A Surprising Conclusion

Posted by Deepish Thinker on January 28, 2014
Economics, US Politics / No Comments

After France, which country has the second largest welfare state?

The USA!?!?


Perhaps not as crazy as it sounds.  The US has a lot of welfare tax expenditures while traditional welfare states often heavily tax benefits, which reduces net welfare expenditures.



Thoughts on Manzi Argument

Posted by Deepish Thinker on November 18, 2013
Economics, US Politics / No Comments

Links to this, not entirely convincing, argument against negative income taxes by Jim Manzi have shown up in a couple of places lately (Tyler Cowen and Megan McArdle).  There are several aspects of the post that are somewhat questionable.  The one that I find most interesting is that we can achieve the same goals by simply recycling policy from the 90s.

“the only method that has consistently demonstrated in the U.S. that it can humanely get people off welfare and into jobs was the workfare movement of the 1990s (which it did without increasing government costs, by the way).”

1990’s reform was indeed fairly effective at reducing welfare dependency.  However, context is important.  In times of economic prosperity and relatively abundant job opportunities, limiting welfare eligibility can act as the spur that pushes people into active participation in the labor market.  In tougher times it becomes somewhat questionable policy.  In 2012 President Obama granted waivers to states allowing them breach limits specified in the legislation.  Many Republicans were harshly critical of this move.  However, the lousy economy meant there was no realistic way for states to meet the targets.

Fundamentally, workfare operates on the assumption that employment opportunities are available if people are willing to take them.

This need not always be the case.

Employers are willing to take on an additional worker if a couple of things are true.  Firstly, the value of the worker’s output must exceed the cost of employment.  Secondly, the cost of employment must be less than plausible alternatives, primarily outsourcing and automation.

We live in a world where two things are inarguably true.  The cost of employing people is going up.  Obamacare is just the latest in a long line of policy initiatives which make employing people more expensive.  Given the current Liberal enthusiasm for jacking up the minimum wage, it is almost certainly not going to be the last.

Meanwhile, the cost of alternatives to employing people has collapsed.  It is clichéd to point out that globalization and automation have reduced low skill employment.  However, with regard to automation, we may be closer to the beginning than the end.  Consider, for example, how many people with high school educations make a living driving.  Then consider how close we are to a world in which most of those drivers won’t be needed.

This is not an argument that low skill employment must inevitably disappear.  In a more economically rational world the price of low skill labor would fall to the point where employment opportunities would reappear – Say’s Law to the rescue.  But this is not an economically rationale world, it’s a political one where the government mandates a floor price (minimum wage + payroll taxes + insurance + unemployment + ……) for low skill labor.

In this world mandating that low skill people find work isn’t going to achieve very much.  They can’t legally accept employment at a rate that sane employers would be willing to pay.  Or, in other words, it isn’t legal for low skill wages to fall to the market clearing rate.

It’s tempting to suggest that we should simply get rid of the minimum wage laws, payroll taxes, insurance requirements and regulations that drive up the cost of employing people.  However, as politically viable policy this pretty much a non-starter.   Even if Republicans had the House, the Whitehouse and a filibuster proof majority in the Senate can you imagine them repealing the minimum wage and replacing it with nothing?

For political (and humanitarian) reasons, doing something about employment costs requires that we also have an alternative way of maintaining the total income of low skill people.

Considered in this light, a well-designed Negative Income Tax solves two problems.  It offers a better alternative to the horrendous existing tangle of welfare programs that supports people while preserving the incentive to work, which would be the usual argument made in its favor.  In addition, it offers a possible solution to one of the more difficult policy challenges we face.  How do you keep low skill people employed in a labor market which generates less and less demand for low skill labor at the current price?

Defending the Indefensible

Posted by Deepish Thinker on November 13, 2013
Current Events, Economics, US Politics / No Comments

Alan Blinder has put forward a defense of the Affordable Care Act in today’s WSJ (gated).  It’s not terribly convincing.  Considering some of his points:

“But a badly designed website doesn’t signify a badly designed policy.”

