Chocolate and Gold Coins

Tuesday, February 28, 2006

D.C. Bloggers’ Meet

Are you interested in meeting Arnab the Greatbong? If you are, then there will be a great opportunity to meet Arnab-da and other D.C. area bloggers on March 11.

  1. Where? Union Station (on metro red line) lower level food court near Aditi. (directions in link).

  2. When? March 11, (Saturday), from noon until whenever. We will try to keep it going until at least 3:00 to accommodate late shows.

  3. Will there be free food? No, but there are plenty of non-free choices there.

  4. Will there be free beer? No, demand always exceeds supply at that price, (gratuitous economics angle thrown in), but non-free choices are available. If Arnab brings kool-aid I recommend not drinking it.

  5. Who will be there? Good question! We are trying to get everyone to come to this thing.

Certain - Updated

  1. Arnab the Greatbong

  2. arZan

  3. Chetan

  4. Madhu

  5. Michael (me)

  6. Ph

  7. Piyushgupta

  8. Ravikiran

  9. Rubbersoul

  10. Ujval

Interested - Updated

  1. Ganesh

  2. Sajit

  3. Vishnu Pavan

  4. Lots of other people

Plus, as an added bonus, you might have the opportunity to briefly chat with famous bloggers from around the world including:

Phone-Ins - Updated

  1. Gaurav

  2. Jai Arjun

  3. Saket

  4. Sujatha

  5. Sunil

  6. Vikram Arumilli

  7. Perhaps some other people

We need to add to this list. If you are interested, please comment. If you have friends who might be interested, please e-mail them. The more, the merrier. It should be really fun.

1YAT: Stuck Working on Saturday Evening, Mumbai

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."

This is an excerpt from a nice post from Rahul Bhatia. I added a bit of commentary here.

Saturday, February 25, 2006

1YAT: Free Food: Why Do Americans Love It?

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.

I still don't have an explanation for this phenomenon. Is this an American thing or is it just as true in India and elsewhere? I believe Europeans have a more muture attitude about food.

I know that if there is food lying around, I tend to eat it. Or, as I tell my wife, such things, "tend to get eaten." My wife was intending to give boxes of chocolates to her parents in India. We forgot all of them in our refrigerator. We bought replacements in Germany on a layover. When we got home, I scarfed them down in less than a month. One day, my wife noticed that they were all gone. She was not happy.

I need to get back on that diet.

Friday, February 24, 2006

Picking the Green Fruit

India, land of the mango, prefers to pluck its fruit when it is a little green and not fully sweet. The BCCI selectors do the same thing. They pluck the talent before it is fully ripe. They hope that international exposure will ripen them up quickly. But it might just as easily lead to a ruined career and a squandered talent.

The latest example of the deplorable tendency to pick the unripe fruit is the selection of Piyush Chawla. He is a great talent and he might soon be a star for India. But he is only 17, he has only played one season of Ranji, and he just isn’t ready yet. Sreesanth and Vikram Singh also look very raw. A couple more years in Ranji league would be very beneficial. But for some perverse reason, the selectors seem to think that if they don’t choose these young colts, in a few years these talents will be lost. And there is some reason to worry about that: the idiot selectors three or four years from now will overlook these seasoned professionals for the next U-19 flash-in-the-pan.

Examples of choosing talent too soon abound: Parthiv Patel, Ajay Ratra, Tinu Yohannan, Avishkar Salvi, Amit Mishra, Agit Agarkar, Laxmi Shukla, Amit Bhandari etc. There are several problems associated with choosing players too soon:
1. You might guess wrong and pick a no-talent.
2. The players might fail, and worse, cause the team to lose a big game and feel a sense of having “blown their big chance” for all of the rest of their careers. A little maturity can help deal with the emotional part of the game.
3. The players might not be fully talented yet. Agit Agarkar had some batting ability but also a flawed technique. A few years of Ranji might have helped. Instead, he went to Australia and came back damaged goods.
4. Choosing your U-19 stars over your Ranji stars robs Ranji of its significance. If the only way to make it into the team is to be 18 and super-talented, then you know that if you are already 20, you might as well give up.
5. You need to give them a chance to taste failure and really dislike it. These U-19 players have succeeded at every level in their brief careers. They come to the main team and see failure for the first time. Worse, they see their own inept performance caused the failure. Dealing with failure is a part of the learning process and choosing them too young denies them the opportunity to learn.

If I were the BCCI head, I would make a blanket rule: no one gets selected – no matter what – unless they have played 4 seasons of Ranji. Suddenly success in the Ranji league will be all-important, as it should be. The league will be more competitive and older players will not lose heart. And younger players will not become so impatient because they know that there is no way to make it to the team in less than 4 seasons. The benefits of such a strategy would be enormous.

