Sunday, August 27, 2006

More polluted California law

An article in the New York Times, “California Builders Fight Air Pollution Fee”, by Carolyn Marshall, is another example of polluted California law.

According to the article:

The fees are part of a new regulation by the San Joaquin Valley Air Pollution Control District requiring builders of commercial and residential projects to use energy-saving technology and traffic-reduction features in their projects. The rule requires payment into a fund for pollution control. The idea is to make developers more accountable for the explosion in traffic and emissions that typically accompany building.

The ultimate cause of pollution and traffic is people, not builders. By charging builders, all those who do not live in new homes escape the fees, even though they are responsible for just as much, and often more, per capita pollution and traffic. Older homes also experience a one-time positive relative price change.

If people are the cause, isn’t it more sensible to charge people? On the other hand, existing people are not responsible for being born; their parents are. Shouldn’t parents be charged to have children (sorry, I couldn’t resist)? Alternatively, shouldn’t polluters be charged for the amount of pollution they produce?

Requiring specific energy-saving technology doesn’t make sense, either. If too much energy is being consumed, raising energy prices will reduce consumption by the same amount but in a way that leaves people better off, on average (marginal benefit equal to marginal cost).

Of course, who is to say what price should be charged for pollution or that too much energy is being consumed or that too many babies are being born? Certainly not the environmental activists. On the other hand, if it is me, fine.

Saturday, August 19, 2006

U. S. Representative Robert Wexler on the Medicare D “Doughnut Hole”. Spin or dumbth?

Wexler’s article, “’Doughnut hole’ a black hole for seniors; allow Medicare to negotiate drug prices” was published in the Palm Beach Post. Here are some excerpts with my comments.

After being rushed by the Bush administration to sign up for a drug plan under Medicare Part D and avoid paying stiff penalties, an estimated 7 million seniors are receiving a rude awakening as they find themselves plummeting into an abyss of prescription-drug non-coverage known as the "doughnut hole."

This carefully crafted clause in the Part D program is nothing more than a large gap in drug coverage that occurs between $2,250 and $5,100, where seniors and the disabled are required to pay 100 percent of their prescription-drug costs . . .

You receive a rude awakening if something is a surprise. The doughnut hole was not a surprise.

Presumably, those who signed up for Medicare D did so because it was an improvement over alternatives, even with the doughnut hole.

Many who signed up have a low probability of reaching the doughnut hole. For these people, Medicare D with the doughnut hole is a far better alternative than it would be if it did not have the doughnut hole. Why? Because they aren’t forced to buy doughnut hole coverage they don’t want or need.

Others who signed up have excessive drug costs and will go far beyond the doughnut hole. Their total drug cost will be lower with Medicare D than with alternatives.

The fact is that Medicare D is an improvement for every rational person that signed up, not a disaster.

President Bush and Republicans in Congress, in cooperation with the pharmaceutical and insurance industries, devised a flawed program that conveniently omits benefits for beneficiaries when they need it the most.

Mr. Wexler’s rhetoric is good, but his logic leaves much to be desired.

Some of those who need it most are those whose drug costs far exceed the doughnut hole range. These people are far better off with the superb coverage beyond the doughnut hole range and the doughnut hole than they would be without the doughnut hole and no extensive coverage beyond it.

Less obvious is the fact that those who need drugs the most often do not reach the doughnut hole range. Equating need with total cost is fallacious. You can save a life on $100 monthly.

This goes against the principle of what it means to be insured. Usually, the purpose of insurance is to protect individuals against large losses; contrarily, the Medicare Part D doughnut nut hole leaves seniors completely unprotected, facing skyrocketing prescription-drug costs that they cannot afford.

Great spin, but only spin.

The insurance principle is to spread the cost across a suitable cohort for those who find the tradeoff between average cost certain versus probability distribution of loss and risk aversion favorable. No rational person wants too pay for too much insurance.

The fact that Medicare D has a doughnut hole is not the same as leaving seniors completely unprotected. What would be leaving seniors completely unprotected would be no Medicare D and no alternatives. That is not the case.

With respect to affordability, there is a negligible chance that people who define affordable as below cost (as many of the complainers do) will ever find a sensible Medicare drug program affordable.

The argument made by proponents of the Republican prescription-drug program is that the doughnut hole was necessary to keep the cost of the program down and save taxpayers money. In fact, the only effects resulting from the doughnut hole are huge windfalls for pharmaceutical companies and inadequate drug coverage for millions of seniors. Ironically, according to a recent report issued by the Center for Economic and Policy Research, if Medicare had been allowed to bargain directly with pharmaceutical companies - as is currently done by the Veterans Administration and state Medicaid programs - the savings would be more than twice the size of the doughnut hole. Direct bargaining by Medicare with pharmaceutical companies would completely eliminate the doughnut hole, in addition to providing substantial savings for the federal and state governments.

Mr. Wexler is pulling a bait and switch.

The current style of program would cost more without the doughnut hole.

Direct bargaining would change the program by slowing the development of new drugs. Cheaper drugs lead to less effective drugs over time, because pharmaceutical companies will slow development of new drugs if their profitability is reduced. There is no free lunch, no matter what Mr. Wexler says.

Those who are griping about the high cost of newer drugs can put themselves into Mr. Wexler’s world by simply refusing to buy any drug developed more recently than, say, twenty years ago. These generically available drugs are cheap. You will never reach the doughnut hole by buying them.

Sunday, August 13, 2006

Don’t blame me; blame Charles Wilder

My friend Charles Wilder doesn’t want to be blamed either, because someone sent it to him.

