Robin replies to my recent post on Hanson's Fallacy:

Few deals can guarantee to get everyone more of what they want, but by encouraging and enabling more better wider deals, the use of efficiency analysis sure seems to me to tend to get most everyone more of what they want.  Isn't that good enough?

Here's the reply I posted in his comments:

It would have been sufficient if you said: "When I said 'everyone,' I meant 'most everyone.'"  I'm not jumping on you for lack of disclaimers, but for stubborn overstatement.

Don't miss Jon Haidt's response to my questions.  It's in the comments, but I reproduce it here in its entirety.

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Again, this will be the subject of my talk on Thursday evening March 18 at Campbell University. It is also the subject of this podcast featuring Don Boudreaux and Russ Roberts. Boudreaux says that he does not vote, which I am sure will get an adverse reaction. Mostly, the podcast is about taking the romance out of elections and government.

I also downloaded a sample of American Progressivism: a Reader to my Kindle. My guess is that I will not buy the entire book, unless commenters tell me that I have much to learn from it. But my takeaway from the sample is that one hundred years ago progressive thinking was just that--thinking. Today, it is more unconscious.

In the thinking days, apparently there was some explicit argument that the original Constitution was out of step with the times. As the country urbanized and industrialized, as science improved and as economists and others began to call themselves social scientists, progressives argued that limited government was a bad idea. Perhaps government by wise technocrats, unburdened by Constitutional limits, would be better.

Over the past one hundred years, our government has evolved as if this thinking had triumphed. The Constitution does not restrict government the way it was written to do so, and we have a lot of technocratic government. Yet we no longer read of Progressives criticizing the Constitution--perhaps, having gotten their way, they might as well just keep quiet about the Constitution at this point.

Anyway, in the widely-unread Unchecked and Unbalanced, I suggest that there are trends cutting the other way. I argue that concentrated political power is inconsistent with the growth in specialized knowledge. The golden age of central planning was the era of mass industrialization, particularly during the two world wars. Since then, central planning has done poorly. Nonetheless, modern progressives still seem committed to it.

The Washington Post reports on cuts proposed in the budget in Montgomery County, Maryland.

The proposed budget cuts in Montgomery, which require county approval, reflect not just the recession but also decisions made by officials over many years. Salaries and benefits have risen sharply over the past decade. "There is pain in this budget, for our county and for our county employees," Leggett told subdued county employees and others gathered in a Rockville auditorium Monday. The total budget is down 3.8 percent. "There are some things we will do differently, and some things we will not do at all."

Historically, the public employee unions have owned this state. Until I see a "teacher-approved" candidate lose, I assume that the public employee unions still own the state. My guess is that the proposed cuts do not do nearly enough to reduce salary and benefits for "teachers" (probably half of the teachers' union members never set foot in a classroom under our featherbedding system) and other overpaid county workers. And my guess is that when deciding which cuts to approve the County will try to maximize the impact on services while minimizing the impact on employees.

I have been following, but not writing about the Lehman accounting scandal. Simon Johnson brings up a past scandal (Enron) and a future scandal (Greece). He points out the role of investment banks in designing and/or executing transactions that are done solely to cook the books.

I saw a lot of this during the S&L crisis, with Freddie Mac and investment banks "helping" underwater thrifts play accounting games, with the thrifts' regulator cheering us on (I say "us" because I worked for Freddie, although not on these transactions). The incentive of the regulator was to hide the problem until somebody else was in office.

I do not have much useful to say here, except to note that the worst accounting scams tend to come from government agencies and from regulated financial institutions. And as Andrew Ross Sorkin's column points out in the case of Lehman, the regulator typically knows and seemingly approves of the way that the bank games the system. If the government does not apply honest accounting to itself or insist on honest accounting at regulated/insured institutions, what is the point of accounting standards?

UPDATE: See Jennifer S. Taub on the rule change that spurred the growth in repo financing of mortgage securities.

Robin Hanson is probably the most logical mind I know, so it pains me when he keeps insisting that:

As an analysis tool, economic efficiency is designed and well-suited to finding win-win deals that get us all more of what we want.

