Sunday, March 31, 2013

Revealed preference and empty words

I saw this list of the 12 worst Supermarkets earlier today.

I was pretty sure Shaws, the local monopoly in Cambridge, MA, would be number one but it fell all the way to #3 because the stores are clean. Ranked just above it, at #2, was Wal-Mart.

Yes, Wal-Mart, the largest grocer in America, which faces stiff competition from a variety of regional chains and yet tends to dominate wherever it goes . . . is the kind of place no one wants to shop at.

So what should we trust, what people do when they go and shop there, or what they say when they say it is one of the worst supermarkets?

Probably the former. The survey (apparently) gives equal wait to prices, cleanliness, food quality, and service. That means Shaws can make up for 30 and 40% markups by having a clean store with clear aisles. But would you be willing to pay 30% more for the right to shop in a cleaner store? I'm not.

Wal-Mart customers complain about long lines, bad meat, and poor service, but are "highly satisfied" with the prices. Evidently if I can shave $50 off you grocery bill you're wiling to wait 10 extra minutes in line. That make's sense. $50 for 10 minutes works out to $300/hour for your time.

Friday, March 29, 2013

Cost Analysis: Flex Time Edition

Slate has a great cost-analysis of flex time for workers with young children.

As regular readers know, I write about cost analysis because it fixes a major problem with cost-benefit analysis: it requires you to think about why a plan is good and why it is bad and make tradeoffs and tough choices. Cost analysis is black and white: we obsess over why an idea is bad so we can trash it without any regret about benefits we are sacrificing.

The basic idea in the Slate article is that, without flex time, women can either be career women or stay-at-home moms without much of a career.* Flex time gives women a third option with more work-life balance, but by opening the door for work-life balance some women choose to get out of the rat race and as a result (on average) women earn less, work fewer hours, and will ultimately have fewer top positions in their field.

The only problem I have with the article is this sentence:
This kind of work-life balance may make for happier womenconsider the Netherlands, where women are quite happy . . .
By acknowledging that flex time makes women happier you're acknowledging the tough tradeoff between happiness and money/prestige that women face. No one wants to hear about how you can't have a work 60 hours a week earning money and spend 8 hours a day with your family and get 8 hours of sleep.

* - This is an exaggeration. Obviously there are many ways to do some of each, so flex time really just expands women's options.

Thursday, March 28, 2013

Fans say time keeper should not decide the game

The NBA league office confirmed that time should have expired when Kobe Bryant made a game winning shot against the Minnesota Timberwolves on Saturday night.

The league office statement explained that "the time keeper did not want to let the clock decide the game." An anonymous source clarified that "[w]ith just 0.8 seconds remaining Kobe may not have had time to set up a decent shot if we started the clock when he received the inbounds pass" so the time keeper decided that "it was not up to [him] to decide the game, so he let Kobe spot up before starting the clock."

Lakers' Coach Mike D'Antoni commented that "They should start the clock, I think, in theory, but also in theory they want players to decide the game. So, I can understand it" before adding that "[t]his is Kobe Bryant was are talking about, the normal rules don't really apply, right?"

Timberwolves coach Rick Adelman, best known for losing game 6 of the 2002 Western Conference finals to Kobe's Lakers due to 22 inexplicable free throws awarded to the Lakers in the 4th quarter, was fuming after the game. "If you are going to not start the clock in order to give Kobe a shot, why not wait until we get another shot as well?" The league office fined Adelman $5,000,000 for making "a really retarded comment."

When asked about whether the shot came in time at shootaround the next morning Kobe was incredulous. "If time is still on the clock, I got it off in time. Like Fish." referring to the game-winning shot Derek Fish took 0.6 seconds to make when the clock only had 0.4 seconds left.

Tuesday, March 26, 2013

Why Medicare bills are like College Tuition

Imagine you're married and have two teenagers. Somehow you ended up with $25,000 in credit card debt and payments are you don't know how it happened. Since you kids are in their teens you know that in a few years they will go off to college and tuition bills will start arriving in the mail. You don't want to get deeper in debt in the future so you've dedicated most of your financial planning to dealing with those tuition bills.

Does that make any sense?

Sort of. That is how most policy wonks think about the federal budget. The U.S. is deep in debt and Medicare costs are increasing rapidly. If costs continue to grow as the baby boomers retire the country will be forced to run massive deficits (or raise taxes) to pay those big bills off on the horizon.

