Monday, February 27, 2006

Any Storm in a Port

There is much ado in the press about a recent attempt, perhaps as a side effect of the pursuit of a larger goal, of a company owned by the government of the United Arab Emirates to take over management responsibilities of several important U.S. ports. I say “as a side effect” because the taking on of these responsibilities will occur when the UAE firm takes over a British firm that already manages the facilities. The hostile reaction of Americans and our political leaders does not do us proud. And, while these arguments are also important, I do not focus on the fact that most security responsibilities will remain in the hands of the U.S. government.

The primary argument against allowing this transaction to occur is that it enhances the chances of these ports being used as the target of or to facilitate a weapons-of-mass-destruction attack. This argument does not seem compelling. All of the 9/11 hijackers took their flying lessons at very ordinary U.S. flight schools. They bought their tickets on U.S. airlines through normal channels. The only instance of which I am aware where a “Muslim” business has proved unusually fruitful in advancing the jihad involves not a gigantic multinational corporation such as the one seeking to operate the ports but very small businesses that transfer money in relatively small amounts from overseas nationals of predominantly Muslim countries back home.

So is a multinational company managed mostly by Europeans, Americans and other non-Arabs but owned ultimately by the government of an Arab country more likely to be a conduit for jihad? I don’t see how. Multinational companies are overwhelmingly constrained by the need to maximize profit, and is the least likely sort of institution to be penetrated by covert agaents. Indeed, just today it was announced that the company is requesting extended scrutiny by the U.S. government. One is hard-pressed to imagine, for example, the Saudi religious establishment or the Pakistani secret services or other organizations that are not multinational organizations even consenting to, let alone requesting, that sort of scrutiny. But that is a telling notion of how constrained this “Arab” firm is by the needs of its customers. (Even the idea of an “Arab” firm is of limited value. The United Nations is where we dream of people of all nations working together in harmony, but the management teams of global corporations is where, united by a single objective, they actually do.)

The primary thing that makes us vulnerable to attack is our very nature as an open society, and there is no turning back from that. That the U.S. left in particular would opportunistically leap on the port saga while objecting to restraints on other aspects of our openness - immigration, students coming from abroad to study, and other things equally costly to restrict but more in their political interest to defend - is particularly foul.

Alas, by subjecting this bid to extra (and even paranoid) scrutiny, we are sending a message to the world. And that message is that the rule of law in the U.S. is not what it appears. If you are of or your firm is ultimately owned by people of the wrong genotype or religion – Arabs today, perhaps Chinese or other theoretically hostile nations tomorrow – your contractual rights in the U.S. are less than those of everyone else. And so doing business in the U.S. legal system becomes riskier not just for Arabs but for anyone who might theoretically imagine the American government turning hostile to his. We then find it more costly to transact with people outside our borders. The undeniable turmoil in the Islamic world is driven much more by people threatened by globalization than by those embracing it, and in our reaction to this episode we are signaling that when we sing its praises we don’t mean to include them too. The reaction of them, and of many varieties of non-Americans, to this signal will be predictable, and to our detriment.

Thursday, February 23, 2006

Rethinking Gender Sexual Equality

In such time as I have to watch the Olympics I often pay attention to the outcomes of women’s team sports. A common pattern is that nations that are perceived to have more sexual equality do well in these sports. Economically this makes sense because it is easier for them to generate enough skilled players to man staff a team. In ice hockey in 2006, 2002 and 1998 the gold, silver and bronze were taken by (Canada, Sweden, US), (Canada, US, Sweden) and (US, Canada, Finland). Ice hockey is not so widely played worldwide, but in basketball, a much more popular sport, this pattern still generally holds. For 2004, 2000 and 1996 the medalists were (US, Australia, Russia), (US, Australia, Brazil), (US, Brazil, Austria). And for women’s soccer they were (US, Brazil, Norway), (Norway, US, Germany), and (US, China, Norway). Among these countries only Brazil and Russia (unlike the old Soviet Union) are not countries where the authorities make a big effort at trying to insure sexual or gender equality. (The choice of “sex” vs. “gender” is itself another effort in signaling via political correctness. “Gender,” as the law professor Richard Epstein noted in a famous article, is an arbitrary categorization of nouns in Romance languages, and is used by those who feel that any differences in observed outcomes between men and women must be due to cultural pressures.)

In China the government routinely issues lofty proclamations about how much better women have it under Communism, and I have had Chinese students of both sexes tell me that China is a society of sexual equality. (That some of them told me this in a special MBA class at our university for students from China in which 31 of 36 students were male, in contrast to the American classes next door which were split about 50/50, went unremarked upon.) And Scandinavian countries are famous for going to great lengths to improve equality of outcomes. Just last month the Norwegian government enacted rules requiring that 40 percent of corporate boards be female within two years.

