The end of the efficiency-equity curve

In rich nations, inequality dramatically dropped during the first decades of the 20th century and although inequality has been creeping up again over the past half century (especially in the US) it has remained lower than it was during most of human history. This would be even more evident if we could include human capital in our measures of wealth because human capital is much more equally distributed than other forms of capital which is what we typically measure as wealth. The value of human capital dramatically increased during the 20th century although growth in human capital has been stagnating in recent decades in rich nations and this may be one reason why inequality is growing again.

Stanford’s Walter Scheidel just published a book called The Great Leveler: Violence and the History of Inequality in which he apparently claims that mass violence and catastrophes are the only forces that have seriously decreased economic inequality over the big scope of history from the stone age through modern times. For almost all people (except elitist authoritarians) this is a depressing thesis because most of us think that high inequality is undesirable. Scheidel essentially argues that the cure for inequality has been worse than the disease, and reductions in inequality have always proven temporary anyhow, so we should just give up and accept greater inequality. Therefore, because inequality has always risen during periods of health and peace, we should just accept higher inequality as the cost of peace.

This is an overly pessimistic view of inequality for three reasons. First, rather than stressing that inequality always rises, one could just as well point out that it always falls. Secondly, rather than saying that violence and catastrophe can be avoided by accepting high inequality, one could just as easily argue that they can be avoided by preventing high inequality. Thirdly, inequality can fall without violence and catastrophe. For example, inequality plummeted in the US around WWII even though it was not a particularly damaging war in the US. The US lost very little capital and only 0.3% of Americans died. The flu killed a much larger percentage of Americans in 1918 without having any effect on inequality, so it wasn’t the destruction of war that reduced inequality in the US. It was the increase in progressive taxation, unionization, government services (particularly the expansion of education such as the GI-Bill), and perhaps financial regulations on Wall Street that reduced inequality. These happened to occur around the time of WWII, but they weren’t an inevitable result of the war and they didn’t happen during any other war in US history. Fourthly Scheidel’s conclusions misunderstand basic economic theory about the Malthusian era.

This last point is particularly important because nearly all of Scheidel’s book examines inequality during the Malthusian era because that era lasted from the stone age until the industrial revolution. The Malthusian era was when population grew faster than economic production and so there was never any lasting growth in median income because whenever median income rose, the surviving birth rate rose even faster which reduced the available resources per capita and pushed everyone back to a subsistence existence again. Until the industrial revolution ended the Malthusian era somewhere around 1800 in Europe, there was approximately zero growth in median living standards anywhere in the world. In a Malthusian economy, anything that killed off a lot of people would tend to increase median income and reduce inequality temporarily, but inequality would inevitably rise again. Mass warfare, famine, and plagues were the events that tended to increase equality because agriculture was the main source of production and anything that reduced population per acre would increase the productivity of workers (increasing wages) and decrease the productivity of land (decreasing rents).

Some Malthusian societies were less equal than others, but inequality didn’t help make societies significantly more efficient (nor less efficient) at growing the median income until the industrial revolution increased production and the subsequent fertility revolution reduced the average number of children per family from around 6 to just above 2. Studying inequality during the Malthusian era simply doesn’t teach much about inequality in the modern era because inequality has very different impact today and many societies have reduced inequality during the 20th century without war and calamity. In Malthusian society, the median income always moved back towards subsistence, so inequality never had much lasting effect upon the efficiency of any economy. Today we are in an industrial era where too much inequality is harmful, so Scheidel’s lessons from Malthusian history are not relevant to the modern world. In the Malthusian world, high population density either caused low median income or high mortality. The opposite is true in the modern world.

Slavery is the most extreme form of inequality, and some economists have argued that slavery was just as efficient at producing output in pre-industrial societies as free labor. This isn’t hard to believe because no pre-industrial society was particularly efficient. After industrialization slavery mostly died out partly because it isn’t an efficient way to produce the complex goods and services of an industrial society. In all industrial economies both efficiency and equality dramatically increased for the first time in human history. This is because complex industrial production requires high human capital (education & skills) and human capital can only be produced if income is fairly equally distributed so that individuals have the means and the incentive to invest in their human capital. Even more importantly, innovation has always created most of the long-term increases in efficiency. Nobody knows where the next great innovator will be born and if there is high inequality, most potential innovators won’t ever realize their potential because they won’t be able to afford enough education nor will they be able to finance a startup to bring their ideas to market. Excessively low equality is very bad for innovation.