1. A bicycle can't stand alone; it is two tired.
2. A will is a dead giveaway.
3. Time flies like an arrow; fruit flies like a banana.
4. A backward poet writes inverse.
5. In a democracy it's your vote that counts; in feudalism, it's your Count that votes.
6. A chicken crossing the road: poultry in motion.
7. If you don't pay your exorcist you may be repossessed.
8. With her marriage she got a new name and a dress.
9. Show me a piano falling down a mine shaft and I'll show you A-flat miner.
10. When a clock is hungry it goes back four seconds.
11. The guy who fell onto an upholstery machine was fully recovered.
12. A grenade fell onto a kitchen floor in France resulting in Linoleum Blownapart.
13. You are stuck with your debt if you can't budge it.
14. Local Area Network in Australia: The LAN down under.
15. He broke into song because he couldn't find the key.
16. A calendar's days are numbered.
17. A lot of money is tainted: 'Taint yours, and 'taint mine’.
18. A boiled egg is hard to beat.
19. He had a photographic memory which was never developed.
20. A plateau is a high form of flattery.
21. The short fortuneteller who escaped from prison: a small medium at large.
22. Those who get too big for their britches will be exposed in the end.
23. When you've seen one shopping center you've seen a mall.
24. If you jump off a Paris bridge, you are in Seine.
25. When she saw her first strands of gray hair, she thought she'd dye.
26. Bakers trade bread recipes on a knead to know basis.
27. Santa's helpers are subordinate clauses.
28. Acupuncture: a jab well done.
29. Marathon runners with bad shoes suffer the agony of de feet.

Sunday, August 06, 2006

Hurricanes: Forecasting and insurance

A recent article in the Sunday New York Times, “Researchers Lower Estimate of Hurricanes This Season”, provides perspective on how little credence the media, politicians, and environmental activists deserve when they confidently forecast either doom or the absence thereof.

Forecasts of the number and intensity of hurricanes on a one-year basis are not accurate and cannot expected to be accurate. Neither are forecasts for several years very accurate.

Hurricanes, in a particular part of the country, such as Florida, are not insurable, i.e., the total loss cannot be reliably predicted for one year or several years.

It may be that hurricanes are not even insurable in the aggregate, at least for time intervals of several years. This is because they are too few in number to average out over only a few years.

The worst hurricanes may not be insurable over any reasonable time interval. By definition, such hurricanes are the worst storms. That means they are low probability events. Trying to average out events drawn from the extreme right tail of a probability distribution takes a lot of draws and the volatility is enormous.

One implication is that hurricane insurance losses cannot be forecast very accurately and insurance companies that charge what the media, politicians, and consumers view as fair hurricane insurance premiums are likely to money.

The same perspective applies to predicting and insuring against most low probability events.

Reinsurance works only if you don’t go too far into the right tail of the probability distribution.

Here are some excerpts from the New York Times article.

Hurricane researchers at Colorado State University predicted Thursday that this year’s hurricane season would not be as bad as their earlier forecast had indicated, and they said a monster storm like Hurricane Katrina was unlikely.

In December, the researchers predicted nine hurricanes, five of them intense. On Thursday, they reduced those numbers to seven and three.

“Moreover,” they said, “these forecasts do not specifically predict where within the Atlantic Basin these storms will strike.”

Saturday, August 05, 2006

Minimum wage laws

To make things simple, assume no inflation, fixed technology, and employers that always employ labor with a specified skill set up to the point where the cost of an additional worker equals the benefit (e.g., incremental profit). Then raising the minimum wage will cost the lowest end workers their jobs. If this case is realistic, then advocates of increased minimum wages hurt the people they are, ostensibly, trying to help.

The same conclusion holds if there is inflation as long as the minimum wage increase is specified in real terms.

Although this characterization is somewhat simplified, the history of increases in the minimum wage suggests a substantial increase in the unemployment rate over time, which has not been observed.

Abstracting from changing skill sets and improvements in technology, one reason could be that the real minimum wage has not trended up over time.

A useful perspective is that microeconomic equilibrium is tied to relative prices, not absolute prices. Roughly, if the minimum wage is doubled and the result is a 100% one time inflation, then the same equilibrium could hold in real terms, including no change in the unemployment rate.

While this analysis is a bit simplified, it suggests that most of the minimum wage discussions you hear are, at best, misguided and perhaps intellectually dishonest.

Here is an example from a recent Palm Beach Post editorial.

The case for the wage increase is compelling and shouldn't be burdened by political opportunism. Workers who earn the current minimum of $5.15 an hour, less than $11,000 a year, fall far below the poverty line. About 36 million Americans - roughly one in eight of us - live in poverty, a quiet disgrace. Congress hasn't raised the minimum wage in nine years, but lawmakers have given themselves $35,000 in raises during the same period. Think of how costs of living have risen since 1997 - what it was like to go to the supermarket midway through the Clinton administration and what it's like now - and the idea of a minimum wage frozen at $5.15 an hour seems absurdly unfair. Congress has neglected the raise for so long that many states have done it on their own, including Florida, which increased it to $6.40 through constitutional amendment.

One gathers from this editorial that those earning less than the proposed new minimum wage would earn the new, higher, minimum wage, i.e., no jobs would be lost. Furthermore, it seems that the editor presumes that there would be a corresponding permanent increase in these workers’ real wage. If this perspective is accurate, then it is easy to make us all rich, in real terms, by raising the minimum wage to, say, $1000 per hour.

As you can see, most of what you read about minimum wages is BS.