But here is the rub: the credit for these benefits would go to the next board president. Maybe that’s why the board always seems so keen to pick the raw fruit.

Thursday, February 23, 2006

Why Are Indian Movies Mediocre?

I had an insight today. I know why Indian movies, by western standards, are mediocre. The reason is similar to the reason why the India cricket team in 1999 was mediocre despite having the best batsmen (Tendulkar and Ganguly) and some great bowlers as well (Kumble and Srinath).

Hint: the answer has nothing to do with match-fixing. It has to do with labor supply.

Hint number 2. Milli Vanilli.

I will give the answer next week.

Lottery Technology for Prison Overcrowding

A few days ago, I reposted “Lottery Technology", a post about how one might use this idea of a lottery to solve the problem of old age health care. It is an odd idea but I thought it was worth a second look in another context.

Suppose you have lots of prisoners who either face the death penalty or life in prison without possibility of parole. Actually executing those on “death row” is extremely expense because of the appeal system. So the state is stuck with a huge cost either way: either they pay maybe $50,000 a year for life to incarcerate them or several million dollars to execute them.

It might be tempting to pay the prisoners to kill themselves. But how much would you have to pay to get someone to do that? The lottery technology enables this to happen. You can pay someone to kill himself. And it might be economical (although somewhat expensive).

The idea behind the lottery technology is that people will take small risks of facing death in exchange for money. Suppose you create a one minus a million sugar-pills and you place one identical looking pill with a lethal dose of cyanide in it. You mix them up and now no one could know which pill is sugar and which one is poison.

A prisoner might be willing to take such a pill in exchange for a dollar or the equivalent in merchandise. Prison life is miserable and this would allow a little better standard of living. But these small risks add up. If each prisoner spends $40,000 a year, then one in 25 prisoners will die each year.

I don’t doubt that this system would “work” in the sense that it would cause some people to kill themselves – especially the suicidal (obviously!). But I think it might lead to a really abusive prison system. The problem here is that it creates perverse incentives for the prison. The prison will want to make life hell for the prisoners unless they pay for an upgrade in conditions. Soon, prisoners would have to pay exorbitant amounts for just the basics: food, water, light, and air.

Another issue is that it reveals in some sense the waste in not trying to get more labor out of prisoners. If you think of prisoners as a pure liability of course you want them dead. If they were working and producing enough so that the liability was small or even zero, then it wouldn’t be worthwhile to try to pay them to die. I don’t think that prisons should be making a profit (like a gulag), but they shouldn’t lose too much money either. Then the incentive to kill the prisoners disappears.

Tuesday, February 21, 2006

Suppose You Hate Your Religion

Suppose you hate your religion. How should you destroy it? You would do very little by telling the faithful that you don’t believe.

You might do much more damage by subverting it. Suppose you can brainwash some nitwits and convince them to do something outrageous in the name of the religion you hate. Something like
  1. Hijacking an airplane and crashing it into a building

  2. Assassinating the leader of another religion

  3. Blowing up a giant ancient statue of some other religion

  4. Threatening people of other religions who dare say anything about your religion, or

  5. Rioting on trivial issues relating to your religion.

Your hope is that you can tap into a deep-seated self-hatred in your religion. You want to send people into the streets with blind rage – a rage at the death of the respect that your religion once had, a rage at the death of the peace that your religion once offered, a rage at the death of the faith that God loves you.

The hope is that you would eventually make reasonable people of your own faith defensive and even a bit ashamed at what people of your faith do. You would want to show the world that your religion is unreasonable.

But no matter how unreasonable you act, there will be some people who will think, "If they are upset, it must be our fault."

What do you do then?

Hey, it’s fun to burn stuff.

Monday, February 20, 2006

1YAT: Happy Birthday Dad

One year ago, I wrote 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?

By an odd coincidence, it happens to be my father's birthday again this year on this day. And even more odd, the post office seems to have lost my card to my father again this year.

My father's health is not as good as it was last year. This year, we are not asking him to travel to spend time with us during my son's spring break. We'll have to make a trip to Seattle some time.

1YAT: Lottery Technology

One year ago, I wrote possibly my best post ever. It was certainly different. It combined some genuine economic theory with a little drama and even some humor.

Lottery Techonology:
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. [Link]

Read the whole thing.

Sunday, February 19, 2006

My Son’s First Hypotheses

“Daddy, I think there are more Asian elephants than African elephants.”

“Why do you say that?” I asked.

