Lalu…PLEASE!”

Tuesday, February 15, 2005

Habitat for Market Failure

There is a very interesting story in yesterday’s Washington Post by Annie Gowen (who did not ask enough tough questions to Habitat for Humanity). The story is about Mrs. Kesha James and her struggles to keep her Alexandria home in the face of rising property taxes:
Kesha James still remembers walking through the freshly painted rooms of her Habitat for Humanity house for the first time, making plans for the leather couch she would buy, and the piano and the canopied bed for her three little girls.

Today, the couch is still a dream. The living room is in ruins because of a plumbing leak she can't afford to fix. She took a second job and works seven days a week but is still afraid she might lose her house.

Habitat for Humanity of Northern Virginia is a charity devoted to providing affordable housing to low-income families. The important points of this article were highlighted at a post at Crooked Timber, (there is a very nice thread of the issues and I put in my 2 cents worth as well and was not well received).

Let me briefly outline the issues in the story.
  1. Property values in Northern Virginia (City of Alexandria, Arlington County, Fairfax County, and maybe further counties) have doubled in the last five years.
  2. Real estate taxes in this region average about 1% of the assessed home value ( not the sale price), so they have naturally doubled as well.
  3. Habitat for Humanity homes are sold 50% to 75% below market value and have a 20 year zero percent loan. (Nice.)
  4. Habitat for Humanity places a restrictive covenant on the sale of the home during the 20 year loan period that effectively means the owner forfeits the house and Habitat for Humanity refunds any payments made with no accrued interest if the owner wants to sell the home for any reason.
  5. The rising real estate taxes combined with the restrictive covenants have put Mrs. James and other Habitat for Humanity home owners on the brink of financial ruin.
  6. Habitat for Humanity is lobbying the local government in Northern Virginia for abatement of these property taxes, claiming that the restrictive covenants mean that the homes are not worth the assessed value.
This story contains so many examples of market failure, it is very frustrating to read. There are two main issues:
  1. should real estate taxes be rising so rapidly in Northern Virginia?
  2. do Habitat for Humanity homeowners deserve a partial reduction in their real estate taxes?

Rising real estate taxes

Real estate prices across the United States have increased in the last five years due to falling interest rates, but the increase has been especially large in Northern Virginia. The real estate tax in Fairfax, Virginia (where I live) is 1.13% of the assessed value of the property. That rate has not changed since 1999 when I came to Fairfax County. So naturally, the amount of real estate tax revenue must have doubled in the last five years, (actually more than doubled since new homes have been built). So that begs the question: have county expenses more than doubled in the last five years? The answer is “yes” only in the sense that the board of supervisors must have figured out some way to spend all of this revenue because they have certainly not refunded any of it.

This is a classic example of government rent-seeking behavior. Politicians like to spend other people’s money (OPM). It is more fun to spend OPM than spending their own money because they didn’t have to earn it. Rebating the excess revenue generated by rising real estate prices risks causing a future shortfall in future revenues if those real estate price later fall. It is easier, and much more fun, to find some way to spend all the extra revenue in the short run. One could hope that the politicians are using this revenue to build lots of new buildings for schools and police stations and other government facilities. I do notice some new construction at the various recreation centers that the county runs, but there is always a need to refurbish a fraction of the buildings even with constant revenue. My guess is you would have to enter the offices of the board of supervisors to find where this excess revenue was spent.

It would make more sense to peg taxes to total county income than real estate rates. Local governments could still tax real estate, but they would first deflate the tax rate for real estate inflation and then inflate the tax rate for an increase in total county income. In this way, a fixed fraction of the local income would always be available for government services. It really wouldn’t be very difficult to make that change, but it would mean less revenue for the county and the politicians wouldn’t like it. Of course, whose utility is more important: politicians’ or taxpayers’?

Tax abatement

On surface of it, the claim that Mrs. James deserves a special tax reduction is wholly without merit. The claim is that the restrictive covenant reduces the value of the home. This is absurd. The home is obviously worth about the same as other homes in the neighborhood. If Mrs. James forfeited her home, Habitat for Humanity would then be free to sell it for full market value. The restrictive covenant means that the home is worth less than market value to Mrs. James alone but collectively Mrs. James and Habitat for Humanity definitely own a home that could be sold in a months time for full market value (maybe $500,000). Since Habitat for Humanity and Mrs. James are effectively co-owners during the 20-year restrictive covenant, one could argue that the tax burden could be divvied up between the two. However, the original sale agreement specified that Mrs. James would be responsible for the tax, and that is the end of the argument.

