I've spent several days reflecting on my chairman's reaction to public grief over Michael Jackson's death:

I, for one, am no more touched by Mr. Jackson's death than I am by the death of any of the thousands of other Americans who died last week, all of whom - like Mr. Jackson - are strangers to me and to the vast majority of people now so self-indulgently and flamboyantly grieving for a man they never met.

Americans' proclivity to mass hysteria causes me to want government to have as little power as possible.  I neither can nor wish to stop other persons from doing with their lives as they wish.  But I also damn sure despise the fact that, through their votes, so many persons prone to such childish sentiments and displays have a say in how I lead my life.

I agree with Don Boudreaux's basic point: If people get hysterical about a man they never met, it seems dangerous to put real power in their hands.  At the same time, though, it's worth pointing out that this particular manifestation of "mass hysteria" is not only understandable, but benign. 

Understandable: Michael Jackson's music really did touch the lives of millions of people.  Sure, they didn't personally know him, but who doesn't feel a connection to one impressive stranger or another?  I never met Julian Simon, but I feel his loss.  The story of the architect of Hitler's failed assassination brings tears to my eyes.  I'd be ever-so-happy for Emily Whitehurst if she became a superstar.  What's so bad about these feelings-at-a-distance?

Benign: If people have the kinds of emotional needs that Don criticizes, what is the best - or least bad - way to express them?  They could express them in politics, with the usual awful results.  They could express them in religion, with results that are at best mixed.  Or they could express them by idolizing singers, movie stars, novelists, bloggers, etc.  It's hard to see the downside.

I'd actually go further: Fandom would play an important role in a free society.  What role?  Harmlessly dissipating the emotions that, wrongly directly, lead to dangerous hysterias.  In fact, as Tyler Cowen explains in his unjustly neglected What Price Fame?, idolatry serves as a non-cash payment to the creative geniuses who give us far more than we pay them.  Samuel Johnson once wisely observed that, "There are few ways in which a man can be more innocently employed than in getting money."  I'd like to add that "There are few ways in which a man can be more innocently hysterical than in grieving over a celebrity."

Here's one of mine, from Alfred Hitchcock's Rear Window. It's about one of the most important things economics deals with--incentives. Lisa (played by Grace Kelly) and Jeff (played by Jimmy Stewart), are listening to a man in another apartment play one of his songs on a piano:

LISA: Where does a man get the inspiration for a song like that?
JEFF: From his landlord -- once a month.

What are some of your favorites?

How do economists and other social scientists influence public policy?

Yesterday, I recommended Jeffrey Friedman's article on the financial crisis. Its theme is regulatory hubris, and Friedman disparages "economism," which might be described as a belief that wise economists can guide government policies to correct market failures. Note the echo of Hayek's disparagement of scientism.

Also yesterday, Mencius Moldbug wrote,

By far the most significant source of decisions in the modern American system of government is something called public policy. In the 20th century, it was discovered that the task of governing, thought in all previous centuries to be an art requiring wisdom, talent and experience, is in fact a science, like chemistry or card-counting. This set of sciences is often described as the social sciences, a slippery name if I ever heard one.

However, in a review of a book by John H. Wood on the history of macroeconomic policy, David C. Wheelock writes,

Economists have rationalized more than influenced policy, Wood contends, and the direction of influence between economic theory and practice is primarily from the latter to the former.

That would be closer to my view on public policy in general. To find that review, I followed a trail from Pete Boettke to Peter Klein.

The main science of political economy is the science of obtaining and retaining power. As far as expertise goes, the pollster, the fundraiser, and the media expert are all fundamental to the operation. The public policy expert is for decoration. If you want to be an economic policy adviser when you grow up, then my advice is to learn to rationalize the methods used by leading politicians to obtain power.

Is health care reform about health care? No, it is about seizing and retaining power. Was the stimulus about stimulus? No, was about seizing and retaining power. Is cap and trade about global warming? No, it is about seizing and retaining power. Was TARP about saving the financial system? No, it was about seizing and retaining power.

The social scientist's role in the political process is to say, "X is a problem. Government must solve X. Here are some solutions." The solutions that rationalize seizing and retaining power will bubble to the top.