“All African elephants have ivory tusks and only male Asian elephants have tusks. Poachers want to kill elephants for their tusks. So they probably kill more African elephants than Asian ones.”

I thought that was really very good coming from a seven-year-old.

Saturday, February 18, 2006

Remembering Lalu

One year ago, Amit wrote this interesting account of a discussion he had with someone who lived in Bihar under Lalu.

One tight slap under your ear

I was chatting with a gentleman who knows Lalu Prasad Yadav fairly well. He told me:

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."

Hopefully when the election results are out, Lalu's reign will end.
But, I ask this gentleman, will the next guy try to develop the state, or will he make the same calculations as Lalu? The gentleman sighs, gently. We stare into our respective glasses of beer, which glisten under artificial light.[Link]

I recalled reading an earlier post in which Amit had said that kidnapping was a growth industry in Bihar, (and not rocket science – who would have guessed with a genius like Lalu running the state).

Anyway I wrote the following joke in an email to Amit:

Those Bihari kidnappers lack imagination. They should kidnap that famous politician Lalu Prasad Yadav …and hold Bihar ransom lest they release him!

Friday, February 17, 2006

A Modest Suggestion Toward Gender Equality

How do you feel about gender inequality? Do you think that if that is a part of some other culture we should respect it make no comments about it? Or do you think that gender inequality anywhere is reprehensible and cultures that practice it are fundamentally flawed?

In the previous post, some commenters suggested that I was insensitive to other cultures by joking about it. I suppose that is a valid criticism. But I really wish that women in all cultures could enjoy freedom and it bothers me when I see women discriminated against. I sometimes use subtle humor to make my points instead of direct arguments.

My feeling is that gender inequality is unjust. I would want women everywhere to have the same rights as men. But I understand that various cultures have their taboos that make it difficult for gender equality to be a reality.

In some cultures, the men apparently have too much testosterone running in their veins. They see a woman’s uncovered face and they cannot help ravaging her. This is a serious problem for gender equality. One potential remedy for this situation is to place a sheet over the women so no man can see her. But this is absurd. A much more practical solution is just to put blindfolds on the men.

This is my modest suggestion for these testosterone-challenged societies: on even numbered years, the men wear blindfolds and women wear whatever. On odd number years, women where burqas and men wear whatever. It is fair – there is no gender discrimination over time.

But you might say this is an asinine suggestion. Possibly, but is it any more asinine than forcing half of the population to wear something like this:

Thursday, February 16, 2006

1YAT: Too Much Ravioli

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.

On a completely unrelated subject, I found this photo of Irfan Pathan and his family. I am struck by the enormous resemblance between mother and daughter - I literally cannot tell them apart. I wonder if Irfan's sister does any sport?

Health Saving Accounts

President Bush in his State of the Union address pushed for Health Savings Accounts (HSAs) to help reduce medical expenditure. HSAs have gotten a mixed reception from the blogosphere. The current way we do health care in the U.S. is very expensive and a move to put more of the burden of spending on the individual should reduce costs, but it also might increase risk.

The main health risk that individuals would face if they self-insure is chronic disease: diabetes, HIV, cardio-vascular, and cancer are the big ones here. These diseases pose a serious problem for private health insurance. I wrote an essay about that last year.

A year ago, I wrote Dual Insurance for Health Care. It is a good essay about the problems associated with private medical insurance and how we could mitigate those problems. Here is an excerpt:

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. [Link]

Coincidentally, there were some interesting articles on Health Savings Accounts (HSAs) recently in the Washington Post and on Econlog.

Washington Post:

Health savings accounts are ostensibly supposed to fix the health system. Right now, tax rules subsidize company-provided health insurance, but they're less generous toward out-of-pocket medical payments; as a result, company health plans pay most bills and patients have no incentive to shop around for the best bargain. Health savings accounts end this tax bias. Anyone who buys an insurance policy with a deductible of $1,050 or more can open an account and save $5,250 a year toward out-of-pocket health costs, tax-free. This will shift control of medical spending into the hands of consumers, who will discipline overpriced hospitals and clinics.

Or so goes the theory. In practice, probably less than half of all health spending outside Medicaid and Medicare would be affected by the new consumer-driven discipline. Many hospital stays cost more than any deductible, so consumers would have no incentive to bargain; emergency-room patients aren't in a fit state to negotiate prices with their doctors. But consider an even more basic question: Is the ostensible reason for health savings accounts the real one?