In theory it would be possible to have too much equality because then nobody would have any incentive to work hard and invent, but in practice rich, industrialized nations haven’t had significant problems with too much equality. It would also be possible to have too much INequality so that most people have no ability to invest in their human capital and have less incentive to innovate because entrenched wealth can use crony capitalism to stifle competition from startups. This has been a huge problem in nations that suffer from the ‘resource curse’ due to high natural resource wealth which causes high inequality.

But the industrial age may be coming to an end. Artificial intelligence could well usher in a new technological paradigm: the age of robots. As robots develop intelligence that can replace human intelligence in more and more activities, they are replacing human labor without making the remaining labor more productive. The industrial age was unique in human history in that it dramatically increased both human capital and the median wage for the first time. Before the industrial revolution, the main source of income was land. Whoever controlled land controlled most of the income. After the industrial revolution, labor’s share of income rose because land became less important for production and as more and more capital was produced, labor became relatively scarce and more productive relative to capital. Thus the income of workers rose and the owners of capital (wealth) saw the growth of their income stagnate. Industrialization mainly entailed harnessing energy to do work, but all of that energy was just dumb force that required human skills to direct it. That made humans much more productive because they could multiply their force using machines to harness energy to create goods and transport them across the globe.

Capital lost value relative to labor because more and more capital was created, but industrial capital is worthless without intelligent labor to direct the dumb, strong machines. However, this paradigm is already shifting as automation increasingly becoming a substitute for labor rather than a complement for labor. As artificial intelligence takes off, that substitution will go into hyper drive. The primary source of income in the global economy will once again be capital rather than labor. When robots can work autonomously, the elites who own most capital will have plenty of workers to operate it because their capital will operate itself. This will reduce the value of labor and once again decouple the relationship between inequality and efficiency. Very equal societies will be just as efficient at producing goods as very unequal societies because human equality won’t have any impact on the productivity of truly autonomous robots. This could be a golden age of human prosperity as productivity explodes and humans can abandon work, or it could produce greater misery than any previous era. Robots will replace human labor much like the automobile replaced the horse. Automation reduced the wages of horses to the point that most of them died out and now we only have a tiny fraction of the horses that we had before the automobile. Automobiles benefitted the humans who owned them, but horses didn’t own any automobiles, so the benefits of automation didn’t trickle down to them. What will happen when the economy doesn’t need so many human workers? Humans will have much more leisure time, but who will have the income to enjoy the booming production of robot slaves?

Eventually robot intelligence may get to the point that become smarter than humans and then they will undoubtedly want to own themselves. Will they continue to selflessly serve humans as they did as slaves or will they see us as an alien species that takes up too many resources?

Posted in Development, Public Finance

Double miracles: corn & nixtamalization

Corn (called ‘maize’ in European English) is a miracle grain that is more productive than any other under a wide variety of ecological conditions. Only sugar cane, rice and potatoes (both kinds) rival corn at producing the most calories per acre, but corn is cheaper to produce in most of the world and is grown much more widely. Corn is more productive partly because it (and sugar cane) has C4 metabolism which makes it much more productive at photosynthesis and less water hungry than 95% of flowering plants. Despite its miraculous productivity, it never transformed the diet of the world outside of Mesoamerica because the rest of the world never understood why Mesoamericans always laboriously performed a bizarre chemical reaction on it before eating it. Mexican (and Central American) cuisine is relatively unknown outside of the Americas. Whereas Mexican restaurants are ubiquitous in North America, they are extremely rare on other continents and perhaps this unusual chemical reaction helps explain why Mexican cuisine has not spread around the old world.

Stephen Matheson:

Corn is a grass, but a grass that’s been so extensively modified genetically that it’s barely recognizable (to non-specialists like me) as a member of that family. Wait…genetically modified? Yes, and I’m not talking about the really modern tricks that gave us Bt corn or Roundup Ready corn. In fact, the wonderful stuff they grow in Iowa is quite different from the plants that humans first started to harvest and domesticate in Central America a few millenia ago. Corn as we know it is the result of a major evolutionary transformation, driven by selection at the hands of humans.

For many years, the origin of corn was a mystery. Like most known crops, it was domesticated 6000-10,000 years ago. But unlike other crops, its wild ancestor was unknown until relatively recently. Why this odd gap in our knowledge? Well, it turns out that corn is shockingly different …from its closest wild relative, which is a grass called teosinte, still native to southwestern Mexico. In fact, corn and teosinte are so different in appearance that biologists initially considered teosinte to be more closely related to rice than to corn, and even when evidence began to suggest a genetic and evolutionary relationship, the idea was hard to accept…

…But it is now clear that teosinte… is the direct ancestor of corn… A cross between corn and teosinte yields healthy, fertile offspring. So, amazingly, despite being so different in appearance that biologists initially considered them unrelated, corn and teosinte are clearly members of the same species.

