If you have not yet checked out the blog at Division of Labour, you should do so immediately. Their posts are quite entertaining as well as informative. And they have just added three sensational bloggers: Larry White, Deirdre McCloskey and Michael Munger. This is a blog worth checking every day.

Simple Solutions and Simple Care just became more expensive in New Mexico; and complicated care just became less expensive. Of course, the growing cost of additional administrative burdens may more than offset the gross receipts tax advantage enjoyed by complicated care.
According to my calculations, a health care provider now accepting straightforward fee-for-service billing will effectively be taxed on her income at a rate that is 10 to 14 percentage points higher than for an equivalent “managed care” provider. I have created an Excel Spreadsheet that will give you more precise estimates of the difference. Let me know if you would like a copy.
To break even net of tax, a fee-for-service provider must charge roughly 25 percent more (for the same procedure) than a managed care provider.
See my previous post on how well health care turns out when we keep it simple and allow markets to function without government controls.

A friend of mine recently recounted a debate he had with a liberal on libertarianism. His counterpart claimed that in a libertarian world, the FDA would not exist and we would all die of a terrible disease. Sound familiar?
This is a common argument. It has many flaws. I think we can all agree that under laissez-faire, as under any system, some people will do bad things some of the time. Some producers will try to dilute their medicines, take short-cuts in production processes, etc. The question is whether the government is better at policing bad activity than the market. A priori, there is no reason to think that it is. There are several ways that markets police themselves:
1. Reputation. Once people discover that a product is bad, it does not take long for profits to nose-dive. Firms can either: (a) cut corners now, earn high profits in the short term and nothing in the long term, or (b) make their products as diligently as possible and earn a long stream of moderate profits for years to come. The second strategy is almost always more profitable.
2. Asset markets. Stock prices do not just take account of current business conditions, they actually account for a firm’s prospects of long-run performance. What’s more, these markets react instantaneously to news, so stock prices immediately reflect new information the instant it hits. People who claim that businesses have an incentive to cut corners in the short run don’t understand that these asset markets take advantage of the best information available about the future. If a share price does not reflect the actual long-run health of a firm, people can make money by buying or selling shares until the value is accurate.
3. Competition. Rival companies have an incredibly strong incentive to find flaws in their competitor’s products and vociferously publicize them.
4. Information markets. If an industry is not good at policing itself, this provides an opportunity for others to make a profit in the “information industry.” This includes consumer magazines like Consumer Reports or buyer’s services like those that millions use when they buy cars. There is no reason to believe that these wouldn’t pop up if the FDA were eliminated.
What are the FDA’s incentives to police accurately and thoroughly?
1. Reputation? The FDA already has a bad reputation. They certify drugs that are unsafe and keep other, life-saving drugs off the shelf. Their profits are unaffected by this. If you try to stop ‘shopping’ at the FDA, the IRS will bang on your door and arrest you.
2. Competition? There is only one game in town. The FDA has no rivals looking over its shoulder.
3. Asset markets? Fat chance. Unlike stock owners, regulators and politicos have no incentive to look past the next election. Political institutions ensure that almost no one thinks about the long term (witness the impending Social Security crisis).
4. Information markets? The public is notoriously misinformed about political realities. This is because it costs money, time and effort to make oneself informed and unlike in private interactions, it just doesn’t pay off to be informed about politics. The chance that any one vote is decisive is about 1 in 60,000,000 (that was the actual probability going into 2004) so this gives voters little incentive to do their homework and learn whether the regulators are doing their jobs well.
People often assume that economists denigrate regulations because we fear that it hurts business. Actually, the opposite is true. The problem with regulation is not that it hurts business, but that it hurts consumers (it tends to enrich politically powerful business leaders). Regulations like those promulgated by the FDA raise the price of goods. They also raise the cost of doing business so that fewer firms enter the business in the first place. This grants a de-facto monopoly position to those firms already in. This is why, historically, producer groups and not consumers are usually the chief constituencies pushing for regulations!
In some cases, regulatory bodies flat out set monopoly rates. This is what happened in the case of the very first federal regulatory body, the Interstate Commerce Commission. It was instituted to keep railroad rates low. Within a very short time, railway barons were using the Commission to raise rates not lower them. Before the Commission, barons had tried unsuccessfully for years to establish monopoly cartels, but the cartels would always break down. With the Commission setting prices by law, government effectively established a cartel that was unsustainable under laissez-faire.
All of this is to say that I seriously doubt we will all die of a horrible disease were the FDA to be abolished.