In sum, health savings accounts are not just about ending the tax bias in favor of traditional company health plans. The administration is proposing a new kind of 401(k), and using it as an inducement to quit low-deductible insurance. Rich people, who gain most from the tax breaks on saving, will be first to sign on; healthy people, who subsidize sicker people in company health plans, will be right behind them. Their exit may force traditional health plans into a death spiral. The loss of the subsidy from healthy workers will drive premiums up, which will drive more healthy people into health savings accounts, which will drive premiums up further. [Link]


First of all, when he says that $5,250 is too much money to shelter, I totally disagree. To start with, I think that deductibles ought to be at least $5000. Moreover, I think people need to accumulate a lot of money in health savings accounts if they're going to be able to afford health care when they get old. Unless you want to count on Medicare, which if it were a private firm would be declared bankrupt, with its CEO under investigation for financial fraud.

And if traditional health plans--which are not real health insurance--go into a death spiral, why is that not a good thing? Let people buy catastrophic insurance instead. Let the government focus on paying for health care for the poor and the really expensively sick, instead of doling out tax subsidies for employer-sponsored prepaid health plans.

Another point that I would make is that the more you make a fetish out of taxing the rich, the more likely you wind up being opposed to anything that might increase private saving. You can preach about progressivity and you can preach about the need for increased saving, but not in the same sermon.

My problems with HSA's are more that I have a general aversion to programs that are beloved by wonks and operate through the tax system. Maybe that makes them politically clever, but I think you lose a lot in terms of consumer clarity and economic efficiency.

Finally, I worry that special savings buckets might create more substitution than net saving. People who would have saved the money anyway in other accounts put the money into HSA's because they get a better after-tax return. Not whole lot of net benefit there. [Link]

Also there is the Becker-Posner blog - a good discussion but not very quotable.

The current American health system, where most people get insurance from their employers, is the Ferrari plan (based on this analogy). Single payer health care advocates are pushing for the Yugo plan but most people see this as a really bad idea. I think it would be best to go something closer to the Accord plan, with a Bajaj plan for the poor, but I think the free market will not work so well for health care unless some provisions are made. I will explain.

The idea of HSAs is that we can self-insure most of the less expensive medical conditions. In theory, this is exactly right. We could be much more economical about health care if we each paid for it out of our own pockets. We could force health care costs down by shopping around for a better deal.

But opponents of HSAs have a valid point: these accounts might make it easier for firms to basically dump health care. What might happen is that firms will economize by raising the deductible. Since HSAs give the same tax benefits that employers get for offering health care, this would seem to be a move from the Ferrari plan to the Accord plan. But wait! What if you get a major disease like diabetes? What happens then? You’ll be paying maximum co-pays and deductibles every year for life. You’ll end up paying $100,000’s more than your neighbors. It will be exactly like not having insurance on your house and seeing it burn. It would be very bad indeed.

HSAs would work okay for minor medical problems but not for major medical conditions (like cancer) or chronic problems (like diabetes). We still need insurance for these types of problems. Now ordinary health insurance would work fine for short-term medical conditions like broken bones or non-chronic diseases. But I don’t think a private company will do so well in insuring against chronic problems for several reasons:
1. They won’t cover pre-existing conditions. If you are already diagnosed with diabetes, they won’t want you or they will want to charge you more - which is effectively like not having insurance against diabetes.
2. They will want to discriminate against you if you have a bad family history or bad genes. This is reasonable from the company’s point of view – they need to know their risks.
3. Once they know you have a chronic disease, you become a liability to the company. I don’t know about you but I would hate to deal with a company that wishes I were dead. Most of the nice experiences we have with companies stem from the fact that they are profiting from the relationship. Once they are losing money on the relationship – the relationship sours, (think landlord and tenet in a rent controlled apartment).
4. Insurance for chronic disease is an extreme risk for the insurance company. They run the risk that some chronic disease that would just kill you today will be treatable in the future with obscene amounts of money (much like AIDS). This risk could bankrupt the insurance companies.

My feeling is that chronic disease insurance is basically social insurance - it's like the guy above asking for insurance on a car he already destroyed. This is a type of risk is best treated with risk pooling: everyone puts in a piece of his income and each will get back money from this pot according to his medical state – if you have a chronic disease this money will cover (most of) that. If it sounds vaguely Marxian – “From each according to his ability, to each according to his needs” – it is. But I think this is what most people would want. They don’t want to run the risk of getting a chronic disease and not be covered for it. And this leaves the entire medical industry to be free from government intervention.

This is an important point: we can make a basically free market for health care if we separate the social insurance aspect of our current health care system. We can be free to contract directly with the insurance company of our choice and find the plan that fits our budget: the Accord plan.

