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Tuesday, February 28, 2006

Why Seniors Won't Sign Up For Medicare

The Medicare prescription drug plan will save senior citizens billions of dollars, so why are so many of them afraid to sign up for it? You wouldn’t think such a beneficial program would have such a problem to get them to enroll now. Yet that is what seems to be happening. Senior citizens are confused. The government has turned the insurance companies loose, with the result that in some states there are more than 50 plans to choose from all of them complicated and nowhere is there a simple metric that people can use to determine which plan is best for them.

Seniors are clutching their heads and asking someone, anyone (their pharmacists, their kids, AARP) for help. Some of them will end up avoiding the plans entirely and missing out on big drug savings because they can’t figure out which plan to pick.

This reaction to the drug plan was completely predictable based on behavioral economics. There is now ample evidence that when you increase choice by offering more and more options, a point is reached at which freedom is not the result. This is true of trivial consumer choices, such as which flavor of jam to buy, and of extremely consequential choices, such as which 401(k) funds to put your retirement money in.

It is possible that over time, the drug plans now offered by insurance companies will shake out, choice will be reduced, plans will get simplified, and plans like the Freedom Funds will appear and even come to dominate the market because of their attractiveness to Medicare recipients. The Medicare prescription drug plan could have been designed this way from the start. Rather than letting insurance companies compete with plans, the government could have simply extended Medicare, offering perhaps a few choices and a simple metric for comparing options. The choices could have been designed to cater to the prescription drug needs of the overwhelming majority of citizens, with safety features that prevented people from mistakes. Under these conditions, the government could have used its leverage to control drug prices, instead of relying on the insurance companies to do so. And since Medicare is more efficient than any of its private alternatives, there is no reason to think that people would have given anything up (except waste and complexity) if the drug plan had been a government plan. If the government had moved in this sensible direction, it would not now have to persuade and strong arm people into signing up. Senior citizens would enroll in droves.

Why didn’t it happen this way? I think that the Bush administration regarded complexity as its friend, since it would reduce enrollment (and costs) and make the drug plan less of a budget buster. Many conservatives are skeptical that government can do anything right, and they feared that a government run benefit would bully drug companies and kill the incentives to create new drugs. Beyond this, if you believe that individuals are the best judges of their own welfare, giving them choices does more to enhance collective welfare than any universally imposed government program could, even one that permitted a limited number of options. Competing plans should free individuals to pursue their welfare as they see fit.

We now know that this simple belief is far off the mark as a description of the real behavior of real people. While a life without any freedom of choice would not be worth living, it appears not to be true that more choice inevitably leads to more freedom and greater well being. There may be a point when choice tyrannizes people more than it liberates them. The implication of this, both for individuals and for government officials, is that sound social policy cannot consist solely of throwing a greater menu of options at the American people. For the Medicare drug plans, less would be more.

Topsy-Turvy Euro Cycling

World's greatest cycle race comes to London (tfl.gov.uk)
Tour to start in Whitehall in '07 (bbc.co.uk)

Are the French still upset about the battle at Waterloo; or that Lord Admiral Nelson crushing their fleet awhile back? Not at all, and to prove it they are sending their beloved cycling race across the channel to start in London in 2007. That does seem a bit far fetched but it is true; as reported on the London Transport Authority web site:
The Grand Depart, the start of the Tour, will come to London and Kent over three days during the weekend 6-8 July 2007 and is expected to attract more than a million visitors to London, providing a significant economic benefit. (tfl.gov.uk).
Isn’t that amazing; two countries that have long held animosities for each other coming together in a celebration of athletic excellence. According to the BBC there is a very specific reason for London hosting the start of the tour, which was explained by the:
Mayor of London Ken Livingstone revealed the two stages would be used to commemorate the victims of the 7 July 2005 bombings. Livingstone said: "Having the Grand Depart on the seventh of July will broadcast to the world that terrorism does not shake our city. “There can be no better way of celebrating the unity of humanity than this great sporting event coming to us on that day and being seen by millions, safety and happily.” (bbc.co.uk)
That’s a great emotional reason, but getting back to more professional analysis, wasn’t there something about benefits of some economic sort? Going back to the first article, where again the mayor of London was kind enough to provide a quote which was, “it will also generate a significant economic benefit to London—anticipated to be £56m—from spectators, race officials and media staying in the capital in the build up to and during the event" (tfl.gov.uk).