True.  But bad execution will kill a good idea just as effectively as a bad one.  Also, the people who keep telling us that the ACA is good policy are the same ones who assured us that the website would be ready.  Then that it would be fixed by December 1st.

“While Americans either read about or experience the website’s failures firsthand, the enemies of health-care reform are telling them that ObamaCare is a failure. And since virtually no one actually understands how the new law works, the verdict sounds plausible.”

This is a pretty telling admission.  The ACA passed 3 ½ years ago and we still don’t know what’s in it?  What has the administration been doing all this time?  Is a program that’s too complicated to explain too complicated to execute?  Was it even a good idea?

“Thus tech “glitches” make the law’s critics look better and make the administration look like the gang that couldn’t shoot straight.”

“It undermines trust in health-care reform and, more generally, in the government’s ability to solve problems.”

Yup.  Kind of a problem if your basic philosophy is that Washington needs to exercise more control over the economy.

“And it’s not just website problems. Americans are also hearing more and more about a second snafu. (Remember what those five letters stand for.) The president assured people over and over again that “if you like your [health insurance] plan, you can keep it.” Well, it turns out that maybe you can’t; your current insurance might get canceled.”

SNAFU might be an overly polite characterization.  The President is vulnerable here.  Either he didn’t actually understand the implications of his own signature legislative achievement.  Or he deliberately and repeatedly lied in order to sell it.

“Regarding coverage, while the health-exchange website’s problems are causing delays, they will be fixed—though I’m not sure I’d bet on Nov. 30. (If the administration makes that deadline, someone deserves a medal.) The initial enrollment period might have to be extended a bit, which would require some other adjustments. But even with delays, most of the uninsured will be able to get covered.”

I wouldn’t bet on November 30th either.  Nor December 30th for that matter.

Mostly this seems like soft peddling a pretty big problem.  If the initial enrolment period could easily be extended the Administration would have done it already.  Unfortunately the calendar isn’t infinitely flexible.  Changes have consequences.

From a perception perspective the situation is horrible.  On Jan 1 more people will have lost private health insurance due to the ACA than gained it.  A situation that may or may not be resolved by the end of open enrollment.

“Nor are the central elements of insurance reform affected by the technology glitches. Millions of people under the age of 26 are already benefiting by being kept on their parents’ policies. Pre-existing conditions will no longer prevent people from getting health insurance. Annual and lifetime limits will go the way of the dodo. Americans will like all that.”

I’m sure they will, until they get the bill.  All of these innovations will make health insurance more expensive.  Free lunches are difficult to legislate.

“Regarding cost containment, some of the law’s planned demonstration and pilot programs, designed to test various cost-reducing ideas, might be delayed. But they won’t be abandoned. Delays will hurt a bit because these experiments were destined to take years to complete in any case, and our political system is not known for patience.”

Has there been any positive news whatsoever about any of these pilot programs?  Negative news has been abundant.

“But there is at least some reason to think that the “affordable care” part of the act may be working already. The rate of inflation of medical costs has tumbled in recent years.”

We sacrificed the virgin, the volcano didn’t erupt, therefore……..

“All that said, no big social policy ever goes exactly as planned. Two additional hazards that have garnered relatively little attention to date worry me.

The first is the behavior of the “invincibles”—young people who, statistically speaking, are at little risk for high medical bills. To make universal coverage work, the government needs to bring them into the insurance pool as counterweights to the high-risk people.”

Not sure why we keep referring to young healthy people as “invincibles”.  Given what the legislation expects them to do “suckers” seems more appropriate.

“If many low-risk people stay out of the pool, we have a problem: The insured pool will be less healthy than the total population.”

Notice the subtle avoidance of the technical term for this possibility, which would be “death spiral”.