But the question everyone is interest in today is how the U.S. got so deep in debt and what we can do to get out of debt. To understand why we have a large debt today you have to focus on what we spend money on in the past, not what we will spend money on in the future.

The fixation on future costs has led many to minimize discretionary spending. Their projections assume discretionary spending will decline as a percentage of GDP into irrelevance while Medicare costs will explode. So the talking point for the anti-sequester bloc is that "discretionary spending isn't a real problem so we don't need the sequester."

1) It is like saying "I don't need the medicine, the doctor said I would heal."
Projections of declining discretionary spending are based on the premise that Republican leadership will remain obsessed with cutting discretionary spending to the bone. Telling them to stop worrying about the problem because it is going to get fixed is like saying you don't need to take the medicine (the sequester) because the doctor said you would feel better next week (... if you take the medicine).

2) We have a huge debt because of discretionary spending.
This point cannot be emphasized enough. If discretionary spending was so obviously going to recede into irrelevance why hasn't it happened yet. In theory when the Cold War ended there was going to be a major "peace dividend" as military spending decreased. Why did it go? Military spending remains close to 5% of GDP when costs for the wars are factored in and are two biggest factor in explaining why the U.S. fiscal position deteriorated over the past decade.

The Health Care Cost Crisis

Policy wonks around the country agree that the U.S. has a serious health care cost crisis.

As Peter Orzag notes, Medicare currently takes up about 3.8% of GDP and that proportion could rise to 6.8% by later this century. But Medicaid costs are also increasingly rapidly as are private sector so total health care expenditures currently take up 17% of GDP and could rise to 30% of GDP by 2040.

But first, you might be wondering why I'm only talking about the problems with spending money on health care. It is because the fact that fewer people are dying because of all of this money invested in health care is something we can safely ignore. When every other industries grow, like the cell phone industry or the automobile industry, we celebrate all the "job creation" and value the higher quality of new products. In fact, that is why we those industries grow: people like their products so much they spend more and more money on them. But health care is different for reasons I can't explain.

The chart below should the historical pattern from 1945 to 1995 as more of our resources were dedicate to healing the sick.

As you can easily extrapolate why out of sample, health care could easily take up 0.3% of GDP by 2040. Wait . . . that can't be right. Oh, sorry, this is a graph of movie ticket sales as a percentage of GDP. And since it ignores DVD, VHS, and streaming video sales and rentals, obviously it understates the percentage of GDP we are dedicating to movies and entertainment.

I think I just diagnosed America's movie cost crisis.

Monday, March 18, 2013

Is the NYTimes the web's most unscrupulous business?

There are a lot of scumbags running scams on the Internet but it's usually easy to sort out Nigerian princes from legitimate businesses.

The exception is

The Times is running an outdated business model, investing heavily is coverage that is occasionally excellent (David Leonhardt on economic policy) but mostly mediocre. Few people are willing to pay for it with so much free competition.

So if the Times can recruit new customers what are they gonna do?

Hold their current base hostage, of course.

That isn't a misprint. 

You can sign up online but you can't cancel. You have to call their customer service line, which is only available about half the time, tell them your name, e-mail, and address and refuse two hard sells (99 cent for 4 weeks, 50% off for 12 weeks).

NYTimes: Working hard to conform to stereotypes and conspiracy theories since (at least) 2013.

Saturday, March 16, 2013

Why You Don't Have Any Wealth

The NYTimes has a story about how my generation has less wealth than my parents with the subtext that this is a serious problem.

The "problem" is that my generation is investing more in education so we have more student debt and we take longer to get into the workforce.

We make more money, especially when you take into account the life-saving health care we of get as a fringe benefit,* but it takes longer before we start earning. The result is that in our 20s we received far fewer paychecks than our parents did and as a result we've earned less in wages.

No one really doubts that by the time we reach our 40s and 50s everything will have flipped. We will catch up with our parents, pass them, and soar to new high, and probably accumulate more wealth along the way, but while we're young we have more debt (from higher investment) and less savings (from lower income).

Another less misleading way to think about it is that we DO have a lot of wealth but it isn't in real estate, stocks, or bonds, it is in what economists call human capital (i.e. education and experience). Our "lack of wealth" is misleading because it doesn't count our primary asset.

If that sounds abstract a simple example shows what I mean. Would you rather be a newly minted M.D. earning $150,000 a year with $100,000 in debt our a department manager at Wal-Mart earning $35,000 a year with $30,000 in equity in his house? The department manager has $130,000 more wealth but if you take into account human capital the doctor has over $1,000,000 more wealth.