Suppose you believe that regulators cannot possibly have the wisdom to direct human activity. Suppose you believe that politicians spending other people's money tend to choose less wisely than people spending their own money. If you want to get anywhere as a public policy adviser, keep those beliefs to yourself.

Like some commenters, I found Bryan Caplan's post on health care today to be one of his best. And he's already set a high bar. But, believe it or not, given that Bryan is a more-radical libertarian than I am, I think he sold freedom short.

In his point #1, Bryan wrote:

If the problem with free-market health care is just that poor people can't afford health care, then the smart response is simply to give poor people more money (or possibly a cash voucher), and leave insurance companies alone. Think about how we usually handle hunger among the poor. We don't set up byzantine regulations for grocery stores. We give the poor welfare checks and/or food stamps, and leave the grocery stories alone.

His first sentence is absolutely correct. The smart response is to give them more money or health care vouchers. But in the last three sentences, he used the word "we" where he really meant "the government." The government is not us. It's some of us, but it's not us. Many of us do give money to poor people to provide various things and, as Russell Roberts documents in his article on Charity, a large fraction of charitable contributions, before the government started massive welfare programs in the 1930s, was to poor people. Notice Russ's Table 1 showing that as the Great Depression deepened before the New Deal, charitable contributions to poor people rose. Government welfare rose too but it rose massively during the first years of the New Deal and then charitable contributions to poor people fell.

Because Bryan used "we" where he meant "the government," he got himself in a box with his point #4. He wrote:

My most controversial point: While redistribution is the most logical response to the health market's performance, I still oppose it. In the grand scheme of things, poor people in the First World are doing fine.

What happened to his idea that the smart thing to do is to give poor people money or health care vouchers? Did it quit being the smart thing to do? It's clear from context that by "redistribution," Bryan meant forced distribution by government. I oppose it too. And here's where I think he sold freedom short. If he hadn't used "we" to mean the government but had instead used it to mean "Americans" or "people who live in America," then he wouldn't have had to take the position he took in the part of point #4 that I quoted above. If Bryan opposes giving money to poor people in America, then, fine, he doesn't have to and, if he so chooses, he can persuade other people not to. But there will be some of us who still want to give money to poor people in America knowing full well that Bryan is right that we are helping people who, in the larger picture, are already quite wealthy. That's what's so great about freedom: everyone can choose whom to help and whom not to.

The problem all came about because Bryan used the "we" word inappropriately. For more of the hot water that can get you in, see my "Who is 'We'?" and "Who is 'We'? Part Two."

Critical Review is publishing a special issue on the financial crisis. I have uploaded Jeffrey Friedman's introduction. I strongly recommend the entire issue. The paper by Acharya and Richardson is the one that most closely reflects my own views.

Friedman's introduction is much more than a summary. He writes,

if we take seriously the possibility that market participants are making cognitive rather than incentives-based errors, the case for regulation loses considerable force.

His point is that regulators made the same cognitive mistakes as financial executives--trusting the rating agencies, for example.

He says,

Indeed, what may have saved the world from complete economic chaos in 2008 was the fact that the regulations were loose enough that many investors and many bankers had resisted buying the "safe" securities that most banks seem to have bought. Heterogeneous behavior like that, however, is allowed for, encouraged, and rewarded by capitalism; and is either discouraged or prohibited by regulation, depending on
how tight the regulations are.

Which is more vulnerable to catastrophic failure: a relatively unregulated system, in which participants pursue diverse strategies; or a strongly regulated system? For Friedman, the latter is more vulnerable, because of the risk of promoting homogeneous behavior, so that one mistake affects everyone.

All of us have our intellectual hobby horses. Friedman's hobby horse seems to be the existence of cognitive weakness or ignorance. He is constantly asking what happens if leaders have cognitive biases or information gaps. In general, I think when you take that problem seriously, you fear strong government.

Over at U.S. News and World Report, Matt Bandyk has a follow-up question for my last post on mandatory insurance and adverse selection:

Here's my question to Dr. Caplan: But far from being populist anti-intellectualism, isn't the objection that "poor people will not be able to afford health care in a free market and so the sick ones will die" a very real challenge that requires a response? Does the fact that, by Caplan's own admission, a free market in health insurance would underserve sick people show a real problem with the laissez-faire approach?