But what of the U.S.? Can it be said to be one in which sexual equality is as “advanced” as in Europe? Many say not, and point to the undeniable poverty of females in political leadership. Norway and Finland (and of course Britain) have already had female prime ministers, for example. And so too with American legislative seats, which looks bad in comparison to what prevails on the Continent. Consider the percentage of seats held by women in five countries in the lower house of parliament in 2001, taken from this academic paper:


Sweden, like most Scandinavian countries, has political parties that have instituted de facto quotas for women on their candidate lists. The Labor Party in Britain has done much the same. In combination with proportional reputation (which makes it easier to have women constitute half the electable candidates), this gives Scandinavian nations among the highest percentages of women in Parliament in the world. The U.S., owing to its single-member-district system and its incredible incumbency advantages (with the latter slowing the pace of political change by restricting entry), has among the lowest rates in the industrialized world.

But it is possible to look at another measure of equality, that of participation in leadership in commercial life. Here the story is very different. Consider the same set of countries, with segregation data from the ILO on representation of women in the managerial ranks of businesses in 2000. (Note first that each country defines its job classifications differently. For the U.S. I use “managerial and professional specialty,” “executive, administrative and managerial,” and “managers and administrators”; for France, “productions and operations managers,” “other specialists and managers,” and “managers of small enterprise”; for Germany, “commercial, sales and branch managers,” “buyers, purchasing managers,” and “commercial sales and branch managers’; and for Sweden, “production and operations managers,” “other specialist managers,” and “managers of small enterprises.” Note also that all figures are expressed in percentages of those groups, so they should provide some decent sample of broader business management-level representation.)


The U.S., it turns out, is by far the most equitable nation in terms of letting women rise through the ranks in business, achieving almost fifty percent representation. (Representation at the highest levels, the subject of the so-called “glass ceiling,” is impossible to check for the U.S. because CEOs for some inexplicable reason are lumped in with legislators in the Bureau of Labor Statistics job-classification system.)

And this largely unknown gap reveals two different approaches to “equality.” In one, favored in many countries and by many activists, the primary measure of success is equality of representation, and hence perspective, in government, which sets the policies that bind us all. In the other, there is equality of opportunity in charting your own direction in life because of waht you can earn for your talents, manifested as an equal willingness to hire people regardless of sex. As I have argued before, politics is a zero-sum activity, and so refracting “equality” through it is a way to promote group conflict. Commerce is a positive-sum activity, and so as long as everyone’s right to trade is equally protected, people are rewarded not for group identity but for performance. With the labor force having long since transitioned from industry and agriculture to services, women are essentially as productive as men. And so if we accept that “rights” denote the ability to control your own life, your maneuverability as a desirable trader in the world of commerce is more important than your infinitesimal strength as one of many members of one of many pressure groups in the world of politics. So in the end it is Europe with the most work to do with respect to equality of the sexes.


I have found someone else's data on women in management. The source is Table 1.2 from Ch. 1 of Women in Management Worldwide, which shows "women managers" as a percentage of the total worldwide They more or less agree with the figures above. There are no data for Germany, France or Sweden, but there are for some of the European states with rigid labor markets, as well as nominally gender-equal Chine:


So these data confirm the above story: rigid labor markets allow discrimination to flourish.

Friday, February 17, 2006

Separation of Church and State - Two Models

Much of the world is ablaze, occasionally literally, with disputes over the role of religion in the public square. This debate is occurring with the greatest force in two places: the West, where there is now a well-established tradition of, in American terms, a “separation of church and state,” and the Islamic world, where religious strictures as the template for the law is often taken as given. The Western world now takes separation as almost a religious principle in itself, but it turns out that there are two models of such separation, one of which works better in achieving most of the aims of separation that we should be concerned about.

The first approach can be called the open-access model. In it, public funds, facilities and so on are offered to all religions on equal terms, and to any religious expression on the same terms as any other form of expression. Christians can put up a manger on a public square at Christmas time if they want, as long as Muslims or Hindus or atheists are allowed to do the same with their own expressions, and as long as the park is open to nonreligious messages as well. Similarly, any public funding of private education (rare still in the U.S., but common in many other countries) must be provided to parents who put their children in religious schools on the same terms as those who wish to put their children in non-religious ones. In 2003 the U.S. Supreme Court upheld this approach by only a 5-4 margin; because Sandra Day O’Connor was in the majority, her replacement by Samuel Alito, a well-known supporter of the open-access model, will not affect this result. On the other hand, the Florida Supreme Court has ruled that that state’s voucher program violates the Florida Constitution, although for reasons having little to do with church and state.

The alternative approach is the sterilization model, in which the public square and government operations must be scrubbed free of every trace of religious expression. This approach is very popular in some European countries. France, for example, prohibits ostentatious displays of religious symbols in its public schools, in a move targeted primarily at female Islamic head coverings. Turkey too prevents the wearing of such garb in public universities or by employees in government offices.