If Habitat for Humanity had originally agreed to take on a portion of the tax bill, they might have been able to claim a rate reduction for their portion of the tax because Habitat for Humanity is a charity. However, the local government still has the discretion to deny any petition of tax abatement. In this case, Habitat for Humanity’s claim would be weak because the real estate is not being used as a collective good for everyone in the local area. It is only being used as a private residence for a low-income household, and low-income households get no tax abatement.

As we will see, this story illustrates why it is not a good idea to grant charitable organization a special tax break. Before 1999, Fairfax County did not provide any special tax considerations for charities. There is a great quote from the introduction a book by Evelyn Brody of the Urban Institute titled “Property Tax Exemption for Charities”:

[The] Fairfax County, Virginia, board of supervisors recently amended guidelines to permit national charities, as well as local ones, to apply for property-tax exemption. In December 1999, the board approved exemption, worth over $300,000 a year, to the National Wildlife Federation, which has an annual budget of $82 million. One county supervisor praised the Federation for being a good citizen by providing local environmental and educational programs. A dissenting supervisor, however, contended, "We're just giving away tax payer money to an organization that doesn't need it and shouldn't get it.... I'm delighted they do what they do, and I'm delighted they're in Fairfax County. And I think, like everybody else, they ought to pay their taxes."
Who was this dissenting county supervisor? He or she gets my vote!

There is a much more important why no special tax abatement should be granted in this case: it isn’t at all necessary. If Mrs. Jones owned the home with no restrictions, she could apply for a home equity loan and use those funds to pay the real estate taxes and make necessary repairs to the home. The Washington Post quote above shows that the second issue is very relevant: Mrs. James can’t even afford to fix a leak in her living room. Even with the restrictive covenant, Mrs. James could still get the home equity loan if Habitat for Humanity co-signed the loan. Why wouldn’t Habitat for Humanity help Mrs. James when they set her up for her financial problems by placing her in a home that was way more expensive than what she could ordinarily afford? The cynical answer is that Habitat for Humanity would prefer to lobby the local governments to reduce the taxes (and effectively subsidize Habitat for Humanity’s operations) than to help Mrs. James pay the taxes by herself.

Uncooperative game

The core of the problem illustrated in the Washington Post article is a sad uncooperative game being played by Habitat for Humanity and Mrs. James. It is a game that squanders the potential bonus of the rising real estate value of Mrs. James’ home. Habitat for Humanity wants to do what is impossible: produce affordable housing in Northern Virginia. It is impossible because demand for housing, even lousy housing, is so strong in this area that any home is very valuable, and therefore very unaffordable. Habitat for Humanity tries to fight the market by selling the home at well below market value. But if the owner were to simply resell the home, Habitat for Humanity would have produced no new affordable housing in the area. So Habitat for Humanity restricts the resale of the home so that the homeowner is forced to live in the “gift” house. Although the article did not mention it, I would guess that Habitat for Humanity restricts the owner from renting out the house because this would also defeat Habitat for Humanity’s purpose of producing affordable housing. So the net result of the restrictions is that a potentially valuable home is made much less valuable to the owner. But this destruction of value serves the purpose, ironically, of attracting labor to Habitat for Humanity’s enterprise because they can then point to all of the low-income housing that they have produced in the area. Habitat for Humanity participates in the production of the poverty of their homeowners because it doesn’t serve Habitat for Humanity interests to help these people get wealthy on these homes that they did very little to earn.

It isn’t entirely clear, however, why Habitat for Humanity would not want to co-sign a home equity loan for purpose of doing necessary repairs and for alleviating some of the burden caused by increasing taxes. They could be paternalistic and insist that the homeowner only borrow exactly what she needs. Habitat for Humanity could insist that the homeowner pay them a cut of the loan to help buy other properties to renovate. It could be that Habitat for Humanity volunteers would be turned off by the discovery that owners and Habitat for Humanity were making deals. People won’t volunteer their hard labor to make other people wealthy. But this should not mean that no deals at all are possible between Habitat for Humanity and the homeowners. After all, Mrs. James is not going to be wealthy because of a small home equity loan to pay for the leak in her living room and her $5000 tax bill. It is a sad example of how a charity can be oddly indifferent to the suffering that their rules have brought upon the very people they claim to want to aid.

