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I teach masters students the basics of micro- and macro-economics. When we talk about government intervention, one of the first topics is the effect of taxes in an otherwise competitive market. By this point, it’s pretty easy for them to see that taxes hurt both consumers and producers in that market because, generally, (1) buyers have to pay more for the good than before and sellers receive less in revenue than before and (2) taxes reduce the activity that is being taxed, lowering surplus for everyone. For example, if it costs a seller $1 to make a cup of coffee and every day she was selling one to a buyer who was willing to pay only $1.05 (presumably for some amount between $1 and $1.05), placing a 10-cent tax on that market will probably eliminate that transaction. This second effect is called the “deadweight loss” of taxation because losing these transactions creates only costs (to the affected buyers and sellers) and no benefits (because the government doesn’t get tax revenue and consumers/producers do not benefit from transactions that don’t happen). That doesn’t mean we should never have taxes in competitive markets: if the government puts the tax revenue to good use, then social gains can overcome the deadweight loss. It just means there’s no free lunch!
It’s important to note that the assumption here is that we don’t want to limit the economic activity itself (e.g., because it generates pollution). When we talk about “externalities” such as pollution and how taxes can be used to resolve them, I usually ask “Do taxes to correct an environmental externality create deadweight loss?” By this point, a lot of my students have learned to equate taxes with “deadweight loss”, so many will generally say “yes”. However, that is not the case (but I’ll save that for another post).
After we cover taxes, I ask my students: “Do subsidies (in the form of a payment per unit of something produced/sold) in otherwise competitive markets create deadweight loss?” I always think this is an easy question because a subsidy is just a negative tax. The answer then should clearly be “yes”, but the students are usually stumped. So I thought I would write a post about the economics of subsidies.
Unsurprisingly, subsidies work in the opposite way that taxes do: they generally benefit both buyers and sellers by raining the amount a seller receives for selling a good and lowering the amount a buyer pays. No one participating in a subsidized market has an incentive to want to get rid of the subsidy because both sides benefit! Subsidies also increase the amount of the subsidized activity – add a 10-cent-per-cup subsidy for coffee and people will drink more coffee. Someone who wasn’t willing to pay more than $0.95 for that cup of coffee may now buy it for $1 because they also get a ten-cent subsidy that offsets some of that cost. Alternatively, if the subsidy goes to the seller, the seller may lower the price to $0.93, also inducing the buyer to buy.
But this increase in economic activity is not a good thing because the additional “units” being produced and exchanged are costing more to make than the buyers value them at. The net benefit (value to consumer minus cost to producer) to society of this additional economic activity is negative because the buyer values the good less than what it costs to produce. On top of that, subsidies need to be paid for by taxes, which means possibly creating deadweight loss in another market!
One justification people give for supporting subsidies is distributional concerns. Maybe we’re losing some efficiency, but we’re making sure that (presumably poor) people can afford to buy the good in question. However, subsidies are a crude and expensive way for achieving distributional goals because they help everyone who buys in the market, rich or poor. For example, subsidizing college education will certainly help poor students, but if the subsidy is given to everyone, it becomes much more expensive in terms of the amount of revenue (and deadweight loss of taxation) that needs to be generated.
An obvious way to improve on subsidizing something for everyone is more targeted subsidies (like financial aid for poor students). However, even that is not ideal because it distorts individuals’ choices. If we start subsidizing coffee for low-income individuals, coffee will be more affordable, but people will also drink more of it relative to other goods, and it’s not clear that we (or the individuals) want that. Rather, economists advocate giving poor individuals money and letting them decide what to spend it on. That comes with its own set of issues because it creates a larger incentive to pretend to be low-income, but it also respects individuals’ choices and does not lead to unnecessary distortions.
My representative, Rodney Davis, recently introduced a health care bill "to protect people with pre-existing conditions from discrimination against insurance companies." (yes, if you think about it, that sentence is poorly written).
I just wrote to him to ask a few details about his plan. I'm sharing the letter below because it demonstrates the difficulty of ensuring that individuals with pre-existing conditions can buy affordable insurance.
"I read about your new health care bill to make sure people with pre-existing conditions can buy health insurance. I'm just curious as to what happens if insurers offer someone who has cancer insurance for, say, $50,000 per year. Would you consider that acceptable? If not, what provisions does your plan have in place to ensure that does not happen?
If your plan has limits on whether insurers can charge different prices based on pre-existing conditions, how will the plan ensure that younger and healthier people do not have a disincentive to sign up because they are being offered insurance at a price that is much higher than their expected healthcare costs?"
