Economics – Page 186 – artdiamondblog.com

Milton Friedman’s School Vouchers Pass Utah Senate

I received an email mailing yesterday (2/9/07) from Robert Fanger, who is the Communications Director of the Milton and Rose Friedman Foundation. He wrote: "By a vote of 19 to 10, the Utah Senate passed the universal school voucher bill this afternoon."

On Wednesday, the Wall Street Journal ran an editorial on the issue that is excerpted below:

Proving that the best reforms often pass by the slimmest of margins, Utah’s house voted 38-37 late last week to create a state-wide voucher program that will allow students to escape failing public schools.

Union opponents can be expected to mount a furious assault in the state senate, and then head to court. But the senate is likely to pass the reform supported by GOP Governor Jon Huntsman Jr., so Utah may soon become the first state with a universal school choice plan. It would offer students who attend private K-12 schools from $500 to $3,000 in tuition reimbursement based on family income.

Meanwhile, South Carolina could be next. Legislation is now being drafted to allow nearly 200,000 poor students to opt out of failing public schools by giving them up to $4,500 a year to spend on private school tuition. Middle class parents would be eligible for a $1,000 tax credit.

Reference for editorial:

"Choice Advances." The Wall Street Journal (Weds., February 7, 2007): A14.

Real-Time Pricing Results in More Efficient Electricity Generation

Real-time electricity meters in a building in Central Park West behind resident Peter Funk, Jr. Source of photo: online version of the NYT article cited below.

The article excerpted below gets some of the story right. It should emphasize more that the main benefit from real-time pricing would be that it would reduce the peak load. Generation plants need to be built to handle peak-load. The last generating plants to go on line are the least efficient. if the need for such inefficient, peak-load, plants can be reduced, the costs of generating electricity can be enormously reduced.

There is talk of market competition in the states that have deregulated their electric utility industries. But it should be remembered that even where most deregulated, the result is a long way from a paradigmatic free market. The main point is hinted at in the article below. The ultimate suppliers of electricity to the home remain government-protected monopolies.

If we wanted a truly free market, maybe we should actually allow multple companies to connect to homes, the way we allow multiple television and internet companies to connect their cables to the home. Then some low-cost Wal-Mart of electricty would arise, and blow the stick-in-the-muds away.

(p A1) Ten times last year, Judi Kinch, a geologist, got e-mail messages telling her that the next afternoon any electricity used at her Chicago apartment would be particularly expensive because hot, steamy weather was increasing demand for power.

Each time, she and her husband would turn down the air-conditioners — sometimes shutting one of them off — and let the dinner dishes sit in the washer until prices fell back late at night.

Most people are not aware that electricity prices fluctuate widely throughout the day, let alone exactly how much they pay at the moment they flip a switch. But Ms. Kinch and her husband are among the 1,100 Chicago residents who belong to the Community Energy Cooperative, a pilot project to encourage energy conservation, and this puts them among the rare few who are able to save money by shifting their use of power.

Just as cellphone customers delay personal calls until they become free at night and on weekends, and just as millions of people fly at less popular times because air fares are lower, people who know the price of electricity at any given moment can cut back when prices are high and use more when prices are low. Partici-(p. A14)pants in the Community Energy Cooperative program, for example, can check a Web site that tells them, hour by hour, how much their electricity costs; they get e-mail alerts when the price is set to rise above 20 cents a kilowatt-hour.

If just a fraction of all Americans had this information and could adjust their power use accordingly, the savings would be huge. Consumers would save nearly $23 billion a year if they shifted just 7 percent of their usage during peak periods to less costly times, research at Carnegie Mellon University indicates. That is the equivalent of the entire nation getting a free month of power every year.

. . .

Under either the traditional system of utility regulation, with prices set by government, or in the competitive business now in half the states, companies that generate and distribute power have little or no incentive to supply customers with hourly meters, which can cut into their profits.

Meters that encourage people to reduce demand at peak hours will translate to less need for power plants — particularly ones that are only called into service during streaks of hot or cold weather.

In states where rates are still regulated, utilities earn a virtually guaranteed profit on their generating stations. Even if a power plant runs only one hour a year, the utility earns a healthy return on its cost.

In a competitive market, it is the spikes in demand that cause prices to soar for brief periods. Flattening out the peaks would be disastrous for some power plant owners, which could go bankrupt if the profit they get from peak prices were to ebb significantly.

. . .