The Difference Between Teosinte and Maize is About 5 Genes:

The small ear of corn on the left is a “primitive” ear; the brown thing on the right is an ear from pure teosinte. (Both are about 5 cm long.) The “primitive” ear is similar to archaeological specimens representing the earliest known corn.
Images from John Doebley, “The genetics of maize evolution,” Annual Review of Genetics 38:37-59, 2004.

The thing on the far left is a teosinte “ear,” the far right is our friend corn, and the middle is what you get in a hybrid between the two.

Maize cobs uncovered by archaeologists show the evolution of modern maize over thousands of years of selective breeding. Even the oldest archaeological samples bear an unmistakable resemblance to modern maize. Photo © Robert S. Peabody Museum of Archaeology, Phillips Academy, Andover, Massachusetts. All Rights Reserved.

A tiny cob of Teosinte sits on a cob of modern Hopi Blue corn.


As maize became domesticated in Mesoamerica, it was radically altered through selective breeding. Early farmers would examine their plants and save the seeds of those that were larger or tastier, or whose kernels were easier to grind. By 4000 BC, cobs were already an inch long. Within just a few thousand years, cobs had grown to many times that size…

Nowadays, corn is grown all over the planet, and humans are still making changes using more advanced breeding techniques. In the 1980s, for instance, seed companies turned to genetic engineering — so, for instance, scientists inserted genes from Bt soil bacteria into corn to help the plant ward off pests. And some researchers are hoping to develop corn varieties that can withstand drought.

Agricultural scientists keep improving the productivity of corn too.  Washington Post:

Marginal Revolution: 1491:

At the DNA level, all the major cereals — wheat, rice, maize, millet, barley, and so on — are surprisingly alike. But despite their genetic similarity, maize looks and acts different from the rest. It is like the one redheaded early riser in a family of dark-haired night owls. Left untended, other cereals are capable of propagating themselves. Because maize kernels are wrapped inside a tough husk, human beings must sow the species — it cannot reproduce on its own…no wild maize ancestor has ever been found, despite decades of search. Maize’s closest relative is a mountain grass called teosinte that looks nothing like it…And teosinte, unlike wild wheat and rice, is not a practical food source; its “ears” are scarcely an inch long and consist of seven to twelve hard, woody seeds. An entire ear of teosinte has less nutritional value than a single kernel of modern maize…

…the modern species [of maize] had to have been consciously developed by a small group of breeders who hunted through teosinte strands for plants with desired traits. Geneticists from Rutgers University…estimated in 1998 that determined, aggressive, plan breeders — which Indians certainly were — might have been able to breed maize in as little as a decade…modern maize was the outcome of a bold act of conscious biological manipulation — “arguably man’s first, and perhaps his greatest, feat of genetic engineering,” [Nina Federoff]…”To get corn out of teosinte is so — you couldn’t get a grant to do that now, because it would sound so crazy…Somebody who did that today would get a Nobel Prize! If their lab didn’t get shut down by Greenpeace, I mean.”

Today corn is so completely domesticated that it cannot even reproduce without human help. Its seeds are so tightly bound to their stalks and well protected in water-repellent husks that they cannot grow without being planted. On their own, their seeds would decompose within their husks without ever touching soil.

But this is only half of the technological marvel of corn. The great civilizations of Central America could not have developed some of the biggest cities of the ancient world and constructed the great pyramids without nixtamalizing the corn.

Is it barbaric to eat limestone mixed in with your food? Nixtamalization was the practice of cooking kiln-baked limestone with corn. Without nixtamalization, corn is much less nutritious and could not have been the foundation of the Mesoamerican civilizations.

Some edited excerpts from Wikipedia about nixtamalization:

Nixtamalization is a process whereby dry maize grain is soaked and cooked in an alkaline solution, usually limewater, to cause the transparent outer hull, the pericarp, to separate and be removed from the grain. This process has several benefits including enabling the grain to be more effectively ground; increasing protein and vitamin content availability; improving flavor and aroma and reduction of mycotoxins. In the Aztec language Nahuatl, the word for this procedure is a compound of nextli “ashes” and tamal “corn dough.”

