*

Here’s an argument I have heard multiple times from people on the left side of things: yes, this policy may shave half a percentage point or so from the growth rate, but do people want to be a few percent richer if they have to live in a more unequal society?

If this was true, then why is there nobody on the Left celebrating the last few years? They could even hail Obama as a great leftist: for the moderate price of a less than a percentage points of GDP growth (growth just below 2% instead of just above it), inequality is coming down. Seriously, has anybody actually stood up and said this economy is what we’ve been fighting for? Without too much searching, I think the answer is No.

In abstract, sacrificing just a few percentage points of GDP sounds easy. In practice, it’s actually pretty nasty.

*

Do people want to be a few percent richer if they have to live in a more unequal society? Yes.

Rick Perry’s fascination with a model of strong states and a weak, mostly coordinating, centre could have as its model, the European Union. Even the hard money advocates, like Perry and Boehner, could be interpreted as saying “we want the Fed to be more like the ECB”.

I have to conclude that there is an undercurrent of closet europhilia in the Republican Party.

It will be a great party and for a great cause.

If you happen to live in Pittsburgh, be sure to stop by. Of course, you can always just donate online.

Hope to see you all there next week.

Gov Official: Your drug is too expensive.
Pharma: It costs us a lot to develop, we need to charge 100 for it.
Gov Official: 50.
Pharma: No, we cannot sell it this cheap. How about 95?
Gov Official: Nope, it’s either 50 or nothing.
Pharma (grumbling): Ok, 50, but we’re not happy.

Here’s how I think they’ll go:

Gov Official: Your drug is too expensive.
Pharma: It costs us a lot to develop, we need to charge 100 for it.
Gov Official: 50.
Pharma: Let us think about it.

Pharma leaks a story about government death panels putting a value of life. Some congressman are asked about it my a news station friendly to the opposition party. A bipartisan effort is made to care for the needy.

Pharma: We thought about it and it’s still 100.
Gov Official: Ok.
Pharma: Next year, we’ll have a cost of living increase. It’ll be 110.
Gov Official: Let us think about it.
Pharma: Maybe this should a public discussion.
Gov Official: No need, 110 is very fair.

Your ability to negociate is exactly defined by your ability to walk away. In many of these cases, there is no way that the government will walk away. If anything, it’s the providers who routinely threaten to walk away from Medicare!

What do you think that doctors and patients would feel and do if there was a guideline for what fraction of a doctors Medicare cases could be prescribed brand-name medication or referred to specialists? The reason that the US government doesn’t do this now is because people don’t want it to do it. In other countries, the general population accepts this (in large measure because the richer, more educated, population who would protest is the one who ends up getting those brand-name medications and expensive procedures).

One of the most irritating things about the health care debate from the liberal side is that they propose often very sensible ideas, but then fail to actually argue that it should be done, saying they’ll press for them in 2016 if only you agree to spend a few billion dollars now.

Two weeks ago, as the FDA revoked the license for Avastin for breast cancer as evidence mounted that it is ineffective and it may even be detrimental. Medicare immediately announced it would continue covering it at full cost! What is stopping Medicare from taking advantage of this long-hanging fruit: stop paying for a very expensive treatment that probably makes people worse. It could do it now. There will be a backlash, sure; why won’t there be one in 2016?

I bet that most business schools have some ethics guidelines and lectures. I also bet that most of them teach basic econ and that incentives matter. They either don’t believe the incentive theory or the ethics statements, because they then refrain from properly punishing cheaters.

1. It’s obviously true.
2. It’s obviously false.

People that claim (1) mean that markets are the best predictors of the future. People that claim (2) mean that markets are not perfect predictors; they are often wrong. The two are not incompatible and are in fact both obviously true.

As a general rule, you cannot beat markets as they make the very best prediction that is humanly possible with current knowledge and technology; still, the very best prediction is still often wrong.

If this is theatre, it’s bad theatre; in good theatre, the actors at least pretend to care for the enterprise.

There is a bit of a teenage girl feel to this. You know, the bitchy girl with an attitude throws a party, nobody cares to come because they are doing something better and she spends a month arguing that everyone ganged up on her.