The smart metering programs are not new, but their continued rarity speaks in part to the success of power-generating companies in protecting their profit models. Some utilities did install meters in a small number of homes as early as three decades ago, pushed by the environmental movement and a spike in energy prices.

For the full story, see:

DAVID CAY JOHNSTON. "Taking Control Of Electric Bill, Hour by Hour." The New York Times (Mon., January 8, 2007): A1 & A14.

(Note: ellipses added.)

Graph showing the range of variation in hourly electricity rates in different months. Source of graphic: online version of the NYT article cited above.

Plastic Pipes Need Less Labor, So Unions Oppose

Residential plastic pipe. Source of photo: http://www.omaha.com/index.php?u_pg=46

(p. D1) The City of Omaha is considering allowing an alternative to copper pipes in residential plumbing, a move the local builders association says could keep new home prices from rising so fast.

. . .

(p. D2) "Omaha is kind of unique in not allowing plastic. It’s kind of an isolated pocket," said Blas Hernandez, Papillion’s chief building official, who also has worked in the Kansas City, Denver, upstate New York and central Nebraska areas.

Mike Lipke, western regional manager for FlowGuard Gold CPVC pipes, agreed. He said Omaha and Chicago stand out among Midwestern cities for not allowing plastic water pipes.

Several people with long tenure in the building industry said they believe Omaha has lagged in adoption of plastics because the material is less labor-intensive to install and organized labor has fought to protect work for its members.

Stephen Andersen, business manager for the 470-member Omaha Plumbers Local 16, said he doesn’t think it’s necessarily faster to install plastic pipes, and he personally favors copper "because it’s such a good product, a proven product."

. . .

With the housing market slowed and copper prices still high, now may be the time to make affordability the most important consideration, said Paul Frazier, president of the Frazier Co. and a member of the Metro Omaha Builders Association’s board.

"MOBA is fully behind" the proposed change, President Rocky Goodwin said. Frazier represented MOBA in discussions with the Omaha Plumbing Board.

"We’re long overdue for this," Frazier said. "Anything that holds costs down while doing as good or better job is a good thing.

. . .

Lipke, who sells CPVC, said all the model codes and all 50 states approve the use of plastic and plastic has captured two-thirds of the market.

. . .

"People might try it because it’s less money, but they won’t keep using it if it doesn’t work," Lipke said. "It’s a good product, and it certainly shouldn’t be banned the way it is in Omaha."

For the full story, see:

DEBORAH SHANAHAN. "Omaha may lift ban on residential plastic pipe." Omaha World-Herald (Wednesday, January 24, 2007): D1 & D2.

(Note: ellipses added.)

[Joseph Schumpeter was born on February 8, 1883.]

The Difference Between Being a University President and Being a Cabinet Officer

At a dinner last week to announce the winner of the business book of the year award, Lawrence H. Summers, the former Treasury secretary, poked fun at his tenure as the president of Harvard. . . .

Specifically, he said he was woefully naïve when he had been first asked to describe the difference between being a university president and being a cabinet officer. ”I guess I didn’t get it right in the answer I gave in my first year or two,” he said, ”because I used to say, ‘Well, in Washington, it’s so political; there’s organized opposition to everything.’ ”

For the full story, see:

JANE L. LEVERE. "OPENERS: SUITS; HARVARD EDUCATION." The New York Times, Section 3 (Sun., October 29, 2006): 2.

(Note: ellipsis added.)

Schumpeterian Alan Greenspan Receives Second Richest Book Advance Ever Paid

Why is this man smiling? (Alan Greenspan has reason to grin.) Source of photo: online version of the NYT article cited below.

I believe that the market for economists is imperfectly competitive, since the supply and demand for academics is highly regulated by governmental and quasi-governmental institutions. But it is interesting that the second highest book advance ever paid is going to Alan Greenspan. Greenspan is a practical, eclectic, economist who believes that Schumpeter’s process of creative destruction is important for understanding the workings of a capitalist economy.

(p. C1) Alan Greenspan, the former chairman of the Federal Reserve, has agreed to sell his memoir for an advance of more than $8.5 million, according to people involved in the negotiations, making a deal that appears to give him the second-largest advance ever paid for a nonfiction book.

. . .

(p. C8) Mr. Greenspan’s advance ranks second only to the more than $10 million paid to former President Bill Clinton for his memoir, "My Life," which was published in June 2004. Pope John Paul II received an advance of $8.5 million in 1994 for his book, "Crossing the Threshold of Hope," and Senator Hillary Rodham Clinton received an $8 million advance for her memoir, "Living History," published in 2003.