Habitat for Humanity should reconsider their incentive compatibility issues. They want to make sure that the homeowners are “deserving.” But who deserves a below market home? Maybe the Habitat for Humanity volunteers do. Suppose Habitat for Humanity instituted a rule that these homes only go to volunteers who have worked with Habitat for Humanity for at least 2000 hours (up from a minimum of 300 hours). They would then be giving valuable human capital skills to the poor, increasing their labor force, and making sure the new owners deserved these homes. Then, there would be less ill will toward those who used a home equity loan against their “gift” home for bettering their lives.

Monday, February 14, 2005

Too Much Ravioli

My six-year-old son only likes a few foods: muffins, peanut butter and jelly sandwiches, pizza, and ice cream. This makes it difficult when we travel since my wife and I have grown tired of eating pizza. We have persuaded him that ravioli is kind of like mini pizza, but he still greatly prefers the real thing.

Last night we went to a very nice Italian restaurant and he ate a small portion of ravioli. Afterwards, we went for dessert and my son had ice cream, which he greatly enjoyed. Later he complained that his tummy hurt. “Did you eat too much ice cream?” I asked. “No, I did not eat too much ice cream. I ate too much ravioli.” I beamed with fatherly pride: already he understands the concept of opportunity cost.

Sunday, February 13, 2005

Dual Insurance for Health Care

Recently, Russell Roberts who helps write the very entertaining and world famous blog café hayek and John Irons who writes the blog argmax debated health insurance at econoblog. Russell Roberts is a libertarian economics professor at GMU which is a libertarian department in general, so it was not surprising that he blamed government meddling for rising health care costs. He came closest to identifying the problem when he mentioned the government mandates that stipulate what must be covered by health insurance (he provides a link to Virginia mandates). However, the things he mentions are really more symptoms of the problem and not the core of the problem.

John Irons works at a progressive think tank in D.C. called The Center for American Progress. He doesn’t think that the fact that our health care costs are heavily subsidized is the reason why health care costs are rising rapidly. He believes that private health care markets in the way that Russell Roberts envisions would collapse because of adverse selection. He is right, but for the wrong reason. He says that

One problem with the health insurance market is that you, as a purchasers (sic) of health insurance, know much more about your health than do health insurance companies.
This statement isn’t even close to being relevant. It doesn’t matter what insurance companies can know about you. Their hands are tied.

I’m not a health care economist (my wife is), however, I do know what is the fundamental problem with the way we do health insurance in America. The problem with health insurance is fundamentally a problem with social insurance. People want private insurance, and they want social insurance, and they want the private insurance companies to provide that social insurance. It just doesn’t work.

The problem with privately provided social insurance

A good example of private insurance as it should work is private automobile insurance. If I have a car, I am required by law to provide proof of liability insurance. I just show up at the insurance office and ask for a quote. They type in the information into their computer and determine what premium would cover my expected annual automobile insurance cost. Private insurance does one thing well, computing my expected payout. They charge this amount, plus a little commission, and they pay out the actual payout. Simple.

Now suppose a person comes into the insurance office and says “I need auto insurance.” “Why certainly, what type of car do you have?” asks the agent. “I don’t have a car anymore. I totaled it this morning. That’s why I need auto insurance.” This guy isn’t getting any private insurance. He needs social insurance.

Health insurance is a mixture of social and private insurance. Laws prevent insurance companies from discriminating on the basis of almost anything in computing premiums. Everyone where I work (or any other workplace) pays the same amount for the same type of health care regardless of anything. I get coverage for things I could never need. And I don’t pay extra even if I am already sick! Fair? Certainly, but it is expensive. There’s no way I can shop around for a better deal because it’s my employer’s choice, not mine, and because they couldn’t cut me a deal even if they wanted too: it discriminates.

Society likes having social insurance but doesn’t like paying for it. So governments regulate. They pass minimum wage laws as if this will magically impart added productivity to low-wage employees. And they decree that we are all equal in the eyes of the insurance company, even though some are obviously much more expensive.

The path back to free markets: dual insurance

The way to improve the health care market is to create a free market for health insurance just like the free market for automobile insurance. We have to realize that we want two kinds of health insurance: private and social. We need to separate out the social insurance from the private health care market to make private health insurance efficient. What we need is a public insurance company that insures the private insurance companies against the risk they face.