The two approaches result from a completely different conception of the problem. In Europe, with its tradition of religious wars, the concern is that one denomination will gain control of the state. Religion itself is now arguably seen in largely secular Europe as a toxic idea from a bygone age, from whose inevitable excesses the rest of society must be protected. The increasing number of Muslims in France who stubbornly cling to their religious traditions in a country whose Christians have abandoned theirs is something that baffles many French authorities and elites, and so implicitly the sterilization model is about protecting a post-religious world from the legacies of a bygone and more primitive era. If people insist, they may send their children to private schools, go to mosque and church and so on, but no religious observance is to be permitted in any institution entangled in any way with the state, because excessive belief itself is the problem.

In the open-access model religious expression is just another type of expression, and the state should not discriminate against it. It is true that when the park service has to clean and oversee the manger (or when a valedictorian offers a prayer at graduation), the nonbeliever (or the believer in something different) has to pay for that, and that violates his beliefs. But that’s true of any public expression one might disagree with. If there is a big public march in favor of affirmative action, which I might oppose, then the overtime paid to the police to protect the marchers and therefore enable them to spread their message comes out of my wallet, and so I too am forced to subsidize a disagreeable message, even though it has nothing to do with religious belief. The open-access model says treat religious speech and thought like any other speech and thought. Religious beliefs should compete on the same terms as other types of belief, as long as the state does not favor particular religious beliefs (by, for example, providing vouchers for attendance at Catholic but not Jewish schools).

The open-access model is superior for two reasons. The first is that the sterilization model requires that religious believers be excluded from public services available to nonbelievers. The price of being an observant Muslim girl in France is that you are prevented from attending public school, with all of the opportunities it is presumably supposed to offer. This is, it seems to me, simply discrimination.

But the second reason is more practical. Start from the premise that free speech, broadly speaking, is to be protected. The reason is because it represents competition – a more competitive auto market leads to better and cheaper autos and hence enhanced social welfare, and a more competitive market for ideas leads to better (i.e., truer) ideas and hence enhanced social welfare. This is presumably as true as religious ideas as for any other. But the sterilization model is a subsidy, in two ways. It subsidizes nonreligious belief at the expense of religious belief, and arguably within the realm of types of religious belief subsidizes nonbelief at the expense of all other types of belief. A person who wished to advocate greater public expenditures on the poor for explicitly nonreligious reasons, for example, would have greater access to the public square than someone who advocated it on the basis of the Gospels or the Koran. (Ironically, many European governments engage in the opposite kind of activity on the one hand even as they militantly suppress public entanglement with religious expression. For historical reasons these countries subsidize state churches, for example. This is no better than the systematic purging of religious expression from the public square.)

In general discriminatory public subsidy, in the economic way of thinking is bad for at least two reasons. First, it distorts resource use, giving the subsidized activity an artificial advantage. Individuals will have less opportunity to evaluate the truth of religious than nonreligious ideas. Second, it leads to rent-seeking – to the currying of favor by special-interest groups via lobbying for ever more privileges. For example, nonbelievers, having first achieved the special privilege of, say, squashing religious but not other kinds of expression in public schools, might insist on ever and ever greater restrictions on public religious advocacy, which would lead to society consisting of ever more nonbelievers. This is arguably a contributing factor, although surely not the only one, to declining religious observance in much of Europe. (Turkey, with its hardline sterilization policies, is unsurprisingly one of the most secular Muslim countries.)

How does this work in practice? Just recently a high court in Italy issued a ruling indicating that the crucifixes that have long been present in Italian classrooms should stay there, even though the most common form of Catholicism in Italy is the lapsed variety. The open-access model indicates that they should not be there, because other forms of religious expression do not receive such privileges. On the other hand, one occasionally reads in American schools about students who want to do school reports about Jesus but whose teachers prohibit them from doing so on spurious church-state grounds. Sometimes sterilization reaches absurd proportions. Agape Press reports that an elementary student in Tennessee was forbidden by a teacher from reading the Bible at recess. The school argued, correctly, that recess was still school time and hence subject to school rules, but so what? The open-access model argues that if any student is allowed to read any book, then a Christian student must be allowed to read his scriptures.

So too Cal State-San Bernardino has denied recognition to a Christian student group that denies membership to homosexuals and non-Christians, arguing that it violates university anti-discrimination rules. But Christianity (and indeed advocacy of any kind of discrimination) is an idea, and for some Christian denominations acknowledgement that homosexuality is a sin is a core part of their beliefs; to deny them to right to express that belief on the same terms that other groups express theirs is suppression of a particular type of speech. For a university of all places (and a state university at that) to have nondiscrimination trump free expression is disturbing. It seems to me that it is impossible to believe in free speech, in state engagement at all with the subsidy of the expression of ideas (via the construction of public schools, enabling public demonstrations and so on) and the sterilization model at the same time.

Monday, February 13, 2006

The Implications of the New Behavioral Economics

One of the most provocative developments in economics in recent years has been the revolution in “behavioral economics,” the idea that the way people make choices – for decades the fulcrum of economic analysis of all problems, including seemingly non-“economic” ones – is governed by the findings of cognitive scientists and evolutionary biologists.