Where do HSA’s fit in here? They could be used to cover co-pays and deductibles. Your social insurance would not cover 100% of your medical bills so you might need to add some of your own money. But I agree with Arnold Kling and others: why not just end the deductions for health care and make everything taxable? This seems easier and better than making a new class of savings account.

There is one potential advantage of a special medical account could have (but that the HSA's don’t currently have): the ability to give virtually unlimited credit. The account could be like a credit card with either positive or negative balance. Unlike ordinary credit cards that would limit your debt, this one could be virtually unlimited since presumably no one would really want to run up a huge medical debt unless they needed to. The advantage here is that in an emergency, people could get immediate care without the hospital needing to find out how the patient would pay for this care (an important consideration). People could just show their medical credit cards and get immediate care.

Wednesday, February 15, 2006

Milton Friedman on Types of Spending

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. [Link]
Via Nuggets and Aphorisms.

I will make analogy based on this classic piece by Milton Friedman about types of spending.

Suppose you want a new car (or motorized vehicle). What kind of car do you get?
1. A buys a car for A with A’s money: Honda Accord – a good quality car for a nice price.
2. A buys a car for A with B’s money: Ferrari – a great quality car for a ridiculous price
3. A buys a car for B with A’s money: Bajaj – a nice vehicle for the money for a ridiculously low expenditure
4. A buys a car for B with C’s money: Yugo – a piece of junk car worth nothing and costing much more than it is worth

In most cases, the Accord plan works best and the Yugo plan is one of the worst. But you got to watch out for that Ferrari plan: it will really bankrupt a nation!

I am planning a post about health care and this will be part of it. The current health care system in the U.S. is definitely the Ferrari plan.

Saturday, February 11, 2006

1YAT: The Exercise Bike

One year ago today, I wrote the Exercise Bike:
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?

Today, the exercise bike mostly sits idle. Believe me, my wife would gladly put a fortune in an exercise bike like the one above.

From time to time, I might recycle a good post from one year ago with a 1YAT title. Recycling is good for the blog environment.

Friday, February 10, 2006

Altruism in Marriage

Here is an interesting tidbit:

Altruism may breed better marriages, a new study suggests.

“That’s interesting,” I think, so I read on:

Study participants were asked whether they agreed with statements that define altruism, such as, “I'd rather suffer myself than let the one I love suffer.”

Those who agreed with [this statement] tended to also report happiness with their spouses.

Hmm. What do you want to bet that the ones who didn’t agree with the statement had spouses who weren’t happy with them?

Why Farming is No Fun

A recent post on the new “The Other Half” blog raises an interesting question: “Why is farming always no fun?” Farmers around the world are always miserable. Many are poor. The rest are destitute. Why is that?

It has to do with the elasticity of demand. The demand curve always slopes downward: people buy more of something if it costs less. But demand is elastic if they buy a whole lot more of something if the price is a little less. For example, the demand for computers has been very elastic. As the price of these things has come down many more people have bought them. The computer industry is relatively fun to be in.

The market for oil is inelastic: if the price drops 10% then people aren’t going to run out and buy SUV’s just like that. So it is much better in that situation to be a monopolist and actually restrict supply. This is what OPEC does and they have lots of fun. If you face an inelastic demand for your product you want to be a monopolist and you want to reduce the quantity of your commodity that is for sale. You sell less but you make much, much more money.

Farmers face inelastic demand. That is good because otherwise the drop in farm prices would mean that people would eat 10 times as much and everyone would weigh 1000 pounds. But it means being a farmer is no fun at all. Over time, farming, like all industries, has become more productive. Farmers can produce more food from a given plot of land with less labor input than their fathers could. This has been great for consumers. This has been hellacious on farmers.

Economics would suggest that farmers should consider other lines of work. Farming is bound to be a declining industry for years to come. Fewer and fewer people will make a living off of the land, and this is good for the economy. This frees up labor to do other things. But it doesn’t do the farmer any good if he was completely unprepared to do anything else.

This was my point of my post on Fallow Minds some months ago. I felt that poverty in India could be drastically reduced if more farmers were able to retrain into skill crafts. And firms might be willing to finance this transition if the former farmer could pay back this investment out of his future earnings.

Thursday, February 09, 2006

Aphorism of the Day

"If you serve a feast of broccoli and carrots, don’t expect many guests."

From The Ergodic Set.

Wednesday, February 08, 2006

The Ergodic Set

In a Markov process, an ergodic set is a subset of the measure space that maps to itself. Once you’re in there you cannot escape. All hope is lost.

