Marginal Revolution

Richard Thaler joins *Economic View*

His first column is on behavioral economics and mortgages; excerpt:

Some critics contend that behavioral economists have neglected the obvious fact that bureaucrats make errors, too. But this misses the point. After all, wouldn’t you prefer to have a qualified, albeit human, technician inspect your aircraft’s engines rather than do it yourself?

The owners of ski resorts hire experts who have previously skied the runs, under various conditions, to decide which trails should be designated for advanced skiers. These experts know more than a newcomer to the mountain. Bureaucrats are human, too, but they can also hire experts and conduct research.

Blame it on the young

Nir Jaimovich and Henry Siu write:

We investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the U.S. and other G7 economies. During the postwar period, these countries experienced dramatic demographic change, although details regarding timing and nature differ from place to place. Using panel-data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in U.S. business cycle volatility. Through simple quantitative accounting exercises, we find that demographic change accounts for approximately one-fifth to one-third of this moderation.

That's in the June 2009 American Economic Review (somewhat different version).  One ungated earlier version is here.  A later NBER version is here.  The very useful PowerPoints are here.

Assorted links

1. There seems to be a Flynn Effect for memory.

2. How to use Kindle in foreign countries.

3. Few people want to improve their empathy.

4. Should Manhattan buses be free?

5. Negative interest rates in Sweden; not everyone likes the idea.

*Other* notable events from July 4

1803 – The Louisiana Purchase is announced to the American people.

1826 – John Adams and Thomas Jefferson, the second and third President of the United States respectively, both die on the fiftieth anniversary of the United States Declaration of Independence, of which they were both signatories.

1827 – Slavery is abolished in New York State.

1837 – Grand Junction Railway, the world's first long-distance railway, opens between Birmingham and Liverpool.

1855 – In Brooklyn, New York, the first edition of Walt Whitman's book of poems, titled Leaves of Grass, is published.

1865 – Alice's Adventures in Wonderland is published.

1946 – After 381 years of near-continuous colonial rule, the Philippines attains full independence from the United States.

Here is the link, so your celebration should be a good one.

A theory of Fed announcements

If you've been paying attention, the Fed likes to release bad news after the markets close on Friday afternoon. The past couple weeks, they've announced the failures of small regional banks.

Well today [referring to a Friday], they announced something just a little bit bigger - the government bailout/takeover of Fannie Mae and Freddie Mac, the two large mortgage finance guarantors. The markets have been expecting this for a while, but obviously not everyone was expecting it as their stock prices were $5.50 and $4 respectively when the market closed today. If everyone was expecting this, then those prices would have been a lot closer to zero.

Here is more.

The best paragraph I read today

Do I belong in an insane asylum?  Or should I be on the FOMC (with Hall, Thompson and Svensson?)  Damned if I know.  This blog is either grossly overrated or grossly underrated, but it ain’t average.

That's Scott Sumner.

Voice (and loyalty)

After several of you complained, the Kindle price, for Create Your Own Economy, has been lowered to $14.27, from $20 something.  Maybe someone at Amazon reads the comments at MR (really, I had nothing to do with it).

What other prices would you like changed?  Health insurance -- how much should that cost?  A barrel of oil?  Just let them know.

A simple economic model of today's NBA

Given economic bad times, many teams have overspent.  But they have lots of long-term contracts, plus there is a salary cap and luxury tax for going above that cap.  Real wages ought to fall but most of them cannot fall right away.  If a player becomes a free agent, few teams will bid and those players will absorb a disproportionate share of the required wage cuts (the pricing of complementary inputs had some indeterminacy anyway, plus there is an AC constraint). 

The lower returns available mean that a given free agent is more likely to be a self-deluding trouble maker who has worn out his welcome (Artest, Gordon, etc.).  This favors teams with dominant players (Cleveland), strong systems (Boston), and strong coaches.  All those teams can swallow the troublemakers without cracking up.  It also favors teams which suffer from well-defined "missing pieces."  It favors already-good teams and indeed we see that Cleveland, Orlando, San Antonio, and LA have been major players in the free agent or trade markets.

I predict a greater dispersion of win totals for next year's season.

I am wondering to what extent a similar analysis applies to economics departments, or to teams of bloggers, or to other groups of complementary labor inputs.

Addendum: TrueHoop comments.

Adverse Selection Once Again

Adverse selection is an easy story to tell but a hard story to verify.  In fact, empirical studies indicate that adverse selection is not an important (equilibrium) effect in the market for used cars, or used trucks, or of auto, life insurance or health insurance.  See my earlier post, Adverse Selection is NOT the Problem, for reasons why markets handle asymmetric information better than most economists think.

In two excellent posts (here and here), Bryan Caplan further points out that the adverse selection model does not explain current regulations.  Adverse selection, for example, implies that it's the low-risk consumers who drop out of the market so it's the low-risk consumers who need a mandate to buy insurance.  But...

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.

See also Tyler's post on this issue which makes many similar points.

Maniacs, all of us

Is blogging declining?  Matt writes:

Laura at Apartment 11D offers an excellent précis of the ways in which the blogosphere of today lacks much of the charm of the blogosphere of four or five years ago. I would say that there are compensating benefits to the new, more professionalized, more institutionalized blogosphere. But it really is different and the change has been for the worse in many ways.

Laura links to many comments.  I'm more optimistic.  Very few (if any) of my favorite bloggers have quit and of course there are some new ones.  It's surprising how few of them have quit.  (If blogging is so great, why hasn't competition competed away their returns?  What about comparative advantage in this sector is so persistent?)  The rest of the output you can ignore.