For the full story, see:

EDWARD WYATT. "Greenspan’s Book Deal Is Said to Be Among the Richest." The New York Times (Weds., March 8, 2006): C1 & C8.

Barney Frank on Schumpeter’s “Great Concept”

Barney Frank. Source of photo: http://www.house.gov/frank/welcome.html

Policy-makers are often enthused by the innovation unleashed by Schumpeter’s process of creative destruction, but draw back out of fear of the destruction of jobs. In the passage below, Barney Frank expresses that fear.

I think that there are answers to the fear. More and better jobs are created, than destroyed; workers can invest in general skills that do not depreciate, and retool the specific skills that do depreciate; and conscientious workers suffer from lack of recognition and upward mobility, when creative destruction is stiffled. The pain is less than usually thought, and the gain is greater.

One of the consequences of this separation between economic growth and the well-being of the great majority of citizens is that an increasing number of citizens don’t care about economic growth. Not surprising. Not only do they not benefit, but in many cases they get the short-term disruptive effects.

I mean, there was a great concept from Joseph Schumpeter of creative destruction in which, as the old economic order is destroyed, resources are freed up for the new order.

Well, increasingly, we have people who see the destruction in their own lives, but don’t see that they’re going to be part of the new creation.

Source:

Transcript of remarks delivered at the National Press Club on "Wages" by Democratic Representative Barney Frank of Massachusetts, on January 3, 2007.

Increase in Minimum Wage, Decreases Employment Among Low-Skill Workers

Basic price theory seems to imply that raising the minimum wage, will result in greater unemployment. Almost all economists accepted this conclusion until several years ago, when some empirical results seemed to challenge it. Now there is active debate.

Here is the abstract of a relevant, just-published, article in the leading journal in the field of labor economics:

We infer the employment response to a minimum wage change by calibrating a model of employment for the restaurant industry. Whereas perfect competition implies that employment falls and prices rise after a minimum wage increase, the monopsony model potentially implies the opposite. We show that estimated price responses are consistent with the competitive model. We place fairly tight bounds on the employment response, with the most plausible parameter values suggesting that a 10% increase in the minimum wage lowers low-skill employment by 2%-4% and total restaurant employment by 1%-3%.

The article reference is:

Aaronson, Daniel, and Eric French. "Product Market Evidence on the Employment Effects of the Minimum Wage." Journal of Labor Economics 25, no. 1 (Jan. 2007): 167-200.

Becker on Friedman

Source of graphic: http://www.ideachannel.com/Friedman.htm

David Levy has noted in an email that at the reception to preview the new Friedman documentary, Gary Becker gave a great presentation on Milton Friedman, and it was a great shame that no one recorded it. I feel especially guilty, because I had thought of recording it, and had even brought a small camera that would have (badly) done the job. But the room was dark and crowded, and by the time the talk started, I was in conversation a long way from where Becker started speaking.

Levy suggests that maybe those of us who were there, should record our memories of what Becker said. I like that idea, and will record mine here.

Becker started out by saying to Bob Chitester that he wasn’t sure that the documentary did justice to Friedman. (Chitester was the producer, I think, of the original Free to Choose series, and a moving force behind the new Friedman documentary, to be first shown on PBS on January 29th, 2007.)

Becker mentioned that Friedman was a missionary. He would talk economics to anyone–if a taxi driver made a mistaken comment about economics, Friedman would set him straight.

Becker mentioned that while Friedman liked to argue about ideas, he never saw him be mean to anyone.

Becker mentioned that a friend of his taking Friedman’s price theory class (I think Becker may have said the friend was Gregory Chow?) asked Becker how he could keep asking questions in Becker’s class, when Friedman would keep showing the ways in which Becker was mistaken.

Becker mentioned that he talked to Friedman a few days before his death, and that they even talked a little economics.

Becker emphasized that Friedman had been both a great economist, and had made an enormous difference in the world, in particular in making the world more free.

Some background: Becker spoke about Friedman at two sessions at the Allied Social Sciences Association meetings in Chicago in early January. One was in the afternoon (about 2:30 PM?) of January 5, 2007, and also included Robert Lucas, and Tom Sargent. I missed that session because I wanted to attend a session featuring the research program of Robert Fogel on longevity. The second session, at 6:00 – 7:30 PM on Sat., January 6, 2007 was at a reception sponsored by the University of Chicago to preview the new documentary on Friedman. I attended this reception through Becker’s presentation, but did not stay for the documentary preview. My friend Luis Locay attended both sessions, and told me that some, but not all, of the stories Becker told were similar in both sessions. Locay also mentioned that Becker appeared to get more choked-up at the session on January 5, 2007.