There are really only two ways (that I can think of) to ensure that (1) people with pre-existing conditions are not being offered health insurance only at exorbitant prices and (2) you don't create a "death spiral" where people buying insurance on the individual market are increasingly sick because the healthier people drop out due to rising prices. The first is having an individual mandate (a stick) and the second is a generous tax credit that makes buying health insurance very cheap on the margin even if the pre-credit price is very high (a carrot). I look forward to seeing what Davis's actual plan is (the "Better Way" Republican agenda does mention a tax credit).
I’ve been getting increasingly frustrated with how hard it is to keep up with new research. At some point after starting my job, I subscribed to table of contents emails for the top five + a few other econ journals. Then I noticed that, once in a while, I would see a newly published article in my research area that I had never heard about. Given that it typically takes at least 1-2 years to publish a paper in economics and that drafts are widely available as working papers, that was not a good sign.
To try to remedy that problem, I then subscribed to two working paper series: NBER and SSRN. But even that didn’t seem good enough. In environmental economics, there are plenty of good researchers who are not part of the NBER (and thus can’t release their working papers that way) and do not use SSRN. But how could I possibly remember to check all of their websites once in a while to see new papers? On top of that, my inbox was getting bombarded with abstracts of many irrelevant papers, and I was wasting a lot of my already precious time sorting through them to figure out which ones I should read.
I looked to see if there was anything out there that could help me stay up to date efficiently and sanely. I won’t bore you with the details, but places like Research Gate, Google Scholar, Mendeley, RePEc, and others fell far short of what I was looking for. So I decided to build it myself (or, more accurately, hire a programmer to build it for me) and in the process also create a tool for others who may be having the same problem. I’m calling it “Academic Sequitur”.
The idea is simple: Academic Sequitur will be a one-stop shop where you can create a “portfolio” of research to follow, whether it’s research in a specific journal, on a specific topic, or by a specific researcher. We’re starting with economics and finance but depending on how things go, we may expand to other disciplines. A beta version will be available in about 6 months, so stay tuned! And if you want to be notified of when Academic Sequitur comes out or have any other thoughts, let me know by emailing email@example.com.
(This is based on a true story, but I may have changed some details like field of study and gender to protect the student’s anonymity)
Shortly after Trump got elected president, a student made an appointment to talk to me. She was in the last year of her finance degree and had a good job lined up, but was doubting whether she should continue with her life plan in light of the election. She realized that she wanted to make a difference in the world and a career path in finance didn’t seem like a good way to do so. Instead, she was considering going to work for a women’s reproductive rights organization (I definitely changed this detail, but it roughly captures the spirit of this student’s desires).
I told her to consider sticking to finance and donating a large part of her salary to her favorite organization. Why? Because individuals who hold high-paying jobs can often make a lot more of a difference this way. Her starting finance salary would have been probably at least $120,000 a year. If she left finance and went to work for the non-profit, she would make at best $40,000 a year. But what if she donated $80,000 of her finance salary to the non-profit instead? Well, the non-profit could hire TWO people like her and she would still earn $40,000 per year, as much as she would have at the non-profit.
Of course, there are some caveats to this. She would probably have to work longer hours in finance and maybe she would enjoy it less than the non-profit job. So to stay indifferent between the two, maybe she would donate “only” $50,000. Still, the organization might prefer having that money to having her work there, especially if she didn’t have any special training.
That brings me to the second piece of advice I gave her. If, after considering the high-paying-job-plus-donations option, she still thought going into the non-profit world was better, I advised her to think about positions in non-profits where her finance training would be useful. For example, if she wanted to help low-income women, perhaps she could get involved with an organization that provides financial training to disadvantaged women or manage a non-profit’s endowment. Even though that may not have been her first choice, it would probably be more valuable to society.
So as we sit here wondering, “What the f*** do I do now?”, consider whether your salary allows you to make a substantial donation to the many organizations out there fighting the good fight. If you’re a student, don’t feel like you have to drop everything and become a full-time activist (though you should still call your Congressman once in a while and follow the non-alternative news!). First, sit down and think about how much money you can generate for your favorite organization by not working for them. Alternatively, consider which causes your skills could be useful for – a lawyer going to work for ACLU is a lot more useful than a lawyer going to build houses for Habitat for Humanity.