David Friedman asks the following question:
“Assuming that airline passengers will soon be allowed to use their cellphones mid-flight, is it ethical not to wrench a phone from a loud talker’s hand and twist the earpiece off the phone, thus rendering our offensive communicator phoneless?”
It will be interesting to observe what etiquette and/or rules emerge voluntarily. Maybe we will soon see “talking” and “nontalking” sections on airplanes. Of course, if a cong gets personally offended (as is likely) airlines may be coerced into enforcing the cong’s rules.

Leave it to Venezuela. This (subscription required) makes the wishful thinking of New Mexico’s social and economic development schemes look small. Any bets as to the success of Venezuela’s new utopian cooperatives?
Here is a sample of what Hugo Chávez is trying to do:
“To accomplish that goal, the Chávez government is plowing billions of dollars into new programs, called “missions,” which act as social welfare agencies. Mostly financed by the PDVSA and run by a hodgepodge of bureaucratic offices, the missions are largely devoted to health-care education and jobs training. They exist as a sort of parallel government and are controlled by Mr. Chávez. The missions provide hundreds of thousands of Venezuelans with monthly stipends to learn everything from reading and writing to setting up cooperative farms. Mr. Chávez plans to combine the dozen or so existing missions into a megaproject dubbed “Mision Cristo,” or Christ’s Mission, which he proclaims will end poverty in Venezuela by 2021.”
This is bad news for Venezuela, bad news for Latin America and bad news for New Mexico.

Congratulations to the Rio Grande Foundation’s Micha Gisser. His excellent letter to the editor regarding health policy was published yesterday in the Wall Street Journal. Here is a portion:
“The economic problem lies in the fact that traditional medical insurance covers two dissimilar events, catastrophic and minor illnesses. Consumers’ demand for catastrophic medical incidents is inelastic: a consumer will not use more of the heart-surgeon’s services just because his out-of-pocket spending is zero. Consumers’ demand for care for minor illnesses is elastic: it is inversely related to price. At the true high price a consumer would consult the medical encyclopedia and use over-the-counter drugs. At a low price (zero if her insurance pays the entire cost) a person would consume much more freely, mainly by making appointments with her doctor for every sniffle and headache. The problem with the prevailing health insurance is that the third-party payment of health-care bills insulates the consumers from the real costs of medical care services for non-catastrophic incidents.”
For the entire letter, click here (subscription required).
Nice job, Micha!

Welcome to Mario Burgos with his new blog. He promises lots of interesting insights into our “emerging” state. Are we really that dumb? Check it out.

Look who dropped into our Toastmasters meeting Tuesday evening!
No shopping mall Santa, he proceded to distribute gifts purchased by each of our generous members. Reality based as it was, we all felt like kids again.
He left these parting words of wisdom: “It’s too bad New Mexico cannot be reality based. We still have too many grownups who believe in the tooth fairy.”

A few years ago I conducted a national study of private prison costs. The results were published in two papers, one written for the Foundation and the other for the Maryland Public Policy Institute. The editor of an important book on the subject and a professor of my acquaintance at George Mason recently received a letter from an expert on the subject–a prisoner. Read it here.

We at the Foundation are saddened to learn of the death of our good friend, supporter and champion of liberty.
Leland and his family moved to New Mexico from Midland,
TX around 1960. He had been a wildcatter in the Permian
Basin, an activity in which George H.W. Bush had also been
active, and they were (and remained) close friends. In
fact, Leland gave George W. Bush his first ride in a small
airplane.
He was a first-rate businessman, and a valued director in a
number of New Mexico companies. He was also a wise
investor in real estate, owning outright or with others
in partnership perhaps 25,000 acres of undeveloped land
on the outskirts of Santa Fe. One such investment, Rancho
Viejo, is now home to Santa Fe Community College as the
result of an outright donation of its campus lands by Leland
and his partners. The Institute of American Indian Arts and
a large Catholic church have similarly located on land donated
by the Rancho Viejo Partnership.
Leland was also a founder of Santa Fe Preparatory School,
the premier independent school (grades 7-12) in Santa Fe,
and involved in a major way assisting establishment of
the Santa Fe campus of St. John’s College.
His widow is Evaline (nee Rife), and they have five grown
children. Three are married daughters with children who
live out-of-state. One is a son, Warren, who is married
with (I believe) two sons, is now chairman of the Santa Fe
Preparatory School board and is respected in the Santa Fe
business community. Another son lives in Taos.

Read the latest column by George Mason Professor of economics and nationally syndicated columnist, Walter Williams, for yet more evidence on the academy’s bias.