It’s too early to know what young healthy people will choose to do.  Many people place a very high value on having health insurance.  Young people may choose sign up for this reason, to avoid ‘wasting’ money on the penalty, or simply because it’s the law.

Of course if the website can’t be made to work they aren’t getting on board and the ACA will become a case study in adverse selection.

“Second, there’s the behavior of businesses with more than 50 employees. Some companies that now cover their workers with costly health-care plans might decide to drop that coverage once the exchanges are up and running.”

At this point businesses with lots of low wage employees resemble a group of penguins on the edge of the ice.  Nobody wants to be the first to jump.  But that doesn’t mean they aren’t considering taking the plunge.

Best guess is that businesses with a lot of high turnover/low wage employees initially manage costs through restricting as many employees as possible to less than 30 hours per week.  If the exchanges ever get unkinked, wholesale dumping of lower level employees onto the exchanges will begin shortly after.

“Considering all these problems, is the game worth the candle? Absolutely—because the status quo ante was so unacceptable. America cannot be a humane society if we leave 15% of our population uninsured.”

To be clear, even under the most optimistic assessments the ACA is going to solve maybe half of this problem – at enormous expense.

“America cannot be an efficient society if we spend 50% to 100% more of our incomes on health care than other countries, and yet don’t get better health outcomes.”

The second part of this statement is dubious at best.  Once you control for lifestyle differences (i.e. things like driving mileage, gun ownership etc.) that impact health but aren’t healthcare related the US healthcare system stacks up pretty well.

The first part is more interesting.   Something like 17% of US GDP is healthcare.  In other words 17% of the total economic output of the US is healthcare goods and services.  That’s a much higher percentage than other advanced countries, but is it the wrong percentage?  Don’t know, but then neither do any of the people who drafted the ACA.

“We can’t let a botched website get in the way of goals that big.”

No.  The poorly conceived, economically asinine, Rube Goldberg nature of the ACA is the reason we should start over.  The botched website really is incidental.

Burger Automation

Posted by Deepish Thinker on November 11, 2013
Economics, US Politics / No Comments

I’ve previously pointed out that hiking the minimum wage would likely prompt a wave of investment in automation.

My guess is that it will take a while to work out the kinks.  Nevertheless, it would appear that highly automated fast food is closer to primetime than I thought.

(hat tip: Marginal Revolution)

The Liar/Moron Dilemma

Posted by Deepish Thinker on October 30, 2013
US Politics / No Comments

Greg Mankiw has posted a brief analysis of the President’s repeated, and apparently false, assertion that, “If you like your plan, you can keep it.”

1. The White House staff did not know the statement was false.  That is, they did not understand the law the administration was promoting.

2. The White House staff knew the statement was false, but they decided to keep this fact from the President.  That is, they let the President unwittingly lie to the American people.

3. The White House staff knew the statement was false and told the President so, but the President decided to keep saying it anyway.  That is, the President consciously decided to lie to the American people.

Options 1 and 2 are a little problematic.  Both imply that the President didn’t really understand his own signature legislative achievement.  Option 1 implies that not only did the President not know what he was doing, but also that he employed people couldn’t grasp a fairly obvious implication of the ACA.

To simplify is the President a liar (Option 3) or a moron (Option 1 or 2)?

It’s difficult to know for sure, but the President would probably prefer liar.  Perhaps somebody in the Whitehouse press corps should ask.

Assessing the Shutdown

Posted by Deepish Thinker on October 25, 2013
Economics, US Politics / 1 Comment

Some time has passed.  Passions have cooled.  We can now make a level headed assessment of the shutdown strategy pursued by House Republicans.

Objectively speaking it still sucked donkey d**k.