To be clear, I am not saying that you should take a job you find immoral or incredibly unpleasant. There is ultimately nothing wrong with leaving (or not taking) a high-paying job where you don’t feel like you’re making a difference for a low-paying job where you feel like you do. And of course we need people actually working at organizations like ACLU or Planned Parenthood (yes, I’m shamelessly promoting my favorite ones). But these organizations need money too, and if you face a high opportunity cost of joining them full-time (i.e., your salary is or will be high), consider giving them your money instead. You might not get the same pat on the back from your activist friends, but I promise you that you will be making a big difference!
Let’s talk about genetically modified organisms (GMOs). But first, let me ask you a question. Are chainsaws good or bad? That’s a weird question, isn’t it? A chainsaw can be very useful if you need to cut something, but it can also be dangerous if you’re not careful or if you deliberately attack someone with it.
Now let’s go back to talking about GMOs. As I elaborate on below, it’s just as silly to ask whether GMOs are good or bad as it is to ask whether chainsaws are good or bad. Genetic modification is a tool. If used wisely, it can provide a significant advantage over traditional plant-breeding techniques. But it can also be used for evil. So my proposal is that we stop treating all GMOs as being the same (this also goes for people who love GMOs!) and instead think about what exactly is being genetically modified.
Let me demonstrate why this is important. Two very common genetic modifications out there are to (1) make crops herbicide-resistant (e.g., "Roundup ready corn") or (2) make crops produce their own pesticides (e.g., "Bt corn"). What effect would the first modification have? Well, it’s likely to increase the amount of herbicide farmers spray on crops because now you don’t have to worry about killing the crops themselves. This may be undesirable to the extent that higher levels of herbicide are more harmful to human health (although there’s no evidence that Roundup is harmful to human health unless you are stupid enough to swallow it in high doses) and to the extent that it contributes to the creation of weeds resistant to Roundup ("superweeds"). But making crops produce their own pesticides will likely decrease the amount of pesticide farmers spray on crops because the crops are making their own (oh, and for the record, organic farmers use Bt as a pesticide all the time). That could be a significant improvement for the environment, for crop productivity and (because less pesticides are used) for human health.
Fine, but these are only the intended consequences of genetic engineering. What about the unintended ones? Well, let’s think about traditional plant breeding where you’re letting the mutations in DNA happen naturally and selecting the offspring with the best traits. We’ve done A TON of that. How else do you think your banana or your “traditional” corn got here? And we really had no idea what was being altered in the plants’ DNA. It was essentially impossible to guarantee that the new variety was different ONLY in the desirable traits. By contrast, because genetic engineering is very targeted, we can be very confident that no other changes are taking place. So it’s pretty hard to claim that genetic engineering will produce unintended consequences (at least on a systematic basis) – I would be much more worried about that traditionally bred apple you’re eating.
But, you say, these traditional varieties have been grown for hundreds or thousands of years so if there were something wrong with the crops that we developed during this time, we would know by now. That’s certainly true if a mutation made a crop poisonous such that eating a bite killed you. But if we accidentally bred something that, say, doubled your chances of developing a certain kind of cancer if eaten for prolonged periods of time, there’s a good chance no one would have noticed because they were too busy dying of other things. And many fruits and vegetables do contain toxins naturally. So enjoy those glycoalkaloids in your "non-genetically modified" potatoes!
In summary, there is absolutely no reason to think that the entire concept of genetically modifying organisms is a bad idea. By all means, we should ask if a specific genetic modification can have adverse health or environmental consequences. But let’s stop being unscientific about this whole GMO thing by saying we shouldn’t do genetic modification at all.
A while back, I posited a simple mechanism by which completely ineffective treatments can appear effective and maybe even gain prominence as "alternative” or “traditional” medicine. So then are all alternative medicines ineffective? After all, there's that famous joke: "Q: What do you call non-traditional medicine that works? A: Traditional medicine."
At first glance, there's a lot of logic to that idea. If something really works, won't it soon get incorporated into mainstream medicine? Here's a simple explanation for why the answer is "no".
In the US, non-traditional medicine can be roughly described as anything that seems like it’s supposed to make you healthier in one way or another, but with the cautionary label "This statement has not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease." If you want to “legally” be able to claim that something works, you need to have Food and Drug Administration (FDA) approval.
Because FDA approval requires clinical trials, which are expensive, private companies will only undertake such trials if they expect to profit from the results. But private companies will not be able to patent most alternative medicines because most are by definition not novel treatments but ones that have been in use for years, decades, or even centuries. And you cannot patent something that isn’t novel. Instead, a reasonable expectation is that other companies will use the results to market the same medicine and the company who did the testing will not be able to recoup the trial costs by charging more for the medicine.