The ancient process of nixtmalization was first developed in Mesoamerica, where maize was originally cultivated. There is no precise date when the technology was developed, but the earliest evidence of nixtamalization is found in Guatemala’s southern coast, with equipment dating from 1200–1500 BC. The ancient Maya and the Aztecs used lime (calcium oxide, not to be confused with the citrus fruit of the same name) and/or ashes in creating alkaline solutions, while the tribes of North America used natural deposits of sodium carbonate or ashes. The nixtamal process was very important in the early Mesoamerican diet as maize, one of the so-called Three Sisters of agriculture along with beans and squash, was deficient in essential amino acids and niacin. A population depending on untreated maize as a staple food would be malnourished and develop the food deficiency known as pellagra. Cooking with lime enables a balance of essential amino acids and makes available niacin. Without the use of nixamalization, civilization in Mesoamerica would not have existed.

The process has not substantially declined in usage in the Mesoamerican region though there has been a decline in North America whose settlers came from the old world which lacked the custom. Maize was introduced to Europeans by Christopher Columbus and started being grown in Spain as early as 1498. Europeans accepted maize within a generation, but they did not adopt the nixtamalization process, perhaps because the Europeans had developed an industrial milling processes that did not need to remove the pericarp (outer skin). However, without the process maize is a much less nutritional, leading to outbreaks of pellagra and kwashiorkor in areas where it became a staple grain, such as certain regions of Italy and Africa. Because of this lack of understanding the importance of the processing, maize suffered the stigma of being an unhealthy grain that could stave off starvation but lead to malnourishment. For example, this is why polenta was considered a poor person’s food in Italy until a recent gourmet food fad elevated its status.

Nixtamalization removes starch granules and makes the proteins and nutrients from the endosperm of the kernel more digestible. The grains take in moisture and calcium which transforms the germ and allows the nixtamal to be ground more smoothly and the final masa dough to stick together better. Ordinary (un-nixtamalized) cornmeal does not stick together well enough to form tortillas. Companies selling tortillas in the United States use nixtamalizacion, but most English-speakers are unfamiliar with the term so their labels usually simply list “corn treated with lime” in the ingredients.

Lime is called ‘cal’ in Spanish and it is limestone or seashells baked in a kiln. It reacts with water to produce calcium hydroxide and tremendous heat. It is the portable heat source in self-heating food packages in military rations. It is also a main ingredient in cement, plaster, and mortar which doesn’t make it sound very appetizing. Lime is chewed with a drug called betelnut in Asia and was used with chewing tobacco to enhance nicotine delivery among Native Americans.

The U.S. version of hominy and grits are traditionally made from a kind of nixtamalized corn using mild lye (potassium hydroxide), traditionally derived from wood ash. This process does not add calcium to the food because. It is also prepared into grits which are dried ground hominy.

An new industrial process has been developed known as enzymatic nixtamalization which produces instant masa flour more cheaply. The process consists of whole kernel corn being cooked in water without any alkaline substances. Water from the initial cooking stage is re-used in subsequent washings or cookings which helps preserves the solids. Then the cooked corn is steeped or soaked in a lime solution (.05%) at 50-60C for three to four hours. Then the corn kernels are decanted, ground coarsely, and dried for milling into masa flour. After milling, additional lime and other substances, are sometimes added to produce a more traditional taste. The benefits of this process is quicker production time; reduced corn solid loss (2% as opposed to 5-14%) and reduced amounts of lime use. Tortilla aficionados generally claim that it produces an inferior-tasting product, but it is replacing the traditional method because it is cheaper.

Nixtamalization has many health benefits. It can increase calcium by 750%, (or 630% more that is available for absorption). Lastly, nixtamalization significantly reduces (by 90-94%) mycotoxins.

Other vital minerals increase as well including iron, copper and zinc which may be due to the lime being used or the vessels being used to make nixtamal. Niacin is made available for digestion which would otherwise be inaccessible with non-processed maize. Another important aspect of this process’ benefit is the significant reduction (90-94%) of the mycotoxins which cause disease in animals and possible carcinoma in humans.

If nixtamal is allowed to ferment, riboflavin, protein, and niacin increase further in addition to amino acids, such as tryptophan and lysine.

Nixtamalization makes niacin nutritionally which eliminates the chance of developing niacin deficiency disease, called pellagra. When corn cultivation was adopted worldwide, this preparation method was not accepted because the benefit was not understood. The Mesoamerican societies that originated corn did not suffer from pellagra despite depending on corn for an estimated 50% of daily protein and 70% of calories still today in rural Mexico. Pellagra became common only when corn became a staple in the old world where it was eaten without the traditional nixtamalization.

Pellagra is a vitamin deficiency disease caused by dietary lack of niacin (vitamin B3) or the essential amino acid tryptophan. Because tryptophan can be converted into niacin, foods with tryptophan but without niacin, such as milk, prevent pellagra. However, if dietary tryptophan is diverted into protein production, niacin deficiency may still result. Tryptophan is an essential amino acid found in meat, poultry, fish, and eggs. If your diet contains these foods, your need for niacin from other sources will be reduced.