For most of the postwar period the dominant model of human behavior in economics was the rational maximizer – a calculating machine who assesses his options given the constraints he faces and makes the single best choice. The choice can be “best,” at least in advance, even in the presence of uncertainty. A person trying to decide which job to take, whether to move, whether to have a third child, or which mutual fund to invest in knows that there are no guarantees, but he combines a probabilistic calculation with his own attitudes toward risk and is then able to rank his options from best to worst. The future can turn out badly if a bad event happens, but going in you didn’t know it would happen. My own summary of this model is that if we knew everything, we would never be disappointed.

But behavioral economics has poked a lot of holes in this model. The work that gets the most attention comes from cognitive psychology, which has compiled a lot of evidence showing that the above model of people choosing so as to maximize “expected utility” is bunk. Instead, we suffer from systematic cognitive biases, and thus make mistakes that a truly rational person would not but which are hard-wired into our brain. So people might choose differently, for example, when told they have an 80 percent chance of surviving an operation than when they are told they have a 20 percent chance of dying. This effect is called “framing,” indicating that how choices are phrased makes all the difference in how appealing they are. Wikipedia maintains a full list of such biases at The Nobel Prize in economics was (justifiably) awarded several years ago to a psychologist, Daniel Kahneman, for a lifetime of such work. (It probably speaks well of economics that its most prestigious prize can be awarded to someone from another discipline. Gains from trade and all that.)

Less well-known but perhaps as important is bioeconomics, the merging of economics and sociobiology. The Harvard biologist Edward O. Wilson is the most well-known evangelist for biology pollinating if not conquering outright the social sciences. Bioeconomics says we should take account of our genetic predisposition to distrust the other, to fervently desire to propagate our genes, to be predisposed to violence, etc., even when those choices appear obviously “irrational.’ Any economics that ignores this is doomed ultimately to wander in the scientific desert.

There are two issues here, one of science (of seeking to more closely approximate the truth) and of morality. As a scientific matter, the market for economic knowledge is probably sufficiently competitive that if behavioral economics can explain the data it will prosper, and if not it won’t. Indeed, there is some irony in economics finding itself under siege from these disciplines, given that the rational-actor model pioneered in economics has taken over political science in recent years. Political scientists trained in previous generations often bemoan the increasingly mathematical and statistical nature of the articles in the best political-science journals. Even as it has successfully colonized other disciplines, economics finds itself under attack from the rear,

But so what? If economics teaches us anything it is that more competition in ideas will yield better ideas. It may well be that we will better understand, say, the dynamics of collective bargaining once our models have incorporated the hidden, non-monetary motivations lurking deep within the minds of the negotiators on each side. And I don’t think anyone realistically contends that orthodox economics has run out of useful things to say about how markets behave, the effects of an oil price shock, what price controls will do, etc. Even if people can make cognitive mistakes in their reasoning, markets on average may, most of the time, still best be characterized by textbook economic models. While the ultimate verdict is still in dispute, many economists such as Vernon Smith (himself a Nobel winner) indicate that whatever the micro-irrationality, markets at the macro level often look the way the textbooks expect them to look. Behavioral economics, in other words, may be best characterized as an appendix or a series of footnotes in freshman textbooks rather than the table of contents. But we shall see.

But the second consideration, involving morality and law, is much more serious. Many critics of markets as ways of reconciling conflicting human goals increasingly draw on behavioral economics (erroneously) to indict the entire case for markets in many areas. Sometimes this is done slyly. Scientists, for example, may report results from employee benefit plans that show when employees are presented with more choices they are overwhelmed and more likely to choose to contribute to no retirement plan at all, despite the long-term costs and even though more plans should present them with more options and thus make it more likely that they will find one that meets their needs. They might then argue that this suggests that significant privatization of Social Security is a mistake.

Adopting the broader form of this argument – that markets fail because of individual irrationality, and therefore should be more controlled by the state –is worrying for at least two reasons. First, cognitive biases also afflict the people in the government making such choices, and there is no reason to think that they will choose better. This is not just a trivial debating point. Political choice is driven by appeals to the baser emotions much more than the market is, and so the chances that cognitive frailty could lead to poor outcomes are much greater when politics is the arena of decision. (World War I comes to mind.) Second, it is not clear at all that, even if some people are very prone to making choices that they will ultimately regard as poor, binding limitations on everyone’s choice’s should be imposed. If some people can’t make sense of three Social Security choices and would hence prefer only the existing system, should people who can make sense of five, or ten, be deprived of that opportunity?

More broadly, the neoclassical model of human behavior is superior to any of its current alternatives in one moral sense. For all the criticism of its reduction of humans to calculating machines, there is one inviolate principal in the construction of homo economicus: we get to choose our own preferences. Preferences or tastes are taken as given, and the fundamental problem to be solved is then how to best resolve preferences that conflict. The notion of markets as a way to achieve not just sterile “efficiency” but as a peaceful way to resolve our differences implicitly owes a lot to the neoclassical notion that we all have preferences, they’re all equal, and have to be reconciled somehow, with markets being (absent market failure) the preferred way. No one is entitled to more rights than anyone else simply because of their particular tastes.