Harry recently posted about liberal academia. The London-based Economist magazine (a moderate-left paper, in my opinion) has an article about the phenomenon in its latest issue. The Economist calls liberals’ reluctance to release their grip on academia is a “tragedy not just for America’s universities but also for liberal thought.”
Here is some more:
“Academia is simultaneously both the part of America that is most obsessed with diversity, and the least diverse part of the country. On the one hand, colleges bend over backwards to hire minority professors and recruit minority students, aided by an ever-burgeoning bureaucracy of “diversity officers”. Yet, when it comes to politics, they are not just indifferent to diversity, but downright allergic to it.
Evidence of the atypical uniformity of American universities grows by the week. The Centre for Responsive Politics notes that this year two universities—the University of California and Harvard—occupied first and second place in the list of donations to the Kerry campaign by employee groups, ahead of Time Warner, Goldman Sachs, Microsoft et al. Employees at both universities gave 19 times as much to John Kerry as to George Bush. Meanwhile, a new national survey of more than 1,000 academics by Daniel Klein, of Santa Clara University, shows that Democrats outnumber Republicans by at least seven to one in the humanities and social sciences. And things are likely to get less balanced, because younger professors are more liberal. For instance, at Berkeley and Stanford, where Democrats overall outnumber Republicans by a mere nine to one, the ratio rises above 30 to one among assistant and associate professors.”
And my favorite:
“It is notable that the surveys show far more conservatives in the more rigorous disciplines such as economics than in the vaguer 1960s ‘ologies’.”
If you would like to read the whole article, it can be found here with no subscription required (though I’m not sure how long that will last).

Of the 12,167 certified “provisional” ballots cast for Bush or Kerry in New Mexico Bush received less than 40 percent. Does that seem suspicious?

Yep.
Jane Galt writes:
As you may or may not know, the states set the level of Medicaid spending, but the Feds match the states dollar for dollar. New York State decided that a good way to soak up extra Federal money was to require the local governments to match the state, dollar for dollar. Since the Feds match all state and local spending, this had the effect of doubling Medicare spending in the state of New York…

I propose that we add two new words to the English language:
wandingerous adj., colorless, feeble, tiresome and repetitious — wandingerousness n. To see why you should read the opinion piece by Angela Wandinger-Ness in the Albuquerque Journal Friday (11/10).
In it she attacks our president John Dendahl for poor writing and lack of rigor. Here is a sample of what she thinks is good writing:
“There should be accountability and a factual basis that underlies a credible opinion.”
I am not making this up. If you have a subscription to the Albuquerque Journal , you yourself can compare the writing skills of John and Ms Wandinger-Ness. Now tell me what do you think of my proposed new words!
With respect to lack of rigor, Ms Wandinger-Ness cites the ACLU website as evidence that John has not done his homework. The ACLU website???? Why doesn’t she look here or here or here?
Ms Wandinger-Ness lost her PC constraint in the article. I guess the Academy will forgive her, since her personal insults are directed at someone who does not share the Academy’s world view. Aren’t you glad your tax dollars fund such wandingerousness?

At last New Mexico is not ranked last or near last in something good. We are in the top half of states ranked by generosity. Thanks to E. Frank Stephenson at divisionoflabour.com. Professor Stephenson notes that the top 25 states are all greedy red states. Who would have thunk it?

Daniel Akst, who is guest blogging at Marginal Revolution.com, summarizes the fuel and environmental costs imposed on us by fat flyers. I wonder why airlines cannot internalize these costs either by charging fat fees or by offering successful dieters’ deductions?

In my post last Sunday I emphasized three margins to help you assess presidential election strategies. The turnout margin for Republicans turned out to be decisive, making the other margins irrelevant nationwide. It sure is fun to be right!
Even though the other margins are irrelevant nationwide, the Democrat’s fraud margin is getting interesting play here in New Mexico. Our politically ambitious governor has a huge stake in turning our state blue. How many of the 19,500 “provisional ballots” will be valid? Who decides on whether or not a ballot is valid; and how much individual discretion can the deciders exercise? What percentage of the “valid” ballots will go for Bush? Is the percentage of these ballots for Bush statistically possible? We may not be so dumb that we cannot answer these questions precisely. And if the result turns out to be out of the range of statistical possibility, what will that do to our governor’s reputation? You yourself can watch as the results are tallied. This is fun. Stay tuned.

