The Competitive Market and Survival Economics

"Hunger can be a positive motivator" - MO State Representative Cynthia Davis

http://www.colbertnation.com/the-colbert-report-videos/232637/july-01-2009/tip-wag---cynthia-davis---fox-news

The First Welfare Theorem and most of economic theory relies on a presumption of property rights. Property rights however must be protected and enforced, and this protection and enforcement has a cost.


When an individual makes a decision whether or not to steal and violate property rights, the individual weighs his or her perception of the expected value of the attempt against the expected value of declining.


Since the expected value of an attempt includes consideration of the probability of success, a property owner can protect his or her property by manipulating these odds or the perception thereof. The property owner can build a safe or a fence or get a guard dog or hang a credible sign that such a dog may exist.


A civil society typically deters theft in a combination of three ways:

1. Patrol - reducing the odds of success

2. Investigation and prosecution - increasing the odds of capture and punishment

3. Punish - increase the negative incentive to steal


Considering that most attempts at theivery are often more "expensive" in the dangers involved than obeying the law, these methods are generally successful.


In the case of survival crime, for example, stealing to eat, these methods do not work effectively if at all.


An individual who believes that he or she must steal in order to survive will pursue theft against all but the most extreme odds and dangers. The cost of detering such an individual is extremely high as the resources spent on enforcement and punishment must be such that an individual will risk starvation rather than challenge the law.


A much more cost-effective solution (in a rich country) to prevent survival crimes is to feed the hungry. If individuals no longer believe that they will die if they do not steal, then the opportunity cost of crime is much greater.



In the case of school lunches and other school nutrition, there are further benefits from increased reception to education (which further increases the opportunity costs of crime).

What happens when you print money

Continuing:
http://competitivemarket.blogspot.com/2009/06/inflation-as-boogeyman.html


If you were seriously concerned about inflation caused by the printing of money, you should be more concerned about this:

http://www.federalreserve.gov/releases/h3/hist/h3hist5.htm

In this report the Federal Reserve records the "Monetary Base", ie total money outstanding. In June 2008, this figure stood at about $.8 trillion. In June 2009, this number is approaching 1.8 trillion.

The Federal Reserve has more than doubled the money outstanding over the last year. It already happened. Stop worrying about what Obama's budget might do to the money supply 10 years from now.

Did you see the inflation?

http://www20.wolframalpha.com/input/?i=cpi

Health Insurance - Private or Public

Should health insurance remain in the private sector or be provided publically (or something in between)?

Healthcare (or even Health itself) is a scarce resource. How do we distribute the costs and the benefits in such a way that we maximize utility within the constraints of property rights?

Generally, if the conditions of perfect competition are met or when market imperfections are slight, it is better to relegate the production and consumption of a product to the private market with only the general laws against murder, theft, and fraud.

Health insurance, that is the means of paying for healthcare, however suffers several significant imperfections. Any plan to address health insurance policy in the private sector must address these imperfections:

1. Information assymetry: Producers of healthcare, doctors and corporations that develop medicines and medical devices, are at a significant information advantage over consumers of healthcare, the patients. A patient may not be able to decide appropriately whether a particular treatment is worth the cost.

2. Principal/Agent: Patient/Doctor: Worse, most patients don't decide their own treatments. Their doctors do. A doctor may consciously or subconsciously have different incentives than the patient's. (http://roomfordebate.blogs.nytimes.com/2009/06/18/better-medical-care-for-less/?ref=health)

3. Principal/Agent: Patient/Insurer: If the patient seeks excess treatment, the costs are borne by the insurance company. If the insurance company denies treatment, the costs are born by the patient.

4. Sickness Subsidy: The requirement that health insurance premiums should be the same for everyone regardless of health is effectively a subsidy for the sick paid for by the healthy. Those who are chronically ill will enjoy cheaper premiums because those who are generally healthy are paying higher ones. This will lead healthy individuals to seek cheaper and cheaper plans with less coverage so that they can avod paying this subsidy. Ultimately, healthy individuals will eventually choose to remain uninsured or self-insure while the sick end up paying for their own health care anyway.