* - An example: when I was born there was an experimental procedure to eliminate a congenital heart defect I was born with. By the time I was 8 my mom felt it was safe enough to try and now I no longer have a 1 in 200 chance of sudden death. If I were born in the 60s that wouldn't be true.

Wednesday, March 13, 2013

Acemoglu didn't watch KONY 2012

Daron Acemoglu and James Robinson note that
The finding that about 10 percent of foreign aid goes to intended recipients [. . . is] from Uganda, which was not a war zone but a peaceful country at the time of the 2004 study we cite. 
I guess they didn't see Kony 2012.

Monday, March 11, 2013

Jonathan Rees, Luddite, hates MOOCs

My dad repairs computers for a living. For a long time he worked at a hospital and the main thing that would break down were the printers. They would jam, run out of toner, run out of paper, or just go on the fritz inexplicably all the time. But that made work for my dad so, great, right? Of course, it is possible to make printers that can do some self-diagnostics and to make more reliable printers over time. Now fewer printers break at the hospital. When they do it is easier to figure out what is wrong. In some cases it is so easy you don't need a specialist to do any work, many people can replace the paper when the printer flashes the new "replace paper" button.

It probably wouldn't shock anyone to know that my dad isn't a huge fan of printer self-diagnostics or robust craftsmanship in printers. So I don't think anyone would take him seriously if he wrote an op-ed about how terrible these new printers were and why no one should use them. It would be pretty predictable if his main argument was that, while the self-diagnostics are pretty accurate, they miss subtle problems that only an experience human can diagnose, i.e. you can't eliminate his job.

Enter Jonathan Rees: he's a history professor that took a Massive Open Online Course (MOOC). MOOCs can enroll thousands of students at a time and have major cost advantages over traditional brick and mortar schools since buying bandwidth and webspace are cheaper than building classrooms and the per-student instructor cost is 1/100th as big when there are 100x as many students per professor.

Rees sees MOOCs are a threat to traditional education--you know, the kind that he's employed doing--and he's here to tell you about why this new technology isn't as great as it seems. For some reason he thinks you'll trust him since he's an expert and ignore the massive conflict of interest. And for some reason he doesn't mention the possibility of running an experiment to test his hypothesis, as if he doesn't want to know if it's true.

But maybe that isn't surprising. Maybe the reason he doesn't seem to care if MOOCs work is because he doesn't care--he just wants to preserve his profession (and his job).

That's fine. All I ask for is that they place a conflict of interest note before each article so everyone has fair warning before they waste their time on the article.

Wednesday, March 6, 2013

If you were going to be raped . . .

Sometimes people ask this question when trying to get to know people:

"If your house was on fire and you could take one thing with you, what would it be?"

The thing is, some people have come home and found their house on fire. It's a terrible experience. Most people don't respond rationally. I was 15 and I was scared, I just called 9-1-1, grabbed a book and ran out. My mom was 54 and was had a total panic attack.

I still feel like I could have gotten a hose and put out what was a pretty small fire (spreading on the carpet) when I found it. It haunted me for years. And whenever people ask their question, like the Harvard University Housing questionnaire or a pre-freshmen program I did at MIT, it just brings up a lot of bad memories.

I hate to make light of more serious crimes, but I'd compare it to asking people something like:

"If you were about to be raped and you could choose vaginal or anal penetration, which would you choose?"
"If you were pregnant and had to abort one of your twins to save the other, would you abort the boy or the girl?"
"If you sadist broke into you home and gave you the option of having him chop off an arm or a leg hand, which would you choose?"

Saturday, March 2, 2013

The Tebows of Harvard, Part 2

It is easy to offend Asian people so I take some pride in it. Even my wife hates "the Tebows of Harvard" blog post. The point of the post, as you may recall, is that it turns out that sometimes a skill that does you a lot of good on one task does not help that much on a seemingly closely related task. Tim Tebow was a great college football player. You would think that would help him be a great NFL football player. But no, he sucked, because his skill set was not very useful in the NFL the way it was in college.

How does that relate to Asian people?

Asians do very well on the SAT in general and on the math section in particular. That probably has a lot to do with parenting and almost certainly nothing to do with genetics. Asian parents are stricter than other parents about doing homework, studying, and preparing for college. Strict parenting is especially helpful in helping kids learn math.* It shows: 41.3% of the kids who score >= 700 on the SAT math section are Asian and 50.1% of the kids who score >= 750 are Asian. Most likely an even larger percentage of the kids with perfect scores are Asian.