Somehow, this is the feeling I get when reading some of the posts of the new group blog: How the Other Half Lives. With famous bloggers like Dilip, Uma, Vikrum, Anand, and Shivam, this new blog is bound to attract a lot of attention. But the subject matter seems - well - a bit depressing.

Here are some recent posts:
Suicides of farmers in Vidarbha
India’s newest import: toxic waste
People who eat less that $10 of food in a whole month
Dowry deaths
How to treat beggars

It’s not that these stories are wrong or that they aren’t blog-worthy. It is that taken collectively, there seems to be complete dearth of hope about the “other half” in India. And this is a lie. Many poor people are making a better life for themselves in India. India, which has been a poor country for at least 400 years (and maybe 4000 years), is rapidly becoming a middle class country. This is an amazing story, when you think about it. But there doesn’t seem to be any evidence of this transformation in this blog.

I can understand the frustration of a person like Dilip who states, “[In] a rapidly changing India, some people have seen very little change. Strike that: a lot of people have seen very little change.” He wishes that the change would be faster. I wish that too. I wish I could wave a magic wand and make everyone at least middleclass.

Wait – I don’t want that. I don’t want that power. I wouldn’t want anyone to have such power – especially a politician. So maybe we should not be so impatient – it could be worse. The poverty that India has that might be gone in a generation might instead be with India for centuries to come if India asks its politicians to help out the poor.

My complaint is that this blog should, at least once in a while, show the other side. They could occasionally show the Indians who were poor but are now a little less poor: The rickshaw driver who saved up to buy his own Ambassador, the housemaid who sent her daughter to college, the delivery boy who starts his own ramshackle delivery business. These stories do happen. There are stories like this in every nook and corner of India. This is the other half of the “other half”.

I am not saying that stories about dowry deaths and such have no merit – not at all. I think these stories are important and it is important that we read about them. But it is sort of like saying vegetables are important and we should eat them. If you serve a feast of broccoli and carrots, don’t expect many guests.

So please, give us the occasional gulab jamun. Remind us all that poverty is not an ergodic set.

Monday, February 06, 2006

Coordination Failure and Energy Policy

Should the government have an energy policy? Shouldn’t the free market decide these things? Well there might be a reasonable economic argument for having some government leadership, but it might not be completely convincing. For those who believe that all that the government touches turns to gold, they’ll be easily sold. For those who believe that all that the government touches turns to mud, they’ll be very skeptical. But before I give the argument, let me give some examples of coordination.

A few weeks ago, I noted in this post that workers in India didn’t use shovels because they lacked boots. And no one bought boots because there was no market for shovels. Selling shovels in India was a tough task because you needed to coordinate the market for shovels with the market for boots. I would not say that it is impossible to sell both; it is just more difficult.

Another example of coordination failure comes from the computer industry. People who are familiar with software are probably aware that the Fortran programming language lasted about 20 or 30 years longer than it should have. It wasn’t that there were no alternatives, there were too many. Fortran had an established position. Many people knew how to use it. All computers could run it. There was a big body of canned software that could be inserted into your program. These three factors made Fortran hard to beat. Other languages could have been better if more people knew them and used them but not many knew them and used them.

I remember that Pascal was supposed to be the new language. People were split into various camps. Some believed that Pascal was the next new thing and learned it. Others believed one of the various competitors would be the next new thing. Many people felt the next new thing would be coming in a few years, (which reminds me of a cartoon that went, “I’ll buy a new computer when they stop changing them.”) And some people insisted that some version of Fortran was always going to be the standard. Without coordination, Pascal didn’t really stand a chance and the people who invested in learning it got burned. They produced code that was essentially hieroglyphs later.

Of course, the market eventually did shift. Now, I believe (I am not an expert on software) that Fortran has largely been supplanted by C++. So the market worked in the long run. But like Keynes said, “In the long run, we’re all dead.” The transition was slow and it might have been that the transition would have been better if everyone knew when and where the transition would occur. As it was, a lot of people invested in Fortran because they just didn’t know that it would become obsolete.

Suppose for the moment that there were no laws on which side of the road you must drive and people were free to drive on either side. This is kind of what happens in India (at least it seemed like that with the drivers we had). People will spontaneously figure out that they better stick to the most popular side of the road. But then it helps to have right hand drive if you are driving on the left side. And if everyone else in the world drives left hand drive, it might be unfortunate for your auto industry if you drive on the left side.

Well Sweden faced exactly this situation in the 1960’s. The government picked a day (February 3, 1963) and said from that day forward, “we’re driving on the right side.” And that is what happened. It probably was really good for their automobile manufacturer (Volvo). But is this heavy-handed government intervention good public policy? The wiki article explains that one motivation was to reduce the accident rate (Sweden drove left-hand-drive vehicles on the left hand side of the road). This produced a modest short-term benefit and no long term benefit.