Contrast that with what the behavioral model could imply. If taken to its conclusion, we are all products of forces beyond our control – of millions of years of evolution, or of brain wiring that makes us dangerous to others and ourselves. This in turn leads all too quickly to the idea that it is the function of the state to control and restrain us, to choose for us better than we could choose for ourselves. This is ultimately a frightening vision, one in which we become permanent wards of a therapeutic state presided over not by politicians but by experts who know what’s best for us. Given the historical record of experts (who, for example, spent a lot of time in the 1920s worrying about immigration polluting the genetic purity of the American population), this prospect is far more alarming.

And the very notion of justice becomes problematic when brain wiring determines the choices we make. The American Enterprise Institute recently held a conference on the legal and philosophical implications of biology-made-me-do-it. (A primitive version of this defense was trotted out for a killer in California who, it was said in the so-called “Twinkie defense,” was driven to do what he did by an excess of junk food.) If neurons are morality, I can never be held responsible for anything; what I need is not punishment but treatment. This vision, of a world without consequences or the freedom to succeed or fail, is a disturbing one. Give me, with all my cognitive imperfections, the freedom to stumble may way through this life, and keep the experts and the would-be therapists in the ivory tower where they belong.

Friday, February 10, 2006

Why is U.S. Health Care so Expensive?

The U.S. spends far more on health care than other rich countries. At 13.9 percent, our health spending to GDP is the highest among wealthy countries that I have been able to find data on by a substantial margin. Germany is a distant second at 10.7 percent, followed by France at 9.6 percent and Canada at 9.2 percent. The U.K. brings up the rear at 6.8 percent. Why is U.S. health care so expensive? Three perfectly simple reasons suggest themselves:

1. You get what you pay for. It is common to criticize the U.S. for its lack of “universal health care,” by which is meant politics as the ultimate decision procedure for deciding who gets what kind of health care. And, it is said, the deficiencies of the system are apparent by looking at U.S. life expectancy, which is lower than that in most OECD countries, and U.S. infant mortality, which is higher. But these outcomes are the results of choices made both by physicians and patients. Americans make many poor lifestyle choices, and attempt to save premature babies whose rescue would be politically infeasible in many single-payer countries because it would be too costly. These attempts count as U.S. infant mortality (and this variable too is affected by lifestyle choices), while the stillbirths in other countries do not. We make those desperate efforts because we can, whereas political rationing in other countries means they can’t. So the information in these statistics is questionable.

But what happens if you actually get sick? As I noted elsewhere, U.S. cancer survival rates generally exceed those of single-payer countries. (A report outlining those differences is here). Mortality rates contingent on getting a heart attack are harder to track down. According to Table 6-11 of this report from the UK, the U.S. is tied for second-lowest in mortality rates per 100,000 population, but what I am interested in is mortality once you get a heart attack, not as a percentage of the whole population. But according to Tables 6.4 and 6.14 in the same report the U.S. has a much higher rate of cardiac surgeries, from which I infer that we have many more heart attacks. To have a low death rate with what looks like so much more heart disease again testifies to the ability of the U.S. system to provide state-of-the-art care if you actually fall ill.

This is because U.S. care is in part still consumer-driven. Health-care producers respond to the desires of consumers, although consumers don’t typically seek them out until something is wrong. And so I wouldn’t expect the U.S. system to do particularly well on preventive measures, and indeed many U.S. lifestyle behaviors are much worse than in other rich countries. (One, smoking, is much better.) But once you get to the doctor’s office his incentive to provide you with quality care and a nicer experience is more compelling in a private system than a state-powered one. And so U.S. doctor’s offices might be more common and nicer on the inside, and the willingness of U.S. doctors to treat patients with respect greater.

But this is all expensive. And expensive is not necessarily bad. Cars are much more expensive than thirty years ago, but they have many more features and last much longer. Costs in the health industry are going up substantially because we are getting much better health care. Diseases that were much harder to treat now can be treated effectively (AIDS being an obvious example), and so consumers make bids on resources through the price system, and, if the opportunity cost of those new treatments is sufficiently low, they get their wish. Previously unsolvable problems like acid reflux and erectile dysfunction become treatable with breakthrough medicines. High U.S. costs are to a significant extent a function of high U.S. quality. A quick glance at the number of Canadian license plates in hospitals on the U.S. side will confirm this, as will the medical tourists we draw (particularly wealthy ones) from all over the world. On the amenities side, the U.S. system also rates very highly on overall satisfaction. In OECD surveys of how well citizens are satisfied with the quality of the system, the U.S. ranks first out of roughly 20 countries.