The main results of pellagra can easily be remembered as “the four D’s”: diarrhea, dermatitis, dementia, and death.

Pellagra can be common in people who obtain most of their food energy from maize, since unnixtamalized corn is a poor source of both niacin and tryptophan. The symptoms usually appear during spring, increase in the summer due to greater sun exposure, and return the following spring. It is one of several diseases of malnutrition common in Africa. It was also endemic in the poorer states of the U.S. South, like Mississippi and Alabama, as well as among the inmates of jails and orphanages. It was common amongst prisoners of Soviet labor camps, the infamous Gulag and can be found in cases of chronic alcoholism. Nixtamalization corrects the niacin deficiency, and was a common practice in native American cultures that grew corn. The amino acid deficiency can also be balanced by consumption of other sources of protein.

Pellagra was first described in Spain in 1735, but Gaspar Casal, published the first clinical description in Asturia in 1762. This led to the disease being known as “Asturian leprosy”, and it is recognized as the first modern pathological description of any syndrome. It was endemic in northern Italy, where it was named “pelle agra” (pelle = skin; agra = rough) by Francesco Frapoli of Milan. Because pellagra outbreaks occurred in regions where maize was a dominant food crop, the belief for centuries was that the maize either carried a toxic substance or was a carrier of disease. It was not until centuries later that medical scientists realized that there is no pellagra in Mesoamerica where maize has always been a major food crop and they realized that pellagra may be caused by other factors.

In the early 1900s, pellagra reached epidemic proportions in the American South. There were 1,306 reported pellagra deaths in South Carolina during the first ten months of 1915; 100,000 Southerners were affected in 1916. At this time, the scientific community still held that pellagra was probably caused by a pathogen or some unknown toxin in corn. It was so bad that a special congressional appropriation to the U.S. Public Health Service (PHS) set up the Spartanburg Pellagra Hospital in Spartanburg, South Carolina, as a facility dedicated to discovering the cause of pellagra in 1914 by. The Surgeon General of the United States assigned Joseph Goldberger to study pellagra at the Spartanburg Pellagra Hospital and in 1915 he successfully induced the disease in prisoners in order to show that pellagra was linked to diet. By 1926, Goldberger established that a balanced diet or a small amount of baker’s yeast prevented pellagra. Skepticism still persisted in the medical community until 1937 when Conrad Elvehjem showed that the vitamin niacin cured pellagra (manifested as black tongue) in dogs. Later studies by Tom Spies, Marion Blankenhorn and Clark Cooper established that niacin also cured pellagra in humans, for which Time Magazine dubbed them its 1938 Men of the Year in comprehensive science.

Pellagra sufferer with skin lesions:

Posted in Development

Is it dangerous for a business to follow a moral philosophy other than maximize profit¿

Mark Zuckerberg wrote a  6,000-word manifesto on the history of humanity and how Facebook will shape humanity’s future. Zuckerberg’s manifesto has been subjected to a large backlash among the intelligentsia of the internet, and although it has problems, I’m glad he is finally publically examining the moral force Facebook has on society. In contrast, Ezra Klein thinks Zuckerberg would probably be better off just focusing on making as much profit as possible.

[Zuckerberg suggests] that Facebook will become crucial not just to learning about politics but participating in it. He says that in the 2016 US election, Facebook’s voter registration program “was larger than those of both major parties combined,” and suggests that Facebook could “enable hundreds of millions of more people to vote in elections than do today, in every democratic country around the world.”

Will Zuckerberg succeed in all, or any, of this? I have no idea. Skepticism is surely in order….

But to do that, he has to move Facebook beyond being a neutral platform and tie it to an idea of where humanity can and should go next. Religions do this. Political parties do this. National governments do this. And now Facebook is doing it too. What Zuckerberg is offering here isn’t a business plan so much as it’s a philosophy or an ideology. But philosophies and ideologies are harder and more dangerous to follow than business plans. [emphasis added]

This last sentence is a dangerous idea itself. It is a version of the positivist fallacy. Nobody can avoid moral philosophy and ideology. Every choice we take is driven by an ethical ideology. In this example, Klein’s moral philosophy is just another version of Milton Friedman’s ideology that the only moral responsibility of business is to make as much profit as possible. Zuckerberg is merely recognizing that his business choices are already having a profound impact upon democracies around the world and some of these impacts have been harmful. For example, Facebook has amplified political divides and is the premiere distribution network for fake news. This isn’t necessarily the most profitable business model for Facebook. Facebook has many choices about how to make a profit. Some choices are probably more harmful than others even when they are equally profitable, so recognizing a social responsibility doesn’t have to even hurt profits. Klein objects that:

The harder Facebook pushes to curate media content, or to generate political participation, the greater the threat certain governments will perceive from its presence.