This is complete nonsense.  Economic efficiency is designed and well-suited to helping people who want the efficient outcome.   It is equally true to say that economic efficiency is designed and well-suited to hurting people who don't want the efficient outcome.  Some of us are clearly in the latter category.  How then can Robin keep saying that economic efficiency helps "get us all more of what we want"?!

Update: In the comments, Robin gives his standard "distributive problems tend to cancel out" response.  I ignored this argument this because my objection already takes it into account.  Yes, some distributive problems cancel out, increasing the fraction of the population that wants the efficient outcome.  But this hardly means that they cancel out for everyone - or even that everyone can reasonably expect to benefit from efficient reforms ex ante.  In the real world, there will always be some people who prefer the status quo to the efficient outcome.   It might be convenient to ignore their existence, but that doesn't make them go away.

I'll be attending the Kauffman Economics Bloggers Forum in Kansas City on Friday.  You can watch the whole conference here.  I'm not on any of the panels, but I expect I'll be raising my hand quite a bit. :-)

The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration. It's time to start cashing them in.

This is from "Social Security to Start Cashing Uncle Sam's IOUs," by the Associated Press today.

In 2005, my co-author Charley Hooper and I wrote the following:

And that's why the Trust Fund is irrelevant. To buy the bonds in the Trust Fund from itself, the government must get the money from somewhere. It has four options. It can reduce other government spending. It can sell assets. It can increase taxes. Or, it can sell bonds. In other words, the Trust Fund has no effect -- zero -- on the government's financial situation.

Let's make it more concrete with a personal situation that many people can relate to. Say you're planning to send your kid to college. You have ten years and think you need $100,000. In Scenario A, each year you put an IOU for $10,000 in a jar. At the end of ten years, you pour out the jar, swear a bit more than is proper, and then scramble to come up with $100,000, either through borrowing, selling assets, earning more, or spending less. In Scenario B, you skip the jar and IOU charade and advance to the final step: you swear and scramble. The IOU charade was irrelevant.

We also added, in one of the few positive things I ever wrote about Al Gore:

Interestingly, 2000 presidential candidate Al Gore recognized the irrelevance of the Trust Fund. For all the ridicule he received for his concept of the "lock box," what he was getting at was that he wanted to reduce the federal debt in order to make room for the new debt that he knew was coming with the retirement of the baby boomers.

I recommend Bloom and van Reenen's 2010 JEP piece on "Why Do Management Practices Differ Across Firms and Countries?"  The paper is mis-titled, but excellent nonetheless.  Its main mission is to measure management practices, then describe how they vary - and they get a lot further than you'd expect.

Measurement.  Bloom and van Reenen ran a massive "double-blind" survey of thousands of firms in 17 countries.  As they explain:

One part of this double-blind technique is that managers are not told they are being scored or shown the scoring grid. They are only told they are being "interviewed about management practices." To do this, we used open questions in the survey. For example, on the first monitoring dimension, we start by asking the open question "tell me how you monitor your production process," rather than closed questions such as "do you monitor your production daily [yes/no]." We continue with open questions focusing on actual practices and examples until the interviewer can make an accurate assessment of the firm's practices...

The other side of our "double-blind" approach is that our interviewers are not told in advance anything about the firm's performance... We randomly sample medium-sized firms, employing between 100 to 5,000 workers. These firms are large enough that the type of systematic management practices chosen are likely to matter. However, these firms are generally small enough that they are not usually reported in the business press, so the interviewers generally have not heard of these firms before and so should have no preconceptions.

They explain their 18 criteria in detail in the article, and highlight evidence of their external validity: "[F]irms with 'better' management practices tend to have better performance on a wide range of dimensions: they are larger, more productive, grow faster, and have higher survival rates."  Not bad.

Results.  Besides their evidence on external validity, Bloom and van Reenen have nine additional big findings.  The most interesting to me:

1. The richer the countries, the better the management. 

2. Key exception: Multi-nationals are managed at First World levels almost everywhere.

3. Overall, corporations' separation of ownership and control looks like a non-problem, or even a plus.  Firms run by founders - and family firms run by family CEOs (typically by primogeniture) - are well below average.