There are several layers of responses to this question.  I'll start with the textbook answer, then move on to successively more controversial observations:

1. The smart response to market failure varies sharply depending on what the market failure is supposed to be.  If the problem with free-market health care is just that poor people can't afford health care, then the smart response is simply to give poor people more money (or possibly a cash voucher), and leave insurance companies alone.  Think about how we usually handle hunger among the poor.  We don't set up byzantine regulations for grocery stores.  We give the poor welfare checks and/or food stamps, and leave the grocery stories alone.

2. On further reflection, the fact that health insurance is too expensive for the poor is actually an important argument for deregulation of the health industry in order to bring costs down.  For starters, there are many regulations on the books that specify what health insurance companies have to cover - mental health being the most notorious.  In a free market, insurance companies could offer more restrictive policies that the poor might actually be able to afford. 

More importantly, though, health insurance is expensive because regulation sharply raises the cost of health care itself.  Medical licensing regulations, for example, sharply raise the cost of medical labor.  Economists like Milton Friedman have been arguing for decades that mere certification, or even reputation, could give you the same protection at much lower cost.  And while you probably want an M.D. to do your brain surgery, licensed physicians are over-qualified for much, if not most, of the work they do - as you might have noticed if you ever saw a dermatologist for acne.

3. On top of all of this, almost everyone familiar with the data admits that at least in First World countries, the difference in health between rich and poor has little or nothing to do with access to medical care.* It's easy to find anecdotes of poor people who suffered or died because of inadequate medical care, but when you look at the big picture, you realize that these anecdotes must be quite rare.  So despite response #1, more redistribution wouldn't actually help the poor's health very much.

4. My most controversial point: While redistribution is the most logical response to the health market's performance, I still oppose it.  In the grand scheme of things, poor people in the First World are doing fine.  If they weren't, why would millions of people be delighted to immigrate here to take low-skilled jobs?  For thoughtful humanitarians, the quest to improve the health care of the U.S. poor is a red herring.  The crusade that deserves our support is open immigration.

Matt also asks me to reply to a point from Ezra Klein:

I would pose to Caplan a question that Ezra Klein, a good representative of the anti-free-market view on health care, asked on his blog recently:

Are we really sure we want a bustling market in how to cleverly revoke the insurance of people who prove to be sickly?

If you read Ezra's post, there are actually two distinct complaints about free-market health care.  The first is that insurers engage in near-fraud - rescinding coverage on flimsy pretexts when people get seriously (and expensively) ill.  If this were more than an anecdotal problem, which I doubt, I don't see why lawsuits or advertising couldn't handle it.

Ezra's second complaint, though, is "insurers rid themselves of unprofitable accounts by slapping them with intentionally unrealistic rate increases,'" a business practice known as "purging."  Frankly, this story makes no sense.  If a customer is expensive, a company might want to raise his rate so he'd be profitable to insure.  As long as there's competition, though, firms have no reason to raise the rate higher. 

Of course, if the problem is that you want to buy insurance against the possibility of becoming a high-risk customer, you should pick a company that lets you lock in your rate.  See e.g. life insurance, where you can get a fixed low rate for life if you buy your policy when you're young.

Any more questions, Matt?

* Start reading the link on p.181.

Patri Friedman launches secession week, a discussion of secession.

In one of my forthcoming books, Unchecked and Unbalanced, I discuss a number of mechanisms for limiting the power of government. You can think of these as mechanisms for achieving virtual secession, although I do not use that term.

The problem with physical secession is that it is very difficult to achieve critical mass. There is probably not much overlap between the people you want to live with and the people who want to choose your particular form of government. The vast majority of us put up with government we dislike in order to live in proximity to people with whom we want to work and play.

With virtual secession, you could still live in San Francisco or Manhattan or Silver Spring while seceding from much of the government at the city, state, and Federal level. You and your next-door neighbor might belong to very different governmental units.

Suppose, for example, that instead of having your taxes allocated for you by legislators, you were given a list of programs and could choose how to allocate your taxes. What percent of your taxes should go to TARP? What percent should go to fund the mohair subsidy? What percent should fund DC school vouchers? What percent should go to Barney Frank's affordable housing initiatives?