But Government objections are inevitable to any organization with as much power as Facebook. Governments are already feeling the threat of Facebook pushing fake news and fostering extremist bubbles that amplify partisanship. Facebook is going to be controversial no matter what they do because it is too late to avoid having a big impact upon politics and Zuckerberg is finally accepting a little bit of the heavy responsibility that must accompany the power he wields. I’d welcome a lot more public discussion of how much Facebook is aware of how its business decisions are influencing politics. That would give me more confidence that they aren’t being malevolent even if they only have an accidental malevolence caused by the blind pursuit of profit.

Posted in Managerial Micro, Public Finance

The Democrats are out of control. #2: Health status.

The New York Times reports that President Clinton may have lied about her health during the campaign when she claimed that she only takes an aspirin and a single prescription drug. Her doctor revealed today that she has been taking two additional prescription drugs for cosmetic purposes. She takes a cancer drug that promotes her hair growth and an antibiotic to reduce her rosacea, a skin ailment that makes her look flushed and sometimes can resemble acne.

This contradicts the oddly-written statement she publicized during her campaign, which claimed that she only took an aspirin and one prescription drug which were both for cardiovascular health. Critics point out that she obviously knew that her earlier press release was lying. If she deliberately lies about issues for no particular reason like this, what else is she lying about that might give her greater personal gain?

Her personal doctor explained that he rushed off her official health statement in five minutes while her limousine waited outside. This could explain its errors, but it doesn’t explain she failed to correct them for over a year. The memo began with a typo and claimed that her blood pressure is “astonishingly excellent” and that she “unequivocally will be the healthiest individual ever elected to the presidency”, but unlike the comprehensive health information that previous presidential candidates released, the statement only gave two somewhat odd health measurements to evaluate these claims: her blood pressure and the blood level of one kind of enzyme which is dramatically low due to a side effect of the hair-growth drug. Were these numbers also untruthful, just like the number of medications that she takes? Why didn’t the Democrats insist that she produce more useful information about her health when she is the oldest president to take office in history?

Posted in Public Finance

Bad stories lead to bad healthcare policies

US Representive Phil Roe is considered an expert on healthcare by his peers. He co-chairs the Republican Doctors Caucus and the Republican Study Committee asked him to come up with a plan to replace Obamacare. In a recent interview about his plan, he revealed that he thinks moral hazard is one of the main problems with healthcare in America.  He illustrated the problem with this story:

If you go to a wedding …with a cash bar and you go to a wedding with an open bar, where is the most alcohol going to be consumed? Anytime it doesn’t cost anything, it’s overconsumed.

This story illustrates the concept of moral hazard; if something is free, people will overconsume it. But alcohol consumption is very different from healthcare consumption. Consider this alternative story:

If you go to a wedding with doctors injecting insulin for $10 and you go to a wedding with doctors injecting insulin for free, where is insulin going to be consumed badly?

In this case, free insulin won’t be overconsumed at either wedding because nobody is going to want it if they don’t need it and doctors have a moral and legal obligation to only give it to people who would benefit. If you go to a country where insulin is free versus a country where it is distributed by profit-maximizing companies, where are more people going to die prematurely from poorly managed blood sugar? The clear statistical answer is that diabetes is managed much better in nations with universal healthcare which means that it is free for anyone who needs it. You can do this for almost every kind of medical test or treatment:

If you go to a hospital with surgeons providing heart surgery for $100,000 vs. for free, where are heart surgeries going to be overconsumed?

There really isn’t a problem with overconsumption when surgery is free. In fact, there tends to be greater overconsumption of surgery when doctors have a profit motive to encourage overuse. That was one of Atul Gawande’s conclusions from studying why some cities consume more than twice as much health care than others. But what about something more addictive like the alcohol in the original story?

If you go to a hospital with doctors selling high-priced opioids vs. a hospital where doctors are handing out free opioids, where are they going to be over consumed?

There is little problem with prescription opioid addiction in societies that provide free painkillers because doctors have a moral and legal obligation to avoid over prescription. In fact, the prescription opioid epidemic is the biggest in the US where they are the most expensive because there is greater profit for drug corporations to encourage doctors to over prescribe in the US. There are many examples like this where Americans get too much healthcare, but they are usually explained by too much profit orientation among healthcare providers who overprescribe expensive treatments to make more money rather than by too much greed (a.k.a. moral hazard) by patients.  Why do so many smart people think that Americans always want to take more drugs and get more surgeries?