2, I use, you pay…higher premiums. Like all advanced countries, the U.S. relies substantially on third-party payment. If I go to the doctor, my insurance (or the government) picks up most of the tab. And third-party payment – health insurance or Medicare or Medicaid – is expensive. It is subject to moral-hazard problems, where the (un-policeable) best choice for the patient is frequently not the best one for the payer. Since other people – other insurance company customers in particular – are paying most of the cost of my health visit, I have little incentive to economize. I go to the doctor on the slightest provocation, and I want (and often get, because monitoring costs for the insurance company are so expensive) the best treatment available (e.g., branded instead of chemically identical generic medicine), even if of dubious medical marginal utility.
And this moral-hazard problem is inextricably related to…

2. I use, you pay...higher taxes. There is no obvious reason why employers should offer health insurance as a benefit, and if they do there is no obvious reason why it should be of the low-deductible variety, the kind that most encourages overuse of scarce health-care resources. But the reason they do is apparently because of a historical quirk. During World War II the U.S. government imposed wage controls, and to attract workers companies offered fringe benefits not subject to these controls, one of the most popular of which was health insurance. To this day health insurance is not taxable income in the way wages are, and so employers therefore provide versions that are far more generous than ordinary insurance schemes.

Insurance is supposed to pool risk for severe events that will not affect most people. This is how private firms can afford to insure against house fires, for example. But most health care – doctor’s visits and non-catastrophic care – is not rare, it is common. It should be budgeted for like every other expense that adults incur. Milton Friedman is said to have said that if U.S. homeowner’s insurance were run like U.S. health insurance (with the employer picking up some or all of the tab directly, and with taxpayers in turn subsidizing that purchase), it would look just as gold-plated. We would be demanding that our homeowner’s insurance pay every time the kitchen sink got clogged. The hard truth of the matter is that health care is an important good, but it does not therefore follow that we should be relying on insurance or a public single-payer system to take care of ordinary medical fees, even for the poor. Food and clothing are every bit as important as medical care, but we properly expect that the poor and everyone else should be primarily responsible for feeding and clothing themselves, rather than “insuring” against their disappearance. Medical care is no different. Indeed, even now many doctors and hospitals are willing to work out feasible repayment plans for their poorer customers, and it used to be true that doctors felt they had an ethical obligation to treat the poor regardless of willingness to pay, an obligation that has been eroding since the introduction of Medicaid in the 1960s. (The AMA was once a vigorous opponent of “socialized medicine,” and now advocates universal coverage, albeit via a “market-based” system, which allows them to work collectively and leverage their collective power when they negotiate with the government. In this they are no better or worse than every other pressure group.) To the obvious rejoinder that the poor cannot afford quality care because health care is so expensive, it can only be said that one of the reasons it is so expensive is because consumers rich, poor and in-between have so little incentive to make choices – to not get the extra medical test with almost no chance of providing useful information, to not use the expensive medicine when the cheap one will do fine.

I have refrained from mentioning two of the usual suspects – malpractice litigation and drug costs. Undoubtedly these contribute, but I suspect not as much as people think. In any case the drug problem would be easy to solve by repealing the prohibition on importing drugs sold in other advanced countries such as Canada. U.S. prices would come down, theirs would go up, and they would meet in the middle. Currently the power of the U.S. market means that its desires dominate which drugs get made, and other countries free-ride by imposing price controls in their single-payer systems. We could do that too of course, but only at the cost of further cutting the link between consumer desires and drug-company incentives. If we allow imports of drugs other countries would quickly find that their drugs were ending up in the hands of Americans, who are paying more. If they controlled drug exports, smuggling would surely follow. More probably, drug companies would negotiate a harder bargain, and the prices that foreigners pay for various drugs would more closely approximate the more market-driven ones that Americans pay. This is turn would improve the informational value of the price signals drug companies are getting.

All of this leads to a radical proposal for significantly improving the performance of the U.S. health-care system – end the deductibility of employer-paid health insurance. Consumers would immediately notice the higher out-of-pocket costs of care, but would correspondingly choose more wisely. They would also in short ordersee higher wages in compensation, which they could spend on health care or on antyhing else. They would probably be driven to choose health insurance that looks like their car insurance, which covers thefts or major accidents but not oil changes. (Think of how common it is for people not to report minor car accidents because they don’t want their rates to go up.) Such policies would have high deductibles, giving people compelling reasons to save for expenses such as sprained ankles that are not predictable at any moment but can be expected to occur from time to time, while covering most of the expense of heart surgery (which only a minority of people have over the course of their lives). The ability of the health industry to provide more value at less cost would be enhanced without the subsidy of third-party payment. Employers might still find employee demand for health insurance to take advantage of the benefits of risk pooling, but the insurance would be more rational.

But proposing this is probably political suicide, and some thought would have to be given to what would happen to people who are known to be in line for higher health costs. (A cystic fibrosis patient or a diabetic, for example.) In the meantime any policy that encourages people to take account of the costs they impose on others through their health choices is a step forward. Health savings accounts are not ideal, in that they add one tax distortion on top of another, but it is possible (though far from assured) that their better incentive structure may make up for this.

Tuesday, February 07, 2006

You say "Fuh-TAH," I say "FUT-uh," let's call the whole thing off...