So far it seems that surmounting these obstacles is impossible for the private health insurnce market to accomplish, and so I would advocate moving towards a minimum basic national insurance. Individuals would still be able to purchase supplemental insurance plans from private providers to enjoy care beyond that which is contracted to the lowest bidder.

National health insurance does not in itself solve all the problems above, but it has the potential to. We must carefuly craft the national health insurance program to solve these issues or else we will do no better than the private market today.

Money in Education

Public Education is the single most important government program to promote economic prosperity and fight poverty.

That said, what is the best way to support public education?

A New York City charter school is trying something new:
http://www.nytimes.com/2009/06/05/education/05charter.html?ref=education

When school vouchers and charter schools were proposed, I too reacted as most liberals do and opposed any changes to standard pubic education. Now, I must confess I am excited to see what the results of paying teachers higher salaries will be.

Even if the school itself is a failure, we will learn more about what it takes to establish the premier public education system in the world.

Nor is it clear to me that every child will be best suited by the same education methodology.

I now stand firmly in favor of the charter school movement. If schools who accept school vouchers are also required to meet similar standards, then I would be in favor of school vouchers too.

The economic analysis:

Education is an investment in human capital. The student gains skills and knowledge that will make him or her a more productive worker or investor. The returns on elementary, secondary, and undergraduate education are immense and if it were possible, a student would borrow to pay for schooling.

The capital markets however are not well suited to finance general education since there is insufficient visibility to the earning power of a student. Further, most grade school students are minors and are generally unable to make their own economic decisions. Nor are parents generally able to authorize borrowings on behalf of their children.

An educated populace additionally provides the state with many positive externalities. Educated citizens are more likely to obey the law and in voting, more likely to make wise laws. The reduction in crime due to the increased earning power of education reduces costs of enforcement and property insurance.

Mandatory free public education attempts to correct many of these inefficiencies in the competitive market for education:

1. Free public education provides a subsidy for the poor. Poor parents and families are most likely to be unable to afford to pay for their own education (through savings or borrowings) and are most likely to commit crimes of desparation if legal earning power is insufficient. A subsidy in kind can restore efficient consumption decisions by compensating for externalities. (Compensation for externalities is an exception to the general preference for subsidies in cash over subsidis in kind.)

2. Mandatory public education provides protection for children. As parents stand as agent to a child's principal, there may be an incentive for a parent to remove his or her child from school in order to force the child to work or otherwise fail to be educated. Mandatory education requirements (including for those children who are home schooled) protects children from unwise parental decisions.

Neither of these objectives however require that the government itself provide the education facilities.

In the early history of public education, when education was such a significant expenditure it may be impossible for the competitive markets to provide a sufficient amount, it may have been justified for the government to provide education. As the economy has grown significantly over the last century, we can transition to a competitive market education system. In suburban or rural areas with lower population density, there may still be a need for publically provided education.

This economy of scale, in that its more cost effective to teach many students together than each one individually, may create a trend towards a natural monopoly in areas of lower population. For example if an area only has 30 students per grade level, then a single teach per grade level is necessary and so a single monopoly school is necessary. If an area has 300 students per grade level, then perhaps 10 schools can operate and create competition.

It's not obvious whether a natural monopoly school should be run by the state or be contracted to the private sector.



The general observation here is that it is not a "free market" that is superior but a "competitive market". The market is generally able to provide higher quality goods and services at lower cost than a government monopoly provided that the conditions of perfect competition are met.

In the case of education, the government needs to compensate for financing and externalities, the principal/agent problem, and for the possibility of a natural monopoly. With these corrections, it becomes possible for the competitive market to assume the remaining tasks.

Economics and death

An interesting article from W. Saletan:
http://www.slate.com/id/2219537/

If you grant that the life and welfare of a fetus has equal value to that of any other human, is there still a case to be made for the legality of some or all forms of abortion?