How would dual insurance work? For the social insurance, everyone would pay into a collective fund (kind of like social security) and this fund would reimburse part of your private health insurance costs. People will be categorized by many myriads of dimensions. Suppose you are placed into one of these categories. The health insurance companies will announce how much they would charge someone who fits into that category. The social insurance chooses some kind of average of the various charges that insurance companies announce (maybe knocking out the highest bid). This is what you get from the social insurance. If you choose the high-end plan, you must pay for the frills out of pocket. If you opt for the low-end plan, you pocket the difference. This puts market pressure on insurance companies to cut costs and provide excellent service.

Social insurance will cover you for the possibility that you were born with bad genes. That’s like insuring against an accident that already happened. Social insurance can do this. I know that libertarians would say that social insurance really isn’t insurance; it’s redistribution. Whatever. Most people would endorse it in this context. Realistically, this is the only way to avoid racial and sexual discrimination in insurance markets while maintaining market efficiency. I think it is a good idea. Of course, never underestimate the government’s ability to muck up a good idea.

Friday, February 11, 2005

The Exercise Bike

I was riding on my exercise bike trying to solve an economic problem of a personal sort involving over consumption when a thought came to me: “Wouldn’t it be nice if the bike dispensed a twenty dollar bill when I finished exercising?” Perhaps I was thinking that because I was beginning to feel a drop in motivation and money always motives me. But then I thought, who would put the money in the bike? Who would pay me to exercise? My wife might. But then I thought that I might do it myself. Is that rational?

You see, maybe I have a time inconsistency problem. Sometimes I feel very motivated to lose weight and would pay to achieve that goal. Other times I feel lazy and think it’s too much work. Maybe I would rather eat pizza. I call up the pizza guy and ask for delivery. Then I realize “Oh no! All my cash is in the exercise bike!” So I furiously race the pizza guy on my stationary bike to get the cash out before he comes. And months later, when I’ve gotten all of the cash out of the exercise bike, my rational self declares “See, I exercised and I lost weight. The money works!” So do you think people would buy an exercise bike that dispenses cash if they had to put the cash in themselves?

Saturday, February 05, 2005

Thanks, Amit

Before I post anything else, I must thank Amit Varma for encouraging me to start a blog. Who is Amit Varma? I don’t really know...some guy in India I guess. I’ve never met him, but he seems really nice.

Actually, I know quite a little bit about Amit from the several blogs that he keeps. He is a poohbah at Wisden/Cricinfo and writes an excellent blog on cricket (a sport involving a bat, a ball, and lots and lots of time) called 23yards. He also has a blog called The Middle Stage that deals with politics and culture that usually has something interesting that Amit trolled up through his search of the Internet. But Amit’s crown jewel of his blog empire is his blog on India called India Uncut. It is an enormously entertaining site filled with good writing and good links. If you’re curious about India and Indian blogs, that’s the place to start.

Mostly, I know Amit as that fellow who writes back. I have written many letters to many people, always very polite, and rarely do they respond. Oh well, people are busy, and I probably write to the busiest people. Amit is very busy. Yet he almost always responds with a nice note. I appreciate that.

There is much I don’t know about Amit. He plans to write a blog about cows. “A blog on cows?” you ask. I have no idea. I could ask him I guess…but it is much more fun to speculate. My conjecture is that Amit likes excellent cappuccinos and excellent chai. He is a connoisseur: he must have fresh milk. Therefore he keeps two cows as pets in his Mumbai apartment. And naturally he would want to blog about something like that.

Update: Amit has generously supplied his blog knowledge to the task of upgrading the look and feel of this site. Doesn't it look great? What a guy!

On Chocolate and Gold Coins

After deciding to start a blog, I had to think of what to name it. Naturally, the really good names have been taken. For example, I thought the name Instapundit would be a good one for a blog but it turns out that someone already took that one.

Chocolate and gold coins are two of my favorite commodities. And naming a blog that deals with economic issues after commodities makes sense, especially commodities that symbolize consumption and income. However, the name “Chocolate and Gold Coins” refers to something else. It refers to types of writing you might find on this blog. Gold coins are something with intrinsic value. You might find something like that here buried deep under the rubbish if you search long enough. Chocolate is another commodity altogether. It is something to be enjoyed briefly and soon forgotten, like a frivolous but fun piece of writing. There will be more chocolate than gold in this blog. In any case, I hope you find something you like here.