If an economist wants to ward off the spirit of laissez-faire insurance policy, all he has to do is repeatedly chant "moral hazard and adverse selection."  The funny thing about this two-part mantra, though, is that the "moral hazard" part doesn't do any of the work.  Almost no one even pretends that governments do anything to mitigate it.

When we get to the "adverse selection" part, the plot thickens.  There is, in theory, a regulation capable of solving the problem: mandatory insurance.  To see how mandates can help, consider a simple example.  Suppose there are two equally common types of people who buy insurance:

High-Risk Consumers: They have a 20% chance of losing $2000.  Since they're risk-averse, they value full insurance at $1000 ($600 more than the actuarially fair premium of $400).

Low-Risk Consumers: They have a 1% chance of losing $2000.  Since they're risk-averse, they value full insurance at $50 ($30 more than the actuarially fair premium of $20).

If insurance companies can't distinguish High- from Low-Risk consumers, an actuarially fair premium for an average consumer would cost .5*$400+.5*$20=$210. 

If consumers purchase insurance voluntarily, though, the Low-Risk will drop out of the market - they won't pay $210 to get a policy worth $50 to them.  With only High-Risk consumers in the market, the competitive price of a policy is $400.  The market fails to realize $30 worth of consumer surplus per Low-Risk consumer.

In a mandatory insurance regime, however, the Low-Risk have to buy the policy.  The result: The regulation is efficiency-enhancing, because it takes $160 from every Low-Risk person in order to give $190 to every High-Risk person.

So far, so good.  It's conceivable for mandatory insurance regs to improve market performance.  But their argument jumps the shark when defenders of government insurance regulation notice the existence of mandatory insurance regulations, and infer that these regs are doing something about adverse selection.  When you actually look at these regs, you'll notice some peculiarities:

1. Mandatory insurance is most prominent in the auto insurance industry.  But these regulations don't target low-risk drivers.  Their main purpose, contrary to the adverse selection model, is to make sure high-risk drivers get insurance. 

2. Even more shocking: The regulations usually go on to somehow subsidize the rates that high-risk drivers pay.  This is necessary because, contrary to the adverse selection model, insurance companies are able to detect high-risk drivers, and do not want to cover them at a loss.

3. Economists usually mention adverse selection in the context of health insurance.  But in the market for individual health insurance - precisely where you'd expect adverse selection problems to be most severe - governments very rarely mandate insurance coverage.  Instead, they focus on mandatory employer-provided health insurance, where the adverse selection problem is likely to be milder.

4. When governments do mandate health insurance, they almost always subsidize the rates that high-risk buyers pay.  This is once again necessary because, contrary to the adverse selection model, insurance companies are able to detect high-risk customers, and do not want to cover them at a loss.

Bottom line: Real-world insurance regulation has little or nothing to do with economists' "moral hazard and adverse selection" mantra.  The "intellectual" bases of real-world regulation of insurance are rather populism and paternalism: Big bad insurers won't cover people unless it's profitable, and simple-minded consumers don't care enough about their own health to pay for it themselves. 

Contrary to e.g. Krugman, insurance isn't a "special" market where laissez-faire doesn't work.  Instead, it's a normal market where democratic politics doesn't work, because both the public and economists remain wedded to populism and paternalism.

Reviewing Tyler Cowen's Create Your Own Economy, Ben Casnocha writes,

when culture is free and a click away, as it is on blogs and Twitter and the broader Internet, we sample broadly and consume it in smaller chunks: "When access is easy, we tend to favor the short, the sweet, and the bitty. When access is difficult, we tend to look for large-scale productions, extravaganzas, and masterpieces," writes Cowen. "The current trend--as it has been running for decades--is that a lot of our culture is coming in shorter and smaller bits." Think 30-second YouTube clips instead of a full movie, iTunes singles instead of complete albums, two paragraph blog posts instead of an entire essay. And now the 140-character limit on Twitter instead of a blog-style free-form text box.

The second reason is the intellectual and emotional stimulation we experience by assembling a custom stream of bits. Cowen refers to this process as the "daily self-assembly of synthetic experiences." My inputs appear a chaotic jumble of scattered information but to me they touch all my interest points. When I consume them as a blend, I see all-important connections between the different intellectual narratives I follow a business idea (entrepreneurship) in the airplane space (travel), for example. Because building the blend is a social exercise real communities and friendships form around certain topics my social life and intellectual life intersect more intensely than before. And I engage in ongoing self-discovery by reflecting upon my interests, finding new bits to add to my stream, and thinking about how it all fits together.