Thankfully the election will be over in two days. The presidential election appears to be quite close. However it turns out, the economic way of thinking may help you assess the success or failure of each party’s strategies.
Economists think at the margin. Margins are net changes from an existing situation. Taking the existing situation as the 2000 presidential election, what strategies may make a difference at the “margin?”
Get out the vote: Post 2000 election analyses suggested that the Democrats were far more effective at getting out the vote. If that is the case, then Republicans likely have more to gain at the margin than do Democrats. Advantage Republicans
Engaging in Fraud: It looks like Democrats are taking political entrepreneurship to new heights! Republicans may be engaging in fraud, too; but so far they have not been caught. How many extra votes will the Democrats get from the “living dead,” dogs, or those “voting early and often?” We will probably be able to tell by examining election results where fraud is suspected. Advantage Democrats.
Legal Challenges: Armies of lawyers from both parties are poised to challenge results in battleground states. One new tactic being tried by Democrats is to challenge results based on voters being “disenfranchised.” “Provisional ballot” rules are somewhat vague and could lead to high-stakes political war. If you want more detail on what is going on check here or here. Advantage: unknown. If the Republicans were sitting on their hands, there would be a large Democrat advantage. The net marginal effect will probably depend on how well each side is able to persuade the public of the righteousness of their arguments. This should be quite interesting if the election is close.

“Lyndon LaRouche is an ex-con who thinks brainwashed zombies have been sent to kill him, Dick Cheney is a tool of Satan and September 11 was an American military plot. Guess what? You’ve paid him millions to run for president.” This was the lead in to the October 24th Washington Post Magazine cover story on LaRouche by April Witt. It doesn’t amaze me that there are such crazy people in the world. What really amazes me is how far they get in life. If you haven’t spent time on a college campus recently, you might not know just how popular LaRouche is with the college crowd. It’s truly amazing. The story is long, but well worth the read.

“I could think of no worse example for nations abroad, who for the first time were trying to put free electoral procedures into effect, than that of the United States wrangling over the results of our presidential election, and even suggesting that the presidency itself could be stolen by thievery at the ballot box.”
–Thomas Jefferson

The election is nearly upon us and now seems an appropriate time to remember why democracy is so messed up.
Imagine three voters with three different opinions about the Iraq war. Our voters are Abel, Bobby and Carl. Abel is a dove. Her first preference is to have a small number of troops in Iraq. If she can’t have her first preference, Abel wants to keep troop levels where they are now. Her last preference would be an increase in troop levels. Bobby doesn’t like change. He would like to see the number of troops remain as they are. If he can’t have this, his second choice is to increase the number of troops to many. His third preference is to decrease troop levels to few. Finally, we have Carl. Carl’s first choice is to have many troops in Iraq. But if he can’t have this, Carl would like to see few troops there. Comparing the current conflict to Viet Nam, Carl believes that the worst choice we can make is to leave troops at their current, intermediary level. For him, it is best to have either many troops or just a few. Summarizing, our voters have these preferences:
________Abel____________Bobby_____________Carl
1st_____Few_____________Current____________Many
2nd____Current__________Many_______________Few
3rd_____Many____________Few_______________Current
Let us assume that Abel, Bobby and Carl all live in a direct democracy governed by the simple majority rule. What will be the outcome of the election? Let us say that this November, the choice presented to the voters is between many troops and the current level (the option few troops is not on the ballot). Abel and Bobby will vote for the current level, winning the election over Carl’s vote for many troops. Let us then suppose that in December, there is another election, this one asking voters to choose between the current level and a lower level. Abel and Carl will then vote for few troops, beating Bobby’s vote for the current level. Finally, in January, voters are asked whether they prefer few troops to many troops. Now, Bobby and Carl will vote for many troops while Abel will vote for few.
So, without changing underlying preferences, voters will first vote to keep troops at the current level. They will then vote to decrease the level. Then they will then vote to put troops at the highest level. From there, they might vote to put troops back at the initial level. Voter theorists term this problem “cycling.” If we saw it in a person rather than an electorate, many of us would conclude that he or she were crazy! Someone preferring milk to juice and juice to water, ought to prefer milk to water! Notice, moreover, that each of the individuals in our little democracy has completely rational preferences. It is only when we try to aggregate preferences that we run into trouble. I should note that democracy doesn’t always produce this odd result. But it is quite possible under reasonable assumptions. Vote rules other than simple majority can make the cycling less likely, but none can rid us of it.
Perhaps we can avoid the problem by letting voters vote for all three options simultaneously? To see how this might work, assume that 30 percent of the public has Abel’s preferences, another 30 percent has Bobby’s and the remaining 40 percent have Carl’s. Now, if given all three choices, 40 percent of the public would vote for many troops, 30 percent would vote for current levels and another 30 percent would vote for few troops. The electorate would choose many troops. But, referring again to the chart, we see that though the election selected many troops, 60 percent of the public would have preferred current levels to more! (Gore supporters angry with their Nader-voting friends no doubt understand this frustration.)
As far as we know, this problem with democracy was first discovered by a French nobleman named the Marquis de Condorcet in 1785. Though cycling (also called Condorcet’s paradox) received some attention at the time, people seemed to forget about it. The mathematician, C.L. Dodgson (better known as Lewis Carol to readers of Alice in Wonderland) rediscovered the problem in the late 1800s. But again the idea was lost. The economists Duncan Black and Kenneth Arrow independently rediscovered the possibility of cycling in the middle of the 20th century. Though volumes have been written about the problem in academic forums, it has been almost entirely ignored in everyday discussions about democracy.
For me, cycling takes its place alongside many other problems with democracy such as tyranny of the majority and tyranny of the interest group. Given the fairly obvious undesirability of other forms of government, I suppose we are left to deal with it.
We can take solace in the fact that our Constitution severely curtails the power of everyone’s vote. We cannot, for instance, vote to deprive someone of life, liberty or property without due process. Nor can we vote to establish a religion or infringe upon the right to bear arms. There was a time when courts held that we could only vote to have government do those things which were specifically enumerated in the Constitution. So let us celebrate the Constitution which limits our power to vote and lament the passing of an age when the Constitution limited much more.