Hugely Wasteful Health-Care Spending

Source of book image: http://www.encounterbooks.com/books/cure/

Milton Friedman is gone now, but the new book reviewed below, includes a forward written by him. Friedman can be praised for many reasons; a minor one is that he was tireless and generous in offering praise and support for others who were seeking to better understand free markets.

About 10 years ago, I broke my leg playing basketball. After I came out of surgery, with a cast stretching from my ankle to the top of my leg, an orderly asked me whether I had ever used crutches before. I hadn’t, so he showed me what to do, swinging through them from one end of the room to the other. The whole lesson lasted about 90 seconds. When I got my hospital bill, I saw that I had been charged $150 for "gait training on crutches." I did what all insured Americans do: I forwarded the bill to my insurance company. Why should I care? I wasn’t paying for it.

One of the problems with American health care, as David Gratzer notes in "The Cure," is precisely a payment system that takes the patient out of the equation. In the early 1960s, the average American paid out of pocket one of every two dollars that he spent on health care; today the figure is one dollar in seven. The inevitable effect is hugely wasteful spending (and inflated hospital bills like mine). In fact, per-patient costs have gone up almost exactly in inverse proportion to the share of spending borne by the consumer.

Dr. Gratzer cites a remarkable Rand Corp. study that tracked health-care spending by 2,000 families over eight years. The families who got free health care spent 40% more than the families with cost-sharing arrangements. And yet the health outcomes for the two groups were the same. The lesson: Market-based health insurance systems, such as health savings accounts, cut out inefficiencies and lower costs without compromising quality.

. . .

. . . : America is clearly at a crossroads in medical care. Within the next decade we will get either some version of Hillary-care or more free-market medicine, starting with universally available health savings accounts. Let’s hope that our nation’s policy makers read "The Cure" before they decide. They will learn that the government route flattens costs only by holding back the pace of technology, artificially controlling its price and rationing its use. That is not a prescription for better health.

For the full review, see:

STEPHEN MOORE. "BOOKS; The Market and Its Medicine." The Wall Street Journal (Tues., By December 5, 2006; Page D6.

The reference to the book under review, is:

Dr. David Gratzer. The Cure: How Capitalism Can Save American Health Care. Encounter Books, 2006. (233 pages, $25.94)

Risk Diversification Only Works If Risks are Random

Source of book image: http://www.inbubblewrap.com/2006/08/should_i_do_it_should_i.php

According to Mr. Apgar, managing director of the Corporate Executive Board and a former McKinsey consultant, the problem is that our traditional tool set deals only with random risk. Equity prices, interest rates, natural catastrophes — all operate, more or less, as perfect markets, distributing risk with equal probability among all the players. No one consistently knows more about what drives these phenomena than anyone else. We can bear or hedge these risks in the secure sense that competitors don’t have an inside lead on the future.

. . .

In real business, though, many of the risks that can potentially wipe us out are non-random — what Mr. Apgar calls "learnable risks" — involving customers, technologies, marketing strategies, supplier relationships and so on. The challenge is not just to learn, quickly, enough about them to survive but to determine whether someone else can learn about them even faster and thus put us out of business.

. . .

. . . Mr. Apgar also explains how to perform a "risk audit," judging a company’s current projects by how they diversify total risk or demonstrate risk intelligence. Here is where his program differs most widely from conventional wisdom — because, as he notes, risk diversification is no virtue if the risks are non-random and we have little intelligence of any of them. If you don’t know much about poisonous snakes, keeping several different species won’t make you any safer.

Like liberty, risk intelligence demands eternal vigilance — and for the same reason: threats evolve. Mr. Apgar’s analysis of the life cycle of a business risk is particularly fruitful. He notes that a successful company needs to maintain a risk pipeline, constantly probing into areas where it has higher risk intelligence and opportunities for real diversification — just as technology and pharmaceutical companies need a proportion of blue-sky research to innovate into the future.

For the full review, see:

MICHAEL KAPLAN. "BOOKS; The Hazards of Fortune." Wall Street Journal (Fri., December 8, 2006): W6.

(Note: ellipses added.)