I think that Casnocha does a better job of imposing order on Tyler's book than my own review.

Sometimes, a book will consist of one idea for an essay, stretched to book length. Create Your Own Economy is more like the opposite. It is many essays, some of which are so compressed that you have to sit for a while and fill in some of the explanatory material yourself. If you read Tyler's blog at marginalrevolution.com, you will be familiar with that feeling.

I've repeatedly encountered the following social conservative meme, most recently in an argument over the Mark Sanford affair:

We've got to stop acting like hypocrites are the worst thing in the world.  At least hypocrites have moral standards; they're just not living up to them.  All the war on hypocrisy really accomplishes is to give people a strong incentive to become libertines, people who openly flout traditional moral standards.  What could be worse?

I could argue that traditional moral standards are a mixed bag of truth and error.  But I don't have to.  Even if traditional moral standards were infallibly correct, ardent social conservatives should still prefer libertines to hypocrites. 

Why?  Because they can and usually do avoid close social relations with libertines!  A conservative Christian needn't worry that she will accidentally disgrace herself by marrying a libertine, because the libertine has the decency to make his intentions known. 

In contrast, it's hard to avoid close social relations with hypocritical traditionalists.  Since they pretend to share socially conservative values, they worm their way into your life and your family.  Then like the hypocrites they are, they shirk, lie, and adulterer, bringing shame to their spouses, children, and extended families.

As an opponent of nationalism in all its forms, I share neither the revulsion people feel against "traitors," nor the grudging respect people feel for the loyal soldiers of enemy nations.  But for traditionalists' evaluation of libertines versus hypocrites, the nationalist model makes sense.  Libertines are like the loyal soldiers of enemy nations; you may not like them, but at least you know what you're dealing with.  Hypocrites, in contrast, are like traitors in your midst - and the wise social conservative will hold them in the highest contempt.
 
HT: An argument with John Nye, my favorite social conservative.

P.S. For the best movie about hypocrisy you're likely to see, try Harakiri.

reviews of economic research.

Pointer from David Warsh

My co-blogger Bryan Caplan comments today on Paul Krugman's blog post on Arrow's famous 1963 article on health insurance. There is more to be said. Krugman writes:

Both George Will and Greg Mankiw basically argue that we don't need a government role because we can trust the market to work -- hey, we do it for groceries, right?

Um, economists have known for 45 years -- ever since Kenneth Arrow's seminal paper -- that the standard competitive market model just doesn't work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough. To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.

In a literal sense, Krugman is right about the standard competitive model. After all, at UCLA, Ben Klein and Armen Alchian taught us that the standard competitive model, if by "standard competitive model" you mean "perfect competition," doesn't work well even with gasoline stations and repair shops. When a company can invest in reputation, what Ben Klein called "brand name capital," the perfectly competitive model goes out the window. But if you read just Krugman's short post, you might think that Arrow is arguing for a government role in health care, as Krugman is, right? And I would bet that Krugman wants you to think that. Yet, nowhere in Arrow's article can I find such an argument. Rather, Arrow is saying that there are things peculiar to health care and health insurance that mean that we have to supplement our standard models. And, as for free-market principles, although Arrow might think that they are not enough, he doesn't say that in the article.

Unfortunately, many economists of various persuasions have said that Arrow's article makes a case for why competitive markets in health insurance will fail [which is different from saying that standard competitive models will fail] and why government regulation is needed. That's what I had remembered it saying. But, as I noted in January, when I went back and read the whole thing, I found no such thing. In fact, Arrow's article is much more careful and nuanced than I had remembered.

Also, and contrary to Bryan's claim, Arrow points out that optimality in health insurance requires that higher-risk people be charged higher premiums.

I won't be surprised if someone can find Arrow saying good things about socialized medicine or other government interventions in health care. What I am saying is that you can't find him saying those things in his seminal 1963 article.

Religiosity is partly genetic, and the religious are out-breeding the secular.  It follows, then, that societies will get more religious over time.  But over at Gene Expression, Razib argues that while the premises are true, the conclusion is false.  He starts by looking at Turkish data from the World Values Survey, then doggedly argues in the comments with a slew of critics.  When one reader insists:

If the religious outbreed the secular - which they do; and if religiousness is correlated with heritable psychological traits - which it is; then society will get more religious.