We can model the coordination problem as n-player game where n is large. Suppose each play can choose either technology O (original) or technologies A, B, C, D, E, or F. O is old and gives a payoff of 5 units. The other technologies all seem equally promising (but each person has a personal favorite) but you really don’t know what you will get if you play it. If at least 50% play A, the payoff will be between 5 and 15. But the same is true for B, C, D, E, and F; and if you don’t get the 50% threshold, your investment is wasted and you get nothing. You can see that people will stick with the “devil they know” rather than risk getting burned. They all might be much better off if everyone knew to pick any one of these alternatives – but which one? If the government chooses then the risk is that not only will they back the wrong horse, the government will kill any chance to back the right one in later years.

Brazil decided to do something interesting in the 1970’s. Like other countries, they were hit hard by the oil shocks. But they didn’t just sit back. They invested heavily in the production of ethanol. Now it is easy to see the coordination problem associate with ethanol: they needed production plants, they need specialized distribution sites (ordinary gasoline stations had to be modified to prevent water absorption), and they needed to modify the automobiles as well.

In the 1980’s and 1990’s, Brazil’s ethanol policy was a big government boondoggle. Oil prices were well below the level needed to make it pay (roughly $50 to $60 a barrel). But now that oil is above $60 a barrel (I read it was up to $66 today) it looks like Brazil lucked out. Or maybe Brazil was smart all along. Or maybe Brazil is still stupid and will find this out in 20 years when they discover that they backed the wrong horse.

On the other hand, we see that Japanese auto makers have developed hybrid technology with their own investment money. This is exciting technology that might evolve into electric cars in ten years. This might be much better than using ethanol. Or maybe hybrids will go along with 8-track tape into the museum of “almost technologies”.

Question 1, “Is it better to say ‘hands off’ and let the market resolve any coordination problem or is it better for the government to show leadership, at least once in a while?”

Question 2, “Should India be trying to copy Brazil’s ethanol production system.” India has the climate for sugar cane – and it is much easier to adopt a proven technology.

My comment is that there is a real difference between ideal government policy and real government policy. In the real world, the government prevents the importation of Brazilian ethanol to protect its investment in corn-based ethanol. Basically, it shows that governments, once shown to have backed the wrong horse, will knee-cap the competition to guarantee that their horse wins anyway.

Other interesting articles: Marginal Revolution, Knowledge Problem, Coyote Blog, Wikipedia on ethanol.

The Stand-In

My wife was talking to my son:
“While Mommy is away, you have to listen to Daddy and do whatever he tells you to do.”

“Yes, Mommy, Daddy is your stand-in.”

My wife thought that was quite funny. I thought he understood the situation quite well.

Sunday, February 05, 2006

One Year Ago

One year ago I wrote:

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.

Thus started my decline into madness.
I also wrote this:

Thanks, Amit

Before I post anything else, I must thank Amit Varma [my wife curses him] 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!

Yes indeed, Amit Varma of India Uncut designed my blog template. Who else (besides Amit and maybe his wife) could say that?
I wonder how his cows are doing.

Yes, this is my blog-anniversary. And I should thank everyone who ever commented on my blog or ever linked to my blog. Here is a partial list of people who did at one time or other comment on my blog. If I left you out – just leave a note and I’ll gladly amend. I you have never commented on this blog and I accidently included you on the list then leave a note in the comments and I will puzzle over what to do.
There’s one or two in this list that might surprise you!

I believe Sunil holds the record for the most (and best) comments but an accurate tally might surprise me.

There have been many occasions where I have been very close to chucking the whole blog. Even yesterday, I thought I should spend my time doing more productive things. But maybe some friendships will eventually form. I need to make more effort in that respect. Anyway, it will be a day-by-day decision.

Thursday, February 02, 2006

Thirteen Years Ago

Thirteen years ago, I had just finished taking my macro mid-term exam. I was in a relaxed mood. Some other students were going to go out for beer. I did not care to join them.

I had another idea. I decided to go up to the prettiest girl in class and say, “I know of an Indian restaurant near where I live. Would you like to go?” It was quite out-of-character for me to do such a thing. And maybe it was quite out of character for her to agree.

We walked together to the bus stop. I was eager to learn more about this lady from Madras. I made some small talk. I asked her what the game of cricket was like. I’m sure now she wished she had said, “It’s a big bore. Don’t ever watch it.”