Some people have used these numbers to infer that Asians should make up a similarly large proportion of the students at top colleges. But Harvard is at most 31.4% Asian, Princeton is just 28%. Yale just 27.7%. MIT weighs in at 30% but that does not include mixed race students and Stanford leads with 32%, probably because of its location.**

Because all of those numbers are inflated, the true proportions of Asians at these top college is on average probably in the 18-25% range, about half of what we would expect if admissions were based only on having high SAT math scores.

But admissions is supposed to be abut more than SAT math scores, right? At the very least we should also consider SAT reading. Not that surprisingly Asian make up a disproportionate share of top scorers on the SAT reading section too. 20.8% of the students scoring >= 700 are Asian as are 23.1% of the student scoring >= 750.

If SAT reading scores were the only factor in admissions then Asians would be pretty fairly represented. They make up 20% of the top scorers and something like 20% of the students at top colleges. The situation is somewhat in between for the writing section which is formulaic like the math section but based on language skills like reading, 31.8% of those scoring >= 700 and 28.9% of those scoring >= 750 being Asian.

So what percentage of the top schools should be Asian: 40-50% like if things would be if just the math test matters, or around 20% like if the reading just mattered? Should it be a combination of the three, as if the top scorers in each section were admitted? And why is there so much variation?

What if colleges used non-academic criteria? With the percentage of Asians qualifying variating widely on academic measures they could shoot all over the place by other measures. If we included teacher evaluations, GPAs, character traits like grit, zest, or compassion maybe the percentage of Asians with top scores would be 50%. Probably it would be more like 11.5%, their share of the population.

That last point, of course, was the point I wanted to make in Part I. Being great on the SAT math doesn't mean you'll do great on the reading or writing sections much less have good character, a good GPA, or good evaluations according to your teachers or interviewers. It is pretty plausible that the reason so "few" Asians get admitted to Harvard is not discrimination but rather just a lack of the traits Harvard should be looking for. In fact, with so little evidence to show for exceptionalism in Asians aside from the SAT math test, it seems more natural to ask why so many Harvard students are Asian, not why so few are.

* - A lot of inner-city charter schools that work with low-income students have had a ton of success in closing the achievement gap on math standardized tests but somewhat less success in closing the achievement gap for reading. Their methods mostly emphasize discipline as they substitute doing the parents job in the parents place by having much longer school days, longer school years, mandatory Saturday tutoring, time to do homework during the long school day, shorter summer breaks, and strict punishments for misbehavior.

* - All of these numbers are inflated for effect where we count all "unknown race" and "two or more races" as Asian. Also they are only for American students, so these are percentages of the American part of the student body.

Is medical insurance just medical insurance?

I ate dinner yesterday. You probably did too.

But we didn't eat the same thing. I had a buffalo chicken sandwich. You might have had PB&J. Or maybe you had steak or lobster. Even if you also had buffalo chicken you didn't necessary eat the same size sandwich, or one with the same quality and mix of ingredients.

We don't expect everyone's dinner to cost the same amount. People eat different things. If you eat more, you pay more.

We tend to think that is fair, even though men eat more than women, on average, so they also pay more for their dinner. Fatter people eat more than skinner people and old people eat less than growing teenagers, with corresponding larger bills, but we don't have a problem with that either.

Yet we do have a problem when people buy very different health insurance products and don't pay the same price. We insist that, to be fair, everyone pays the same or almost the same premiums.

Someone who smokes, for instance, is much more likely to get lung insurance this year than someone who does not smoke. People with diets high in salt are more likely to have high blood pressure and heart attacks. People who exercise are less likely to get depressed (and less likely to get almost any other disease).

Health insurances pays out more when you get sick, so it is worth more to people who are more likely to get sick. It also costs more to provide that insurance. In other words, when Bill and Bob buy health insurance they aren't buying the same thing any more than they are when they buy "dinner." If Bill is a higher risk than Bob he's buying more insurance the same way he might if he was hungrier and bought more food.

It doesn't make sense to insist that Bill and Bob should pay the same price out of fairness any more than it would to insist they both pay the same price for dinner at McDonalds. If Bill orders off the dollar menu and Bob buy a large Extra Value Meal they will pay different prices for the same thing, "dinner," and that is fine because "dinner" isn't just dinner. If Bill pays higher premiums that is fine too, because "medical insurance" isn't just medical insurance.