Over the last several years I have noticed a trend of people ostentatiously pronouncing foreign words, especially place names, the way (they suppose) a native speaker would. To take the example in the title, when I was younger American media commentators referred to the primary component of the PLO as “Fuh-TAH,” and now I often hear it as more like “FUT-uh.” Spanish names are often subject to this effect too; I often hear, say “Nicaragua” pronounced more like “NEE-kuh-LAH-wuh” (where the third syllable is that Spanish “r” sound that lies somewhere between the English “l” and “r”). The more traditional pronunciation in English is “Ni-kuh-RAH-gwuh.”

This is to my mind an annoying example of modern political correctness. Political correctness more generally is an exercise in signaling, i.e. the expenditure of effort to persuade someone that you possess a certain trait that is not directly observable. In the case of PC, adopting particular (often cumbersome) phrases as a way to avoid offense is a way to signal that you are not like “those people.” “People of color” marks you as culturally attuned and sensitive, but “colored people” marks you as a knuckle-dragger. (I have touched on this a little bit here.)

This trend is annoying for several reasons. First, it is selective. While people often make this effort for Spanish names and words, they don’t much bother with other languages with which they are less familiar. Almost no one, for example, pronounces “Kyoto” or “Guangzhou” the way a native speaker of Japanese or Chinese would. (And if they did while speaking in English to another native English speaker they would, frankly, sound ridiculous.) Nor for that matter is the capital of France pronounced “pair-EE.” Curiously, the city of “Lyon” is almost always pronounced, to a first approximation, as the natives do. This may be the exception that proves the rule, in that Lyon is not as well-known as Paris, and so pronouncing it “properly” may provide more of an opportunity to show off. In general, the desire to pronounce some foreign place names correctly (especially those in Spanish) is undoubtedly related to the increasing prominence of “Latino” culture and people in the U.S., combined with a desire to appear tolerant.

Second, it is often done to appear worldly without having to go through the trouble of acquiring familiarity with differences among cultures, which might include an appreciation of the virtues of your own. (Mark Steyn once dismissed multiculturalism by saying that “[t]he great thing about multiculturalism is that it doesn't involve knowing anything about other cultures--the capital of Bhutan, the principal exports of Malawi, who cares? All it requires is feeling good about other cultures.”)

Third, it is an obsession only of the “tolerant”-to-a-fault West. No one in his right mind expects Argentines or Koreans walking down the streets of Buenos Aires or Seoul to pronounced “Nebraska” or “Atlanta” the way the locals do. Japanese unapologetically convert foreign words into forms Japanese can easily pronounce. The one exception to this rule, which again serves to prove it, is foreigners who are eagerly learning English because they mean to immerse themselves in a foreign culture.

Or maybe I’m just cranky.

A partially (but only so) related phenomenon that I have noticed is the spread of English (as in England) usage patterns among a certain sort of American. Americans famously have usage patterns that differ from those of the land of the mother tongue. But there is a host of a national radio program who invites her listeners to “call us on xxx-xxx-xxxx,” when the conventional American form is “call us at…” More often than before one hears people bemoaning having to “stand on line” or even to “queue” (as opposed to “wait in line”), or that their mother-in-law is “in hospital” (instead of “in the hospital”). Perhaps this is another culture-war thing, an effort by the speaker to signal that he is much more like the Europeans than a Neanderthalish Red-stater.

Of course, for Spanish names naturally native speakers will tend to pronounce it in the Spanish style. When I was a kid in Houston we used to speak often of the nearby “San (rhymes with “ran”) Juh-SIN-toe” Monument, commemorating the battle where Texas won its independence, but apparently the largely Latino population now pronounces it “San (rhymes, more or less, with “Khan”) Hah-SEEN-toe.” Here is an interesting discussion of whether such pronunciations when speaking in English reflect courtesy, affectations, or linguistic imperialism. We will know, I suppose, if the biggest city in California once again becomes known as “Loess AHN-heh-less.”

Thursday, February 02, 2006

Oil Addictions, Oil Detox

The most-noted part of President Bush’s State of the Union speech was his declaration that the U.S. is “addicted to oil,” and his announcement of a goal to reduce oil imports from the Middle East by 75 percent by 2020. Easier said than done.

First, it is worth thinking about why imported oil is even an issue to begin with. Contrary to what many claim, the threat from overconsumption – that we will run out of oil – is in isolation a nonissue. The world did not fall apart when forests began to run out back in the days when they were cleared for heating only o be replaced by whale oil, nor when whale oil seemingly in danger of exhaustion only to be replaced by petroleum. Oil is a scarce commodity like any other. If it begins to run out (and there is a growing body of thought known as Peak Oil which believes exactly that, although this is disputed), the price system is the best way to manage this growing scarcity. If people are free to bid on oil to put it to competing uses, it will provide incentives to find more, to make sure that those who can create the most value with it get their hands on it, and for creative entrepreneurs to find alternatives, as happened in the two prior examples.