4. Government firms are the worst-managed of all.

Survey skeptics will presumably dismiss this entire paper.  Since their dogmatic objections are mere words, however, I suggest we follow the skeptics' own advice and ignore them.  There's a lot more work on management left to do, but I for one salute Bloom and van Reenen for getting as far as they have.

HT: Robin

Since Bryan is impressed with people who bet on their ideas, I thought I would remind folks about longbets, a site that encourages exactly that, focused on long-term predictions. For example, Kevin Kelly writes,

The biggest driver of the shift from large families to small families is communication technology and education. As these techniques come into place the switch to lower birth rates is faster than what demographers have expected. And they are more permament.

...the earth's population will reach its peak sooner than official forecasts predict and because there is no visible counterforce compelling the majority of couples to have more than 3 kids each, world population will rapidly fall after reaching its peak.

Kelly does not know about Bryan's next book, which is going to convince everyone in the world to have more kids. Bryan should bet soon, before his book comes out.

The silliest bet is that within ten years the large Hadron collider will destroy the earth. In that case, winning the bet won't mean anything.

Many predictions do not have opposing bettors (including several predictions that already are false). One of the interesting not-yet-false predictions comes from econlog reader Mark Bahner.

He sees a future of managed care, funded or subsidized by vouchers. He elaborates here.

Few people would think that a ne'er do well brother would be justified into taking $50,000 from you to prolong his life (with p = 0.17) for another three months. (Bryan Caplan has made a similar point.?) So why do we approve of comparable transfers through the public sector?

Later, he gives a nod to me, presumably for my view that fee-for-service reimbursement will break down and that in the U.S. this is likely to lead to a voucher solution for Medicare, rather than the supply restrictions we see in other countries. However, unlike me, he does not think that what will emerge is a system of real health insurance, with high deductibles and co-payments. Instead, he thinks we will see managed care.

I think that what is implicit in his view is that we would rather outsource our rationing decisions than make them as individuals or families. Suppose that it is your aging parent who is offered the high-cost, low-benefit procedure and cannot afford it. Do you want to be under pressure to put up the money, or do you want the social norm to be that this decision is up to the managed-care provider?

I'm impressed to learn that Haidt backed up his Five Foundations theory with his own cash.  The offer expired on August 1, 2009, but it ran for two years:

IF ANYONE CAN DEMONSTRATE THE EXISTENCE OF AN ADDITIONAL FOUNDATION, OR SHOW THAT ANY OF THE CURRENT 5 FOUNDATIONS SHOULD BE MERGED OR ELIMINATED, JON HAIDT WILL PAY THAT PERSON $1,000.

The resolution procedure is admittedly slanted in Haidt's favor:

Winning the prize will take two steps. First, you must make a good case, in writing, that some other set of concerns is a plausible candidate for foundationhood. Then, you must collect empirical evidence to show that this set of concerns is psychometrically distinct from the existing five foundations, or is otherwise incompatible with the existing five... We in the consortium will be the judges, and we'll probably want to replicate anyone else's findings before changing our whole theory, but we have stated in print that we take the five foundations are the best starting points; we do not believe they account for all of human morality. (emphasis mine)

I'm nevertheless impressed that they've publicly named and described the leading challengers: equality/oppression, liberty/oppression, waste, wisdom, truth/right belief, truth/honesty, a bipolar theory, self-control, and property.

Question for discussion: Read the details on the challengers.  Which is the easiest to subsume under the Five Foundations?  The hardest?

In the comments, Jason Malloy points out that Jon Haidt recently added a battery of questions to test liberal puritanism.  Here's Haidt's explanation:

At Yourmorals.org we have always found that scores on the Purity/sanctity foundation are higher on the political right than on the left. Conservatives, particularly religious conservatives, live in a more sacralized world. Liberals, particularly secular scientifically-minded liberals, live in a more materialist, un-magical world.

Yet there are enough hints of "liberal purity" scattered about that we at Yourmorals are actively trying to measure it... It can be seen in the liberal tendency to moralize food and eating, beyond its nutritive/material aspects. (See this fabulous essay by Mary Eberstadt comparing the way the left moralizes food and the right moralizes sex). It can be seen in the way the left treats environmental issues and the natural world as something sacred, to be cared for above and beyond its consequences for human - or even animal--welfare.