Thus, testing whether alternative medicine is effective is a “public good”: society (including other companies) captures most of the benefits, while whoever does the testing bears the full cost. This implies that the private market will under-test alternative medicine. In fact, the only reason private companies would test anything that they can’t patent is for PR purposes, which is probably a pretty weak incentive.
The WRONG conclusion to draw from this analysis is that alternative medicine is effective but overlooked by the private sector. But, as my previous post makes clear, alternative medicine could just be “correlated” with feeling cured or work as a placebo. So what do we do about this? The clearest implication is to have public funding of scientific research to test which alternative medicines do and do not work.
It’s true that there is already some testing of alternative medicine. But if you search for “alternative medicine research funding”, you basically get nothing (you get much better results for "dog diabetes research funding"). And given how prevalent the use of alternative medicine is, it seems like we should be funding more research of its effectiveness. It’s worth it (up to a point, of course) to spend some money up front and either put a definitive nail in the coffin of a useless approach or discover medicine that could be incorporated into everyday medical practice. Undoubtedly, some people will keep taking “natural” medicine no matter what research says. But we should figure out what’s true and what’s not.
This is another “fun with math” post meant to impart simple math knowledge that could make the world a better place.
If you aren’t a statistician/math aficionado/empirical economist, you’ve probably never thought about what a “percentage point” is or how it’s different from a “percent”. Frankly, I hadn’t either until one of my advisers in graduate school asked if I was reporting results in percent or percentage points. The realization that there was a difference was eye-opening. Basically, a “percentage point” is always out of 100, whereas a “percent” is always relative to some baseline rate. We can also think of percentage point as telling us something on an absolute scale and a percent as telling us something on a relative scale.
Let me give you an example of why it matters. What sounds scarier, if I tell you that your probability of getting into a fatal car crash is 50 percent higher when driving over the speed limit or if I tell you that your probability of getting into a fatal car crash is 0.5 percentage points higher when driving over the speed limit? Chances are, the first one sounds a lot worse. But the 50% number is relative to some baseline crash rate, which is probably very very low (maybe 1 in a million if we’re talking about a day’s worth of driving). So multiplying that by 1.5 still leaves you pretty safe. By contrast, raising your risk of a fatal car crash by 0.5 percentage points brings it from 0.0001% to 0.5001% - more than a 5000% increase! (By the way, “%” usually refers to “percent”. If you want to talk about percentage points, you should just write it out.)
Why should you care about this difference? Because it’s often helpful to know differences in percentage points rather than percent, especially when it comes to rare events. For example, the risks of birth defects rise dramatically in percent/relative terms with the mother’s age, but the percentage points/absolute changes are actually pretty small. According to this page, 20 year old women have about a 0.19% chance of having a baby with some chromosomal anomalies, whereas 40-year-old women have a 1.52% chance. If you calculate the percent increase in risk, it’s huge, almost 800%. But the percentage point change is clearly much smaller, just 1.33.
Moral of the story - as a rule of thumb, if you want to scare or impress someone, use percent. If someone is trying to scare or impress YOU, ask them what the percentage point/raw difference is.
Search for “What successful people do” and you’ll find dozens of articles and books divulging the secrets. Success could be measured by learning a language, starting a business, having good relationships with people, being happy, etc. Typically, the writers will find some “successful” people and scrutinize their strategies. But what few people realize is that looking at what successful people do is not enough to figure out whether a particular strategy is associated with a higher probability of success. Why? Because you need to (at least) know the rate at which “normal” people employ that strategy!
Let me give you a simple example. Suppose that you read in a book that 80 percent of “successful” people get up at or before 6am every day. 80 percent - that’s a lot! But suppose then I tell you that 80 percent of “normal” people get up at or before 6am every day. All of a sudden, the strategy of getting up at 6am doesn’t look so impressive – it’s just something that all people do. If I tell you that 90 percent of normal people get up at 6am, then it looks like you’re better off sleeping in!
Conversely, just because a strategy is rare among “successful” people doesn’t mean that it’s not a good strategy for success. Let’s go back to the 6am example and say that only 10 percent of successful people get up at or before 6am every day. Is it beneficial to sleep in then? Not if I tell you that only 2 percent of “normal” people get up that early – then successful people are 5 times more likely to get up early than normal ones! So it’s vital to know the rate of a behavior in the “general population” if you want to understand its correlation with “success”.