We went to the house where I was boarding and got my car. I loved my car. It was just two years old and in mint condition. I was proud that I had a decent-looking car. I opened the door for her like a gentleman. Then I we went to “Delites of India” (sic) on Lake Street (Minneapolis).

I am forever grateful that Delites of India turned out to be the right kind of Indian restaurant. It was a nice mom-and-pop type of place that served very nice food in a homey atmosphere. Well, homey might not be exactly the right word. It was decorated with pictures of Guru Nanak Dev and Sai Baba and they played bhajans non-stop. But somehow I thought the place was quite charming.

I had no idea what to order. She was very reluctant to recommend anything for fear that I might not like it. She recommended something safe in the end: alloo channa. They made it very well. I've never seen that dish anywhere else.

We talked for two hours that evening. We talked about Madras and St. Louis and friends we had years ago. She talked about the nice times she had on the beach in Madras and how nice it was to be near a large body of water. I told her about the crazy Indian roommate I had years ago and the many battles he fought with his Chinese suite-mate. We had a splendid evening.

Then I drove her home. She didn’t know how to get home so we got lost. She told me later that she was very nervous. But I found her street on the map and got there with no more problems. I smiled and said that I had a very nice time. She smiled and said she did too.

I drove home feeling just wonderful.

As you might have guessed, my wife and I always do something special on the anniversary of our first date. At first, we always went back to Delites of India. After moving here, we usually went to an Indian restaurant. Last night we did something different: Lebanese take-out.

Take-out doesn't sound romantic but my wife had it all planned. I orderred the food. She picked it up on the way home. She asked me to go get a bottle of wine. She laid out the nice tablecloth and put out some candles. And we had a very nice meal together.

She remembered a detail from that first date that I had not. Usally the waiters were the owners: Mr. and Mrs. Arora. But that night it was their daughter who waited on us. And she kept coming to take our order and we were so busy chatting about this and that we had not looked at the menu so we kept saying: "another five minutes, please." That apparently went on for a half an hour. She was probably getting annoyed with us, but well, who cares.

She thought the picture on the wall was this Sai Baba, but I clearly remember the other fellow. Maybe both were up there (I don't recall the other picture). There were also many pictures of deities on the wall: Krishna, Shiva, and others. This along with the clearly Hindu religious music probably made this restaurant very Hindu (and Sikh with Guru Nanak). I doubt many muslims came to eat there.

But I have to admit that this was one thing I really liked about the Aroras: they were comfortable as they were and were not going to "please the masses" by compromising. They were vegetarians and they served only vegetarian food. They were Hindus and they only played Hindu religious music. If others didn't like that, they didn't care. They weren't profit maximizing, they were utility maximizing. I respect that.

Update 2
With a little googling, I discovered that the waitress that night was Teena Arora and she teaches Indian cooking in San Mateo, CA. I hope her parents are doing well, they were such nice people.

Wednesday, February 01, 2006

Missing Markets

My post last week on restaurants had one interesting aspect: the market for restaurants was missing for centuries not because of some missing technology but because the culture did not accept it. People are sometimes unwilling to pay for services that they benefit from if they feel that these things should be not be sold in the marketplace.

What markets are missing today because people just won’t pay for these things even though they might benefit from having them? I can think of a few examples:

1. Pay toilets. This is a business plan that has been floated and failed a few times. It seems obvious that if there were money in maintaining the toilets, we could all benefit from having clean ones on demand for a fee. But people think: “Why should I have to pay to go to use a toilet?” Also, people fear that they will pay the coin and still get a dirty toilet. I did see this system work (on a small scale) in Zurich, Switzerland in the 1980’s.
2. Toll roads. Yes, they exist, but the model is not popular. People want free roads. The inconvenience associated with paying to toll is a great factor here: I hate to stop and wait at a booth just to pay a 50 cent toll and then I need to fish around form some loose change. A more efficient payment method might make this a workable business plan.
3. Medical care in the U.S. People have money to buy medical insurance but wish that some employer would just give it as a “gift” instead. Tax incentives partially explain this situation but not entirely.
4. Middle-class private secular schools. The local government in each district in the U.S. taxes the local residents and provides schooling for no charge to everyone. Some of these schools are not that good. It would seem that many people would be better off forgoing this “free” education for their children and simply sending their kids to good private schools. However, this market has never really gotten off the ground.
5. Career guidance. There are people you can hire to help guide your investments but there is no market for people who can help you choose your biggest investment: your career choice. I think that there could be a service for people who look at your abilities and try to guide you to a good choice of profession for a fee. But this business plan has never gotten to the runway.

Can you think of other business plans that have failed because people just won’t pay for that sort of thing even though maybe they would benefit if they could and did pay for it?