Consider an alternate universe in which House Republicans passed a ‘clean’ CR, upped the debt ceiling for 6 months without conditions, then went on vacation for 2 weeks.  In other words, did pretty much what Democrats asked them to do.  In this universe the Republican Party has sustained zero reputational damage, the bungled Obamacare rollout has been the undisputed number one news story for a month, the President’s approval ratings are in the toilet, Democratic unity is disintegrating as Democrats in vulnerable seats try desperately to distance themselves from Obamacare, and political world is decisively tipping in a Republican direction.

Compare this to our world where the Republican brand has been thoroughly trashed,  Democrats were gifted a talking point for the 2014 elections, divisions in the Republican party have been exacerbated, and the Whitehouse got a two week free pass from scrutiny over the rollout.

In fairness, the Obamacare rollout may end up being such a catastrophe that it swamps memories of the budget shutdown.   But it’s very hard to see how Republicans are better off for having pursued the shutdown strategy.  Our alternate universe looks much better for the Republican Party

If the results of implementing your strategy were worse than the results of doing what your opponents asked you to do, then, inarguably, your strategy sucked.

$15 Minimum Wage

Posted by Deepish Thinker on October 17, 2013
Current Events, Economics, Seattle, US Politics / No Comments

There is currently a great deal of enthusiasm in Liberal circles for raising the minimum wage. In fact, a $15 minimum wage is on the ballot for upcoming elections in the Washington city of SeaTac and both Seattle mayoral candidates have expressed interest.  To many this seems like an idea whose time has come.

The optimistic case for a $15 minimum wage goes something like:  Low wage workers spend a high percentage of their incomes, so increasing the minimum wage will increase demand which, along with lower turnover, higher productivity and higher employee satisfaction, will more than compensate employers for the increased wage cost, so there will be no impact on employment. 

In short, it’s all sunshine and bunnies.

There are several potential problems with this argument.  However, if you want to dissuade a Liberal friend from voting for a $15 minimum wage it might be better to point out that even if the optimistic case turns out to be substantially true in the short term, raising the minimum wage makes low skill workers more expensive relative to possible substitutes, foreign labor and automation.  Given time employers will find ways to utilize those substitutes.

Consider your local McDonald’s restaurant.  Low wage workers take your order, fill it and clean up the mess you leave behind.  McDonald’s has experimented with automating all of these things to some degree.  The reason your local McDonald’s still employs a bunch of people is that they’re currently cheaper and more flexible than the automation alternatives.  Double the cost of employing those people and the cheaper part may no longer be true.

Something old….

Posted by Deepish Thinker on October 12, 2013
Economics, Space, University of Texas / 3 Comments

This post referring to the savings glut has made me sentimental for Grad school.  It was a problem back in 2006 too.  In fact, it inspire the following SA (which was probably the most fun I’ve ever had  doing homework):


Federal Reserve Chairman Ben Bernanke has suggested that a global saving glut is the primary cause of the unusual flattening of the treasury yield curve and is thus fueling the consumption boom that is driving the explosion of the US trade deficit[i].  Bernanke views the situation as relatively benign and expects it to unwind gradually over time. 

Other commentators are less sanguine and have suggested a variety of remedies.  Most discussion seems to revolve around how to induce higher consumption and lower savings rates in Asia.  Reducing savings rates is certainly one way to address the excess savings problem.  However it is not the only possibility.  We can invert the issue and suggest that the problem isn’t so much an excess of savings as a shortage of investment opportunities.  So the question becomes what could we do to put all those surplus savings to use? 

One suggestion: Colonize the moon.

Why the moon?

At first glance the moon does not look like a particularly attractive destination.  However it is important to remember that in 1607 (founding date of Jamestown, VA) what is now the US was a tractless wasteland inhabited by hostile natives and separated from civilization by a long and dangerous sea voyage. 

In order to understand why the moon might be attractive it is helpful to consider what the moon lacks:

  • Pollutable atmosphere, waterways or oceans
  • Conservable wildlife of any kind
  • Disenfranchised natives
  • Regulations
  • Activists

Now consider what the moon does have; 58.6 million square miles of unclaimed and never mined real estate conveniently located just 385,000km away.  The moon also has the twin benefits of low gravity and negligible atmosphere.