Of course, I have to end this post with a “correlation-is-not-causation” cautionary tale, as every good scientist should. Suppose I tell you that 90 percent of successful people get up later than 6am (as in the previous example), but only 10 percent of “normal” people do (so success = 9 times more likely to get up later than 6am!). Does this mean sleeping in will bring you good fortune? Absolutely not. It’s very possible (and maybe even likely) that success allows you to “rest on your laurels” and relax, so it’s being successful that causes sleeping in, not the other way around.
For the longest time, I didn’t say anything about my views on gun control publicly. I dislike prolonged Facebook arguments where people seem to be speaking past each other. But, meh, you only have one life to live, and I don’t want to keep my mouth shut for all of it.
So here goes: dear people who say “guns don’t kill people, people kill people”, do you really think that someone could do just as much damage with a knife/axe/sword/crossbow or your other weapon of choice? If you yourself had to face an attacker, would you rather have it be someone with a knife/axe/sword/crossbow or a gun? No one is saying that ONLY guns kill people, but they sure as hell make it a lot easier. Also, maybe restaurants shouldn’t give people forks and knives? After all, forks and knives don’t eat the food, people eat the food.
And people who say “limiting gun access would only hurt law-abiding citizens; the criminals will get their guns somewhere else”, I hope you support full legalization of all drugs and free access to prescription drugs, including opiate painkillers. Because in your world, if it’s just as easy for a criminal to get an illegal gun as a legal one, the same logic should apply to drugs, right? But I suspect most who are so vehemently against any additional restrictions on guns don’t have the same view about drugs.
I’m not saying we should ban guns. In fact, I don’t know what the optimal gun policy looks like, but there are plenty of experts out there who have some good ideas. But what I’m sure about is that there is definitely a way to reduce gun violence through more gun control and saying there isn’t is either dishonest or stupid or both (ok, the other alternative is that you’re a nihilist). Resisting more gun control at all costs is simply irresponsible. That is all.
Inevitably, there comes an election cycle where people start talking about moving to Canada if Candidate X wins the race. Of course, this is mostly an expression of a dislike for a candidate rather than a serious intention. As far as I can tell, there was no statistical increase in out-migration to Canada when Bush Jr. won, for example.
Now Candidate X is Donald Trump, and I think it’s time for me to finally speak up and say “Shut up about moving to Canada and do something useful instead!” Talking about moving to Canada is about as lazy as you can get in helping avoid this outcome. So instead of making that your next Facebook post, go and convince someone else not to vote for Donald Trump. As much as you hate to admit it, you very likely know people who will vote for him if you don’t do something about it. Don’t believe? Go ask your friends who they’re planning on voting for. Eventually, you will find at least one person who will say (maybe hesitatingly) “Donald Trump.”
The next thing to say to such a person is not “How could you possibly be so stupid?” or “Our friendship is over!” even if that’s what you’re thinking. What you should do next is find out why that person thinks Donald Trump is the best option this country has and listen to the answer. Don’t assume that anyone who’s willing to vote for Trump is crazy or racist – they may be, but telling them that won’t convince them not to vote for Trump. Instead, engage in a discussion with them about whether their reasons for voting for Trump are justified. Tell them why you’re not voting for Trump and why you think he’s the wrong choice for America in general (other than “He’s an orange-faced idiot”). Help them see that voting for Trump is not in their best interest. Yes, this is a lot harder than lamenting the sad state of American politics, threatening to move to Canada, and calling Trump supporters names. But it’s also a lot more productive. You might even learn something along the way!
To give you some ideas, I will tell you why I think Trump is the absolutely the wrong choice. To keep my posts from getting too long, I’ll do one reason per post. So today will be reason #1 why no one should vote for Donald Trump: we should not let anyone with absolutely no political experience be President, regardless of how smart they are, how much money they’ve made, or how good their ideas are. We don’t let pilots straight out of flight school fly international jetliners – they have to fly regional jets for a while. No one gets to build a house or a bridge until they’ve built something smaller – again, no matter how brilliant they are. Anyone who wants to be President should first do something easier – Congressman, governor, even city mayor. It’s too important of a job to trust to someone completely inexperienced at that particular job.
I know that one of the reasons people support Trump is because they’re tired of politicians’ crap. I very much sympathize with that sentiment. But the solution to that is to look for better politicians, not to take a chance on someone who has never held political office. The better politicians are out there and they can rise to the top. We put the current ones in charge and we can replace them. But let’s start from the bottom up and not the top. Too many lives are at stake to let inexperienced pilots fly 500-person planes; too many lives are affected by the US President for us to pick someone who has no experience governing.
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