I wonder whether people’s views would be different if the phrasing was more along the lines of “nobody is buying Italian sovereign debt.” “Italy throws an auction and nobody shows up.”

(Yes, I know you can often bet on the other side, actively shorting a bond; but it still wouldn’t matter if people showed up at your auction.)

How can I be poorer than I thought? How can a society be poorer than it thinks? A few thought experiments

1. Researcher A thinks he found a cure for prostate cancer and takes out a patent. When the FDA reviews the evidence, it turns out that the data was mis-interpreted and it is no better than placebo. A is no longer rich. Also, society is much poorer because it does not have a cure for cancer.

2. Young Athlete B thinks that he can make the professional leagues. He knows he won’t be the MVP, but he’ll get drafted. It turns out he does not get picked by any team. B is poorer than he thought. Society, however, is pretty much the same: all of the extra income that B lost is not going to someone else. However, it is still possible that there was mal-investment: B spent his teenage years training instead of getting an education. If many young people do that, then it is possible that society ends up poorer than it otherwise would be. However, society is no poorer when compared to the moment just before the draft: it had M would-be-atheletes and expected to end with N < M draftees, and this is exactly what happened.

3. Rich Non-Profit Institution C has a large old art collection, which it values at $1B. Due to the crisis, it sells off its collection to focus on its mission. At auction, the collection only raises 0.5B. C is much poorer, but society is just the same. This type of being poorer does not aggregate. After all, there was someone else who thought they would have to pay $1B for the collection and is actually richer. The use value of the artworks did not change. There is no mal-investment either. This is an instance of a pure aggregation fallacy.

4. Baker D has 1000 cookies to sell for $1/each at a sale. However, only half as many people show up and he only makes $500. D is poorer than he thought. Society is no poorer before the sale starts. Of course, even a large society can think it would be able to export some good and then it turns out that people do not want to buy it.

*

A common conception of the crisis is that There were too many houses built in the US as people thought they could get rich on real estate. It turns out that house prices will not rise forever, so people are actually poorer than they thought.

This makes no sense: if there are too many houses in the US, then the US is richer than it thought, not poorer. People who own the houses might be poorer as owners, but even they are richer as potential buyers (after all, most people sell their house when they want to buy a new house). This wealth loss does not aggregate as what one person will have lost is exactly offset by another having to pay less. There was no misperception of the use value of the houses. If there are “too many” of them, that’s a good thing!

There might be a small effect, where Americans thought they could export their houses to incoming immigrants.¹ As immigration dries up (and, in the case of Mexico, it might have gone into reverse), there are fewer people willing to come work in exchange for houses on US soil. Is this the narrative of the recession: Americans built a lot of houses for Mexicans immigrants, but then the government did not let the Mexicans come and buy them. Not really very convincing (it could be true, though—look at the states which had the biggest busts).

I can hear the objection: if having too many houses is so great, how come Detroit isn’t booming? Well, in the case of Detroit (and other similar cities), the empty houses are a symptom, not a cause. The city of Detroit is losing population despite having cheap housing; not because of it. Do you think the city would be better off if it bulldozed enough houses to get prices all the way up to, say, Cleveland prices? During the New Deal, people actually did things like this, culling millions of pigs during a crisis, but most economists now think that it totally misguided. Additionally, the Detroit example does not apply: there are issues with the sort of population that is attracted to very low rents and abysmal public services. They are often those without a job or prospects of ever getting one. But, again, this problem does not aggregate: if every city had lower rents, these people would not move to all of them (there are only so many of them).

*

There is still a whole lot of naïvety in the above argument.

After all, just because there are more houses and people are richer, there might still be major rigidities in the economy that make it so that simmultaneously (1) there are a lot of empty houses and (2) there are fewer households being formed. As it turns out, this is exactly what is happening. This is a mix of behavioural factors (households, like companies, don’t want to mark to market when prices are going down, although they were often happy to do so on the upswing), and contractual rigidities. But these rigidities are not about wealth, at least not real wealth. And here, I stop disagreeing with Scott Sumners and direct you to him for the argument on NGDP.

¹ Why not consider selling a house to an immigrant a form of export?