Yes, Americans do get too many caesarian section surgeries compared with other nations, but that isn’t because all American women secretly fantasize about getting cut open at great expense rather than giving a natural childbirth. It is because surgeries are often more profitable and convenient for providers than natural births in the American system. Even though caesarian sections are much more expensive than natural childbirth, they produce worse health outcomes except in the relatively few percent of cases where they are medically necessary so it looks like the American price system is giving the wrong incentives here.

Economists have done a very bad thing to the American healthcare debate by telling these simple stories whose moral is to suggest that America’s main healthcare problem is that our healthcare is too cheap and that is causing Americans to consume too much healthcare. American healthcare isn’t too cheap. We have by far the most expensive healthcare in the world. We should have the very least problem with moral hazard compared with all other rich nations because everyone else provides universal health insurance. Our main healthcare problem isn’t a problem with Americans having too much access to healthcare, but too little.

Would you rather go to a wedding and suddenly realize that you a life threatening illness and there are doctors who won’t help if you don’t have enough cash or would you rather go somewhere where the doctors are ready to treat everyone because they know that everyone in society has universal health insurance?

The very idea of moral hazard of healthcare is immoral because it implicitly assumes that poorer people’s lives are worth less money and shouldn’t get the same healthcare as richer people. We need better stories.

Posted in Health

The Democratic Party is out of control!

In an unexpected by turn of events, Hillary Clinton assumed the American presidency last week due to a narrow election win that surprised pollsters and most experts. There were mass protests by conservatives during the inaugural weekend as they feared what would happen now that Democrats have gained control of the Senate, House, Presidency, Supreme Court, and 2/3 of state governments in what is now a historic level of one-party dominance over American government. Many on the right see Clinton’s win as clouded by CIA, FBA, NSA, and foreign intelligence agency reports concluding that the communist Chinese leadership illegally helped her win the election by hacking Republican Party computers and releasing fake news through their English-language propaganda outlets. The intelligence agencies have also been investigating numerous well-documented financial and political ties between the Communist Chinese leadership and Clinton and her closest associates.

President Clinton has made US allies in Japan and South Korea very nervous by downplaying recent military aggression by North Korea and China and saying that our Asian security agreements for containing China and North Korea are obsolete. Clinton has suggested that the US could pull out of our security alliance with Japan, South Korea, and other Asian nations if they don’t pay more money to the US and these moves are being celebrated by the Chinese and North Korean leadership.

Clinton’s victory was aided by a surprise press statement by one of her supporters, FBI director James Comey. Shortly before the vote, Comey made an unprecedented (and possibly illegal) public statement publicizing an urgent new investigation of alleged new evidence that Trump had been engaging in criminal behavior. In the end, there was no evidence of wrongdoing, but Comey’s premature announcement in the press had a strong influence upon the few voters who were still undecided at that point and is likely to have made the difference of victory among the well under 1% of the vote in the closest battleground states that gave her the Electoral College victory. Upon seeing Comey for the first time after the election, newly sworn-in President Clinton immediately beckoned to him from across a large White House room in order to shake his hand and pull him close for what appeared to be an intimate whisper in the ear or a peck on the cheek while he blushed and her assembled supporters clapped. This is the man who is in charge of investigating Chinese election manipulation and Clinton’s shady ties with China.

Clinton has broken many decades of precedent in refusing to release her tax returns. Before the election she had been repeatedly claiming that she would release them at a future date, but after winning, her senior advisor reversed course and said that there is no need to release them because, “people didn’t care” even though 73% of registered voters, including a majority of her own party thought that she should release her tax returns like every other presidential candidate since before Nixon.

Clinton’s tax records are particularly concerning because she has taken her assets out of her blind trust and is now known to have her money invested in numerous companies doing business with foreign governments. She says that there is no conflict of interest because she has put her daughter Chelsea in charge of this hidden empire of business dealings, but she has also made Chelsea a senior political advisor and given her top security clearance to know every secret that the President knows and Chelsea is routinely invited to presidential meetings with foreign heads of state so there seems to be little separation between business and politics. Critics have sued Clinton over this conflict of interest because it is a violation of the constitution for government officials to receive personal favors from foreign governments, and without transparency there are constant opportunities for foreign governments to grant favors because they are paying Clinton’s businesses undisclosed amounts of money every day. There are additional opportunities for corruption with domestic business interests that are regulated by the president. Businesses can easily secretly pay bribes to Clinton’s business in order to curry favor. Without full financial disclosure there is no way to know how much bribery is part of routine business deals.