The punchline is excellent: "Can anyone understand Avatar who lacks all intuitions of purity/sanctity?"

Last night, I was a guest of San Jose State University's economics department on a bus ride through Pebble Beach, complete with drinks and hors d'oeuvres. The reason for the event: the annual Public Choice meetings are being held in Monterey. I live about 10 minutes away.

The conversation jumped from topic to topic, as conversations do, and the issue of externalities from education came up. Also, as happens when that issue comes up, even with free-market-oriented economists, education quickly gets equated with schooling. There's a distinction between the two, as that noted education theorist, Mark Twain, once pointed out.

Then someone said, "As Walter Williams says, there are public externalities up through third grade. By then, kids have learned to read the sign, 'Keep off my lawn.'" (Quote sanitized for public consumption.)

From an extremely interesting report by Adam Schaeffer:

the Los Angeles metro area comes in third place for average real spending in our study.23 The average real per-pupil spending figure of $19,000 is a stunning 90 percent higher than the $10,000 the districts claim to spend.

Remember that if there are 20 students in a classroom and spending is $15,000 per student, then school revenues are $300,000 per year. A teacher gets paid, say, $75,000 a year, including benefits. That still leaves $225,000 in profit, which gets divided into capital expenses and overhead. Mostly overhead. You will find that if the teacher to pupil ratio is 1 to 20 in the classroom, overall the adult to pupil ratio will be more like 1 to 6. See Efficiency, Entrepreneurship, and Education, which I wrote ten years ago. See also my letter to the editor about the Montgomery County School budget.

But read Schaeffer's whole piece first.

Next, we have Mark Schneider:

Setting a national goal of having all students proficient by 2014 while letting states create their own tests and set their own cut scores has produced a mess.

You put these two stories together, and the result is that school districts are not transparent about what they are spending or about the results.

I have to say that I was never a fan of national testing standards. I wrote in 2003 that for those of us who want to empower parents the national standards look like part of the problem, not part of the solution. I still feel that way.

By the way, in David Brooks' tribute to Barack Obama as a courageous education reformer standing up to teachers' unions, Brooks does not mention that on Obama's watch the DC school voucher program has been essentially killed.

UPDATE: On David Brooks' column, no comment I can make could possibly top the last line of Jonah Goldberg's take.

Will's latest blogging on Jonathan Haidt's "five foundations" theory of morals inspires me to publicly ask Haidt a question that's been bugging me: How hard did you try to include items about Ingroup/Loyalty, Authority/Respect, and Purity/Sanctity that would specifically appeal to liberals?  Examples that occur to me:

Ingroup/Loyalty: How much would somone have to pay you to vote Republican in an election if you knew the Democrats would win for sure?  To cross a picket line?

Authority/Respect: How much would someone have to pay you to privately ask Clinton embarrassing questions about the Lewinsky affair?  To dance on Martin Luther King's grave when no one was looking?

Purity/Sanctity: How much would someone have to pay you to throw one McDonald's cup out of your car window in Yosemite?  To scream racial epithets in a sound-proof room?

I could be wrong, but when I read your research, it seemed like such questions were rarely if ever asked.  If you included them, I suspect that you would discover that liberals, like conservatives, use all five moral foundations in a serious way.  The liberal-conservative difference, in other words, is largely about which group they identify with, which leaders they respect, and what they consider sacred.  Am I mistaken?

Will Wilkinson writes,

libertarians are liberals who like markets.

This is a succinct way of suggesting that libertarians and liberals share similar personalities and outlooks. There is just an intellectual difference concerning markets and government.

I will be speaking on the subject of markets vs. government in a number of upcoming talks. The first one will be at Campbell University in North Carolina on Thursday, March 18th at 6 PM. I assume this is open to the public. If you have a group in your area that would like me to speak, let me know (you can leave a comment).

Below is a sketch of some of my thoughts.

In this morning's Monterey Herald are two articles from the Associated Press, the first co-authored by Ken Thomas and Natasha Metzler and the second co-authored by Ken Thomas and Natasha Metzler.