Today, the Royal Swedish Academy of Sciences announced that it will award the 2004 Nobel Memorial Prize in Economics to Finn E. Kydland and Edward C. Prescott. Kydland and Prescott have made some fascinating and important contributions to macroeconomics over the past quarter century. They are often referred to as founding fathers of the Real Business Cycle school of macroeconomics. Earlier schools of thought had held that the economy grows at some underlying steady rate and that it was the macroeconomist’s job to make sense of fluctuations around this rate. Real Business Cycle theorists, however, reject the “underlying rate of growth” argument and instead claim that it is impossible to separate economic growth from economic fluctuations. In 1986, Prescott wrote: “The policy implication of this research is that costly efforts at stabilization are likely to be counter-productive. Economic fluctuations are optimal responses to uncertainty in the rate of technological progress.” In other words, policy makers should leave the economy alone and resist the temptation to “manage” economic growth. When politicians tinker with the economy, they create more problems than they solve. In an election season rife with rhetoric about stimulating the economy, it would be nice if someone paid attention to these insights.
Without question, Kydland (age 60) and Prescott (63) deserve their prizes. Still, as the Nobel cannot be awarded posthumously, it is disappointing to see that the Academy passed over some older and equally deserving scholars such as Armen Alchian (90), Thomas Schelling (83) and Gordon Tullock (82).
On a personal note, as an Arizona State alum, I am particularly proud that my school attracted Edward Prescott (though not before I graduated). Furthermore, I should disclose that as a current graduate student at George Mason, I am taking a class from Professor Tullock. (I have little reason to think the octogenarian will be surfing the web, so rest assured, I do not lavish praise in hopes of a higher grade!)

I’ve been reading Jim Powell’s FDR’s Folly. It is an economic history of the New Deal. First of all, I would highly recommend it to all interested in an economically and historically sound recounting of the New Deal. (If my word doesn’t carry enough weight, you may be interested to know that it comes recommended by two Nobel Laureates in Economics).
Anyway, I found a little tidbit about New Mexico rather interesting. There is a chapter which describes the way New Deal relief spending was hijacked by political interests, so that all too often aid went not to those in need but to those most likely to get the Roosevelt Administration reelected. Powell quotes historian James T. Patterson as writing, “Democrats in New Mexico, where politics were raw and open, were especially demanding. From the start Democratic Governor Arthur Seligman requested—and got—lists noting the political preference of all relief and [Civilian Conservation Core] workers in the state.”
Despite this obvious black mark, New Mexico did redeem itself. Disgusted with the way New Deal spending was being used for political purposes, the US Congress passed the Hatch Act in 1939. This prohibited federal employees and state and local employees administering federal programs from using their power to influence the outcome of a political campaign. It made it illegal for these employees to offer jobs to political campaign workers or to manage political campaigns. And the author of the Hatch Act? Why, Democratic Senator Carl Atwood Hatch of New Mexico, of course!