Moralists will argue that all murders should be illegal, and we do our best to investigate and prosecute criminal homicides.

Economically, the law against murder and its enforcement reduces the costs that individuals would experience in protecting themselves against murderers. Additionally, it reduces the deadweight costs of economic decisions made under the threat of murder. Conversely, we have to pay taxes to support the police and legal infrastructure that enforces this law.

Laws protecting children from murder by their parents have additional costs, namely social services and foster care for the child. A child, aside from being a consumer, is also an eventual producer. Damaging a child in whom society is investing schooling and medicine and other resources is extremely expensive (and morally abhorrent) and so the additional costs of protecting children may be justified. Most fetuses on the other hand do not yet contain any investment in human capital that others may yet benefit from.

If it is decided that protecting lives in excess of obvious economic benefits is an appropriate policy goal, then resources spent in this effort should be spent in the most cost effective way. Should we spend the marginal tax dollar prohibiting abortion, thereby imposing a special tax on the pregnant woman, and then subsequently in foster care for the unwanted child or should we spend the marginal tax dollar on healthcare for the disabled or elderly? What about feeding the hungry, sheltering the homeless, and clothing the naked? Every resource used to solve one problem is a resource denied another.

Further resources spent saving lives today must be balanced against the possibility of investing in economic growth and saving more lives in the future. Spending a marginal tax dollar on improved public education could generate greater economic growth and opportunity, reducing future numbers of abortions (by reducing unwanted pregnancies and increasing the ability to afford children) as well as greater future tax dollars to save more lives in the future.

The prohibition of abortion contains one additional economic cost that the prohibition of infanticide does not: the forced labor and delivery of the pregnant woman. Unlike children's services which can be performed by government professionals, only one person can care for any given implanted fetus.

This cost cannot be minimized by alluding to the woman's choice to engage in sex (except in the case of rape or coercion) as it is still a cost that must be borne. In no other situation do the laws of the United States require forced labor in this way. Even in cases of conscription or jury duty, we not only offer monetary compensation or service but also an individual can escape the requirement by showing cause. Do we plan to pay women to stay pregnant? Do we plan to permit an exception for conscientious objection or economic hardship?

Should the government have the power to legislate absolutely what occurs beneath your skin? In order for the postulates of Perfect Competition and the First Welfare Theorem to hold, the answer is generally no. The costs to all citizens, male or female, of granting the government this type of power must also be considered when prohibiting abortion.

It's not obvious to me that the life and welfare of a fetus is equal to that of any other living human, but even if it were true, it's not obvious to me that the prohibition of abortion would lead to the greatest realization of a "culture of life".

Inflation as a boogeyman

Krugman returns to his roots as an economist and finally writes something sensible again.

http://www.nytimes.com/2009/05/29/opinion/29krugman.html

The myth: Inflation is bad, so the conventional wisdom says, and since excessive government debt "causes" inflation, Obama is going to ruin the country.

Krugman's review of this myth is sound, but I highlight the following: If you are genuinely concerned about inflation, then concern yourself with the activities of the Federal Reserve that has in the last few months pumped trillions of dollars of new money into the economy, far more than Obama ever will even if he maintains deficits at this level for 8 years.

Any claim that Obama's policies are bad because of the inflation they may one day cause is disingenuous because it misses the far more inflationary actions of the "non-partisan" Federal Reserve.

(Nor am I concerned that the Federal Reserve is going to cause inflation. While I stand opposed to an unelected Federal Reserve with a free mandate to control the economy, Fed Chairman Bernanke is far more competant than his predecessor.)

In the news

Brooks writes a funny article:
http://www.nytimes.com/2009/05/26/opinion/26brooks.html

Gay marriage may not lead to men consorting with animals, but it has led to Republicans laying down with Democrats:
http://www.nytimes.com/2009/05/28/us/28marriage.html?_r=1&ref=politics