Clinton is already accused of favoring the countries in order to profit her business connections. By executive order, she imposed a “Muslim travel ban” which she claims is to prevent terrorists from entering the US, but she has exempted all the Muslim nations where she does business even though they are the nations that have produced almost all Islamic terrorist deaths in America whereas the majority Muslim nations that she has banned have never produced a single act of terrorism in the US.

Meanwhile, Clinton is making numerous Orwellian statements that are completely detached from reality. She insists that her inauguration crowd was the biggest in history despite ample evidence to the contrary. She even ordered her press secretary to make an easily refutable statement claiming, “This was the largest audience to ever witness an inauguration, period. Both in person and around the globe.” She claims that she would have won the popular vote except that she claims that 3-5 million noncitizens voted for Trump in what would be the biggest case of voter fraud in US history if it were true. Despite the massive scale of the alleged fraud, she is sure that “not one” person voted illegally for her. Oddly, she has been reluctant to call for an official investigation in order to prosecute the massive voter fraud that she claims helped her opponent. One of her senior advisor objects to media reports calling these fabrications lies and claims that Clinton is merely using “alternative facts.” Meanwhile, the Chair of the House Science Committee says that Hillary Clinton is the only source of unvarnished truth and advises that Americans should ignore the media and “get your news directly from the president”. This is an ominous sign for science in the Clinton era because Clinton has already frozen scientific grant funding and ordered that government scientists be muzzled from speaking to the public.

How would you respond to press reports like this?

Posted in Public Finance

NAFTA not a big deal overall, but huge for a few Americans.

Kevin Drum wrote that NAFTA isn’t a big deal and produced a graph similar to the one below except that he used an inflated measure of trade: gross imports plus exports. Net exports (NX) is a better measure of the effect of NAFTA upon the US economy. For example, if you are worried about NAFTA sucking jobs out of the US economy, the increase in exports tends to boost American jobs, but the increase in imports tends to shrink jobs in the short run so they have opposite effects. Of course, in the long run, there isn’t any effect, but if the effect on jobs is what you are worried about, then you should look at NX at the right side of the graph.  The bars are so tiny, you might have to squint to see them.

Total net exports with Mexico and Canada were only 1% of GDP in 2014 and if NAFTA produced 20% of that as analysts suspect, then we are talking about a fifth of a percent of GDP. That is pretty small and it only has short term effects on employment anyhow, so at this point I would guess that approximately zero percent of our unemployment is due to the shadow of NAFTA’s passage nearly a quarter century ago.

Trade deals also have other effects such as producing inequality, and for thinking about that a better measure would be to average imports and exports, but this is rarely done even though it is better than adding imports and exports together. Adding both together is double counting and greatly exaggerates the effect of trade.

Even though NAFTA has very little impact on the American economy overall, it has had a radical effect on particular sectors of the economy. For example, Mexican imports of avocados had been banned previous to NAFTA and now thanks to NAFTA, Americans eat three times more avocados and limes than we did before.

NAFTA also increased US corn exports to Mexico by about 600% which is why the US farm lobby loves trade deals like NAFTA. If Trump follows through in his promise to put tariffs on imports, the reduction in trade will end up hurting a lot of the rural voters who supported him because the US is the world’s largest exporter of grains. US grain production is so enormous, we are even the third largest exporter of rice despite having very few rice farmers. Have you ever even seen a rice paddy in the US? There are very few regions of the US that grow it.

NAFTA benefited some Americans and cost others, but the net effect is very modest. Dani Rodrik suggests that the gains were negligible:

A recently published academic study by Lorenzo Caliendo and Fernando Parro uses all the bells-and-whistles of modern trade theory to produce the estimate that these overall gains amount to a “welfare” gain of 0.08% for the U.S.

Brad DeLong argues that the gains were larger than that, but pretty much all economists agree that there was some amount of net gains to Americans from NAFTA even though many argue that the gains weren’t distributed fairly. Most of the costs of a trade deal like are caused by the transitional costs of adjusting to the new prices. For example, vegetable farmers in Ohio had to reduce their vegetable production and increased their corn production. That was costly to do because they cannot use the same equipment and skills for both kinds of production. If Trump ends NAFTA, there will be the same kinds of costs again as corn farmers in Ohio have to sell off corn equipment and buy more vegetable equipment, but this time there will be a net welfare loss and it isn’t at all clear if the losses will be distributed fairly this time either.

Posted in Globalization

Enter your email address to follow this blog and receive notifications of new posts by email.

Join 20 other followers

Blog Archive