It may not be immediately obvious why the second point is important.  Low gravity and no discernable atmosphere mean that it requires relatively little energy to launch objects from the lunar surface.  Thus the products of lunar industry would thus be relatively easy to export.  Simply sling them into space and let earth’s much stronger gravity pull them back into earth orbit where they can be collected for return to the surface.

In addition, there are the obvious tourism opportunities.  The moon offers spectacular scenery, numerous historic sites, and plus entertainingly low gravity.  As the ultimate vacation destination the moon would have little in the way of competition.

What might it cost?

It is somewhat difficult to estimate what kind of investment lunar colonization might require.  As a starting point we can consider how much cost to visit the moon in the 1960’s and 70’s.  The total cost of Apollo and associated programs was approximately $135 billion in 2006 dollars[ii].

While establishing a human presence on the moon is a much bigger objective than simply visiting the moon it is important to remember two important facts.  Firstly, the Apollo program was administered by NASA which is hardly famous for cost minimization.  Secondly, NASA started at the very bottom of the space learning curve.  Any lunar colonization effort will have the benefit of a lot of expensively acquired experience.  For these reasons it seems reasonable, in the absence of other data, to suggest that $135 billion is probably a reasonable ballpark cost estimate for a commercial effort to establish a human presence on the moon.

Structuring the venture

It might be somewhat difficult to raise $135 billion for a moon colonization venture.  For arguments sake let us stipulate that it might be possible to raise $3 billion from risk hungry investors.  Private equity and hedge funds routinely exceed this size, so $3 billion isn’t inconceivable provided there is a good investment story to tell. 

In order to actually build a lunar colony it would be necessary to invest the $3 billion such that it provokes considerably more investment.  The key is to identify all the components required to make colonization possible and then seed ventures to develop each of those components.  These could be start-ups or joint ventures with established companies.  For example, our lunar colonization investment fund might approach Boeing to develop a next generation launch system.  Boeing provides the engineering capability while our company provides the first billion in funds.  Once this is spent Boeing can either find risk sharing partners and develop the project to completion, in the same way it does for new aircraft, or take a pass.  From Boeing’s perspective this would look like a paid R&D project with a free option to create a new product line if it looks commercially attractive.

Essentially we would be creating a portfolio of ventures each of which is valuable because of the existence of the others.  The fact that a complete lunar colonization solution is being developed will make each of the components viable investment prospects and allow each of the component ventures to raise funds individually. 

The return to the original investors comes from the eventual liquefaction of the fund’s equity stakes in the component ventures.  Notice that this investment strategy is the exact opposite of diversification.  For this reason the investors really would need a significant appetite for risk.  However the upside of owning a piece of every major project supplying the commercialization of the moon is potentially huge.

Creating the necessary equipment is just the first half of the equation.  The next step is to create a customer to buy it.  Essentially we need to create an airline with a truly unique route network.  This would undoubtedly be very expensive.  However, raising the required funds need not be especially difficult if demand for transport to and from the moon could be demonstrated.  By the time it is necessary to launch our lunar airline it is entirely possible that demand will have already materialized.  After all Virgin Galactic is currently busy collecting $20,000 deposits for sub-orbital tourist space flights it does not plan to undertake until 2008.  While lunar tourism is certainly one potential source of revenue, the potential of a lunar airline is much greater.  The opening of a dependable link to the moon will inevitably lead to colonization and commercial exploitation.  That means ferrying not just people, but cargo – equipment and supplies – to and from the moon.

Creating Property Rights

A necessary precondition for inducing people to invest in moon based commercial ventures will be the creation of property rights.  Upon landing on the moon in 1969 Neil Armstrong claimed it for, “all mankind”, which essentially means the moon isn’t currently owned by anybody in particular.  There is a UN sponsored treaty governing ownership of celestial bodies however it has been signed by very few countries and ratified by even fewer.  The US is not a signatory.