The only question is how quickly it will happen.

Razib replies:

please. spare me. religious people have been outbreeding non-religious for most of history i assume given the social profiles we know (the same stuff about religious outbreeding the non-religious was true in france in 1840). and the non-religious keep increasing as a fraction. as t -> ∞ you're certainly right, but i really don't care, that's trivial. you seem to live in a world where dynamics are never cyclical.

So, Western society will be getting more religious, and pretty soon.

give me numbers. no qual, quant. in the long run we're dead. you must have quantitative metrics in mind if you're offering an opinion. percentages at time X based on particular parameters.

I learned a lot from the comments.  But by the end of the debate, I just wanted Razib to propose a bet...

In a recent post on health care, Krugman writes:

[E]conomists have known for 45 years -- ever since Kenneth Arrow's seminal paper -- that the standard competitive market model just doesn't work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough.  To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.

I guess that makes me nobody.  But despite my non-existence I can still somehow make two points:

1. On moral hazard: Government regulation does virtually nothing to solve these problems.  It doesn't even try.  Indeed, it often makes moral hazard worse by imposing regulations that make it harder for rates to reflect risk.

2. On adverse selection: As long as rates are legally allowed to reflect risk, there is a lot of evidence that selection is actually advantageous rather than adverse.  Despite its massive citation count, Arrow's paper is deeply wrong.  But even if Arrow were right about the empirical importance of adverse selection, govenrment regulation doesn't do much about it.  In fact, it often creates moral hazard problems that wouldn't exist by imposing regulations that make it harder for rates to reflect risk.

Unlike Krugman, I not going to dismiss everyone who doesn't know these facts as "remarkably ignorant or simply disingenuous."  What I will say, though, is that if you don't know them, you have a lot to learn from nobody.
 
HT: Mankiw

A word to the wise: If you have a theory and want it to spread far and wide, call it "realism."  Who could be against realism?  Case in point: The so-called "realist" theory of international relations.  According to this view, each country acts in its own objective self-interest.  The fundamental reason for international conflict, then, is divergent national interests.  (In the economically literate version, just add transactions costs to explain why countries don't always resolve their differences diplomatically).

To me, the interesting thing about the realist theory of IR is that it's the national version of economists' standard rational, selfish actor model.  While this model works well in some situations, I've argued at length that for individual political behavior, it's dead wrong.  Voters' beliefs are far from rational, and their motives are far from selfish.

If the rational, selfish actor model doesn't even work for individual selves, it's hard to believe it would work for entire countries.  On the other hand, though, maybe there's a difference between group and individual behavior.  In the next two parts of this series, then, I'll separately consider the two key planks of the realist theory of IR: The motivational assumption that each country's goal is to maximize its national interest, and the cognitive assumption that each country acts on unbiased beliefs about how to achieve its national interest.  Stay tuned.

There is a disconnect in the Obama administration's rhetoric on health care. On the one hand, the administration points out that our current health care financing system, particularly for government-funded programs, is unsustainable. This suggests an urgent need for major reform.

On the other hand, the administration is quick to reassure Americans that they will be able to keep the same insurance and maintain the same relationships that they have with their doctors now. As individuals, most Americans are happy with the status quo, and the Obama administration does not want to appear to threaten their satisfaction.

In an essay on hope without change, I cite specific quotes from President Obama that illustrate this forked-tongue approach on health care.

From Scientific American:

One group that does not value perceived losses differently than gains are individuals with autism, a disorder characterized by problems with social interaction. When tested, autistics often demonstrate strict logic when balancing gains and losses, but this seeming rationality may itself denote abnormal behavior. "Adhering to logical, rational principles of ideal economic choice may be biologically unnatural," says Colin F. Camerer, a professor of behavioral economics at Caltech.

Tyler's new book is full of praise of what he calls the autistic cognitive style. It's full of other topics as well, as this brief essay in Fast Company illustrates.

Thanks to Razib for the pointer to the SciAm article, which actually promises much more than it delivers.