First article headline: Roadway deaths fall to lowest level since the 1950s.
Sure, you would expect that with the recession on, right? Well, actually, deaths per 100 million miles fell to 1.16 in 2009, down from 1.25 the previous year, an an all-time low.

Second article headline: Toyota troubles spotlight safety agency.
Here's what the article states that NHTSA head David Strickland said:

Strickland told the panel it was unclear whether the agency can regulate "in a way that allows the industry to build and sell safe products that the consumer wants to drive."

I don't fault Thomas much, although it would have been nice for him not to be on autopilot and to have the sense to realize that Strickland's comment didn't make sense in light of the fatality data and to, therefore, interview another person for balance, someone, say from the Competitive Enterprise Institute.

I do fault Strickland. "Safe products that the consumer wants to drive?" How does he think we choose what to drive now? By buying unsafe products we want to drive? By buying safe products we don't want to drive? By buying unsafe products we don't want to drive?

For the past few years, social scientists have been arguing over the One True Measure of consumer welfare.  Most economists still cling to the Demonstrated Preference Standard: If A buys X, then X makes A better off by definition.  Psychologists and psychologically-minded economists have been pushing the Happiness Standard: If A buy X and feels happier as a result, then and only then is A better off.

I think both standards have some merit.  But I'd like to suggest a middle way.  I call it the Consumer Satisfaction Standard.  According to this standard, if A buys X, and would do so if he had the chance to make the decision over again, then X makes A better off.  The Consumer Satisfaction Standard is less tautologous than the Demonstrated Preference Standard; it allows for the possibility - which we often observe in real life - that a person will not be a satisfied customer.  At the same time, if someone complains about X but keeps buying it, the Consumer Satisfaction Standard treats his grousing as empty verbiage.

I started thinking about the Consumer Satisfaction Standard while writing Selfish Reasons to Have More Kids.  By the Demonstrated Preference Standard, every kid we have makes us better off - and every kid we don't have would have would have made us worse off.  By the Happiness Standard, every kid we have makes us slightly worse off - at least on average.  By the Demonstrated Preference Standard, however, kids turn out to be a great deal.  Why?  Because over 90% of people who have kids would do it over again - and over 70% of people over the age of forty who didn't have kids wish they did.

Question: If you applied the Consumer Satisfaction Standard more broadly, what decisions would look the best - and the worst?

President Obama Walks Into His Own Trap

And the insurance companies continue to ration health care based on who's sick and who's healthy; on who can pay and who can't pay.

The above is from President Obama's speech in Pennsylvania on March 8.

If we take Obama literally, then shouldn't we applaud insurance companies? Don't we want them to ration care by paying for it for those who are sick and not paying for it for those who are healthy? Fire insurance companies ration payments to those whose house has not burned down, saving the money for people who are insured and whose houses have burned down.

Of course, that's not what he meant. He meant the following:

And the insurance companies continue to ration health insurance based on who's sick and who's healthy; on who can pay and who can't pay.

And of course he meant that they tend to deny coverage or charge premiums to those who are sick.

Why did he make that verbal slip? Because he's used to making it on purpose. He, like so many people who advocate further government intervention in health insurance, has been trying to confuse the issue for years--and he ended up confusing himself. President Clinton did it regularly, talking about tens of millions of people going without health care when what was really true was--and is--that tens of millions of people go without health insurance. There has always been a large uncompensated health care sector--doctors and hospitals giving care but not collecting, or not collecting much, from those who can't pay. Moreover, many people who lack health insurance actually, believe it or not, pay for their own health care. Health economist Linda Gorman writes:

Overall, national estimates suggest that the uninsured pay for about half of their care

People who oppose the Obama/Senate/House plans for further intervention are wrong to criticize universal health care. We already have universal health care. That doesn't mean it's not rationed. It is rationed, both to those with health insurance and to those without health insurance. But in that sense it's rationed everywhere. In Canada, the provincial governments ration by making people wait, by denying coverage of certain drugs and procedures, and by making it illegal for people to buy health care, except on a few procedures.