Rather, the problem about which President Bush is concerned is a market failure peculiar to imported oil, and from unstable developing countries in the Middle East and elsewhere in particular. To take an arbitrary example, if five dollars of every 60 dollars paid for a barrel of Saudi oil ends up funding the jihad, the consumption of that barrel has a social cost in excess of what the buyer paid for it. (The argument that oil consumption warms the planet and is therefore also externally costly applies if true to any oil consumption, imported or not, but for a variety of reasons I ignore this problem here.)

While the U.S. does not inordinately import oil from Saudi Arabia (we get more from Venezuela and Mexico), there are fundamental economic laws that currently give the Gulf States an advantage in world oil markets. Whereas before the 1973 oil embargo oil was often acquired by long-term contracts with a single nation, that crisis helped generate a market for oil that looks like that for most commodities and financial assets. Oil is globally traded, and so ultimately those with the lowest production costs will be able to sell. Individual countries' supplies cannot be constrained by consumer choices. And for now the production costs are lowest in the Gulf States, especially Saudi Arabia, where the oil is much easier to extract. Alternate sources such as the tar sands in Alberta, which potentially hold huge reserves, must be feasible not just in the engineering sense but in the economic sense. In other words, it is not a question of whether the technology to enable the extraction of oil exists, but whether the resources required to do so can be acquired at an opportunity cost low enough relative to what consumers will pay for the output that results.

If the alternatives are costly enough, lots of technology can be made economically feasible. As far back as World War II an isolated Germany with few alternatives was able to make liquid fuels out of coal, as did South Africa during the apartheid years. But we do not face those kinds of constraints now, and so it is difficult to avoid Saudi oil dominating the market. Even if the U.S., for example, imposes a huge gasoline tax, driving down demand, that would harm high-cost producers the most and the Saudis the least. An import tariff on oil would be better, but is prohibited by WTO rules. With the Saudis having acceded to the WTO last year, discriminatory tariffs on Saudi oil exclusively are also prohibited, and would be difficult to enforce in any event because of the fungibility of oil. Raising the price of oil through taxation or other legal restraints raises the competitive advantage of global oil for the cheapest producers, whether they sell it in the U.S., Europe, India or China. Even if we managed to buy less Saudi oil, they would sell it elsewhere. (Such measures would be problematic for a variety of economic and philosophical reasons in any event, but I leave those aside.)

So victory also goes to the cheapest producers, and the cheapest producers are at this moment in history in the most problematic and dysfunctional parts of the world. Oil, like other commodities, facilitates corruption and war. Human resources can often leave when they are abused by the state. If they earn too little, for example, Canadian doctors and nurses can go south. Or, to take a non-monetary example, ambitious but religiously observant Turkish female college students who are prohibited by Turkish law from wearing their head coverings on campus can go to college in the U.S. and Europe, as they are apparently doing more and more. Unless the government seizes extraordinary power as in, say, a totalitarian society, the ability to abuse human resources is limited, because they are mobile. (It is precisely for this reason that totalitarian societies impose emigration controls.)

But natural resources are different. They sit in the ground undisturbed until someone takes them out, and control over the land where they are is thus most of what is needed to profit from them. And so the money at stake from control of such immobile resources generates violence to control the income flows those resources yield, with corruption – bribes demanded of foreign oil companies, e.g. – being one of the ways in which this income is, for lack of a better word, “earned.” Because of this “natural resource curse,” control over the oil money in Saudi Arabia, Kuwait, etc. is immensely lucrative, just as it is in Venezuela, Nigeria and Mexico. This partly explains why these societies are so corrupt. But only in the Gulf is there an important fraction of the population or, in the Saudi case, perhaps even the authorities, with warlike attitudes toward the modern world, with oil sales enabling that hostility to be funded. (One could argue that Venezuela is in a different way heading down this same path.)

So low-cost producers will always edge out high-cost ones, and that is right now very dangerous. Ironically, this may be an argument for eliminating the cost advantage of Gulf producers as quickly as possible by using more of their oil. If there are diminishing returns to Gulf oil production, then as the oil disappears their cost advantage will too. Indeed, there are now reports that Kuwait’s oil reserves are already only half the official estimate.

This is highly speculative, but one thing is not. The most foolish answer to whatever problems are posed by our “addiction” would be some sort of government Big Program to achieve “energy independence.” Our energy “dependence” is trade, and is governed by al trade by the cost of production and the value of alternatives to consumption of oil. The alternatives to it are best sorted out by competitive experimentation – by allowing entrepreneurs to explore alternative energy sources as they have in the past and letting consumer willingness to pay and resource cost (i.e., whether they can earn a profit) be the judge of whether the alternative is worthwhile or not, by allowing Americans to decide at the individual level how best to respond to increasing oil scarcity. Because any sustained effort to promote “independence” will not be like the Apollo project – an engineering problem more than an economic one for which there is an unambiguous measure of success. Rather, a government program to find alternatives to oil will be consumed in an orgy of rent-seeking – of ludicrous subsidies to ethanol farmers or (as in the 1970s) “synthetic fuels” producers whose manufacturing process somehow never gets to be efficient enough for the subsidies to end.