New York Times Article Shows Pitfalls of Central Planning

The weather in Grand Cayman is so-so, which is why I'm blogging today.

"Grant System Leads Cancer Researchers to Play it Safe," reads the title of a news story in today's New York Times.

Some choice excerpts:

For 25 years, Eileen K. Jaffe received federal grants to run her lab. As a senior scientist at the Fox Chase Cancer Center, with a long list of published papers in prestigious journals, she is a respected, established researcher.

Then Dr. Jaffe stumbled upon results that went against textbook explanations, suggesting that it might be possible to find an entirely new class of drugs that could disable proteins that fuel cancer cells. Now she wants to find chemicals that might be developed into such drugs.

But her grant proposal was rejected out of hand by the institutes of health, not even discussed by a review panel. She had no preliminary data showing that the idea was likely to work, something reviewers always want to see, and the idea was just too unprecedented.

And this:

Take one transformative drug, for breast cancer. It was based on a discovery by Dr. Dennis Slamon of the University of California, Los Angeles, that very aggressive breast cancers often have multiple copies of a particular protein, HER-2. That led to the development of herceptin, which blocks HER-2.

Now women with excess HER-2 proteins, who once had the worst breast cancer prognoses, have prognoses that are among the best. But when Dr. Slamon wanted to start this research, his grant was turned down. He succeeded only after the grateful wife of a patient helped him get money from Revlon, the cosmetics company.

None of this would surprise Gordon Tullock. Tullock broke new ground in public choice, a part of economics that, among many other things, explains why government funds things the way it does. But he also wrote an insightful book in the mid-1960s on how to fund research, The Organization of Inquiry. Tullock pointed out that to get good research, you need to have good incentives for research, and he proposed a system of prizes for actual breakthroughs.

The complete videocast of the AEI mini-conference on geoengineering is now up, including Scott Barrett's target speech, Thomas Schelling's comments, and my comments.  Like Bart Simpson, I'm my own toughest critic, but I was pleased as punch with my extension of rational irrationality to international environmental policy.  My main points:

1. Barrett's paper blends together two distinct questions: (a) What makes sense to do about global warming, and (b) What countries will in fact do about global warming.

2. On the traditional "realist" view of international politics, this blending makes sense.  According to this theory, countries act in their objective self-interest, so slippage between optimal policy and actual policy can only be caused by differences in national self-interest and transactions costs.

3. From my point of view, however, optimal and actual policy often diverge even for purely domestic questions.   Since people have biased beliefs about the effects of policy, highly inefficient policies can and do win by popular demand.  If domestic politics are this defective, why should we expect international politics to be any better?

4. What does this have to do with global warming specifically?  Well, Barrett explains that geoengineering might turn out to be an extremely cost-effective solution to global warming.  He then goes on to discuss the political barriers to its adoption.  But he seems to ignore the most obvious barrier of all: Many - perhaps most - people would dogmatically oppose the geoengineering solution no matter how strong the evidence in its favor.

5. But won't people also fervently resist extremely costly solutions for global warming?  It depends.  If the cost is visible and noticeably reduces living standards, then popular opposition might well be intense.  But smart politicians can get around this problem by obscuring the cost (imposing emissions regulations rather than carbon taxes, for example), and making sure that the costs come in the form of lower growth rather than absolute declines in living standards.

6. Bottom line: All things considered, geoengineering looks far superior to other policy options on the table.  But despite its advantages, it probably won't be adopted, because public opinion in the world's leading democracies won't stand for it.  And even dictatorships usually try to avoid big clashes with public opinion (not to mention the leading democracies), so China probably won't save us either.

Definitely worth reading, with a variety of topics covered. On one topic, he says

It's difficult to look at, for example, the very low unemployment rates we saw in the early 2000s and say that represented an economy in which everyone was working. Unemployment rates were at roughly the same level that they were in the late 1960s, but if you look at prime-age males, the fraction actually working who were, say, 30 to 40 years old was quite a bit lower in 2001 because there was a big increase in the number who were out of the labor force in that age category.

See also my essay from 2003.

The reason that this is important is that the Taylor Rule, which supposedly measures whether monetary policy is too loose or too tight, typically uses the unemployment rate. However, the unemployment rate understated the slack in the labor market in 2001-2003, when Taylor and others claim that monetary policy was too expansionary.