This would seem to leave the establishment of lunar property rights wide open.  Initially it might seem tempting to claim ownership based on the establishment of a lunar presence and then and sell lunar property.  This is not a great idea for several reasons.  Firstly, it is difficult to sell something for which the legal basis for ownership is ambiguous.  Secondly, any attempt to claim ownership is likely to provoke a government response either in the form of legislation or competing lunar programs.  Finally, putting a price on lunar property acts as a disincentive for the lunar investment required to make the whole venture worthwhile.  From a historical perspective, it should be noted that what really got the colonization of the US underway was the promise of free land.

A better approach would be to create a registry for claiming lunar property.  The idea would be to divide the moon up into parcels which anybody who was interested would be free to make a claim.  The trick is that claims office would be located on the moon.  So lunar property would be available to anyone, or any corporation, committed enough to lunar ownership that they are prepared to travel there, or at least send a representative.

Two key details would be required to make the system workable.  Firstly there would need to be a limit of one land parcel per claimant to prevent the first arrival claiming the whole moon.  The restriction would apply purely to claims, lunar property holders would be able to add to there holdings by purchasing property from each other.  Secondly, a condition of making a claim would be acceptance that disputes would be resolved in the courts of some suitable jurisdiction, for example Delaware.

Notice that this not only creates a system of land rights that is sufficiently fair and open that influential governments are unlikely to feel the need to intervene, it also creates an incentive for people to visit the moon as soon as the system is in place.


By developing the necessary equipment, creating a transport link and building an acceptable system of property rights it may possible for us to open the final frontier.  In doing, so we will open an entirely new frontier for investment and have created a really interesting, and potentially rewarding, use for world’s surplus savings.

[i] Speech April 14 2005 – “The Global Saving Glut and the U.S. Current Account Deficit”

[ii] Marcus Lindroos – http://www.asi.org/adb/m/02/07/apollo-cost.html – estimate adjusted from 1994 to 2006 dollars

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Inflation? What inflation?

Posted by Deepish Thinker on September 18, 2013
Economics / No Comments

Paul Krugman, as he’s rather fond of doing, has been pointing out that predictions that loose monetary policy would spark inflation have so far proved embarrassingly inaccurate.

“Republicans predicted poor economic performance under Obama. And to be fair, the economy has not done particularly well. The crucial point, however, is the nature of the poor performance. Republicans confidently predicted Weimar 2.0 — soaring interest rates and inflation. They lambasted not just Obama but Bernanke — in fact, their attacks on Fed policy had more passion than their attacks on the stimulus, which after all didn’t last long.”

An interesting question to consider is why predictions of high inflation, which many conservative pundits made, have been so wrong.

Perhaps the simplest answer is that they assumed loose monetary policy would work.

To date the results have been unimpressive.  Inflation has remained quiescent in large part because cheap money hasn’t resulted in dramatic increases in lending and consumption.

This leads to the somewhat ironic situation that the advocates of tighter monetary policy overestimated the threat of inflation in large part because they believed the advocates of looser monetary policy, who overestimated the growth impacts.


Posted by Deepish Thinker on September 08, 2013
Uncategorized, US Politics / No Comments

Congress spent the past week having a serious, thoughtful, substantive and bipartisan debate about Syria.

On the down side this does highlight an uncomfortable truth. The partisan dysfunction we normally expect from Washington isn’t due to the failings of our elected representatives, however much we might enjoy blaming them. When circumstances require it, Congress is clearly capable of operating in the way we say we’d prefer.

The fact that serious, thoughtful, substantive and bipartisan debate is largely absent from every other issue simply reflects the deep political divisions in the country as a whole. Red and blue voters demand that their representatives hold to strict party lines. So they do.