Something seems odd about that figure. Either the Tour de France is an amazingly successful tourist generating machine or we have some bad economic benefit cost analysis going on here. To answer this question, more information is needed about London’s tourist revenue, and on how much of an influence does the Tour de France upon a local economy. Thankfully the London Transport Authority does provide a useful figure: the annual tourist revenue. In 2005, visitors spent £9.5 billion, or £26 million—on average—each day. It doesn’t bode well for the Mayor’s claim. Since this will be a three day event the city of London is expect to have generated about £78 million (and no I’m not going to convert that into dollars just know it’s a lot more in dollar terms). Of course the economic benefit quoted won’t include every tourist to London (if it did the Mayor’s success would look more like a fantastic loss), but it will displace a tourist that would have gone to London. That is for the Mayor’s claim to be accurate the total tourist revenue for those three days would have to be £134 million, or a 72% increase in tourist revenue as a result from the Tour de France invading England. That seems to be a feat not even Lance Armstrong could pull off. Yet their might be more to this story.

While this event is hailed as a great benefit to London are their costs being ignored? Their certainly could be. Both stages will be held in the heart of London, and will force many roads to be closed for much of the day. Wouldn’t this be a cost that the citizens of London must bear? Would they be willing to pay to not have this incontinence? This is just one possible cost that might have been ignored when the economic benefit of this event was analyzed.

Yet, before they are condemned completely there is something to be said about the reason stated about the commemoration of the lives lost. After those attacks, London would logically be perceived as a more risky city in which events would be hosted. Thus events such as the beginning of the Tour de France would be a very good way to prove that London is a city that is no riskier (maybe even safer) than any other world city. This justification though doesn’t have a very well defined benefit and thus is rather suspect.

What can be concluded from this rather bizarre news story? For one, bureaucrats in Europe are not much (if at all) better in their use of economics and/or economic analysis than their brethren across the pond. Without knowing the costs (or acknowledgement that costs were considered in the benefit amount) no definitive answer can be given as to whether or not this would enhance London’s welfare, but given the evidence available this seems to be another project that bureaucrats want and taxpayers must bear. Seems the French found a way to have the English foot the bill for their race.

WSJ.com - States Seek Ways to Curb Surging Electricity Bills

WSJ.com - States Seek Ways to Curb Surging Electricity Bills

Some states are seeking ways to slow price increases in electric utility bills for consumers. The governments are seeking a methods to keep costs reduced for consumers. Natural gas costs are rising causing a higher input cost for natural gas power. There has been price freezes in many of the states that are concerned with the increase. The polices being discussed are extensions of the freezes, price caps, and a percentage increase limit on prices.

Looking at the electric market as perfect competition the price cap became a price ceiling causing inefficiency in the market. The Price freezes in the market have some influence in the large percentage increases in areas. Because companies are unable to adjust to the market they charge the highest amount possible. Because of the ceiling the price charged became increasingly smaller than the market price. Companies have been unable to keep up and now that the freezes have ended or close to being over there is the possibility of large increases in price for areas using natural gas.

Although there are quite a few competitors of electricity the companies are restricted to location of their power sources and can only sell within a certain radius. This means the producers have some monopoly power. This is a cause of inefficiency and creates a need for government involvement. The best policy in the current situation is the percentage increase limit on price. This allows the market to have flexing room to keep up with costs of natural gas while limiting monopoly power.

Policy and Science

Prof. Eubanks posted a blog with a quote from a scientist, Dr. Roy Spencer about issues with global warming. He asked how we should evaluate policy alternatives when scientists disagree. I think to start, since BCA is the analytic part of our efficiency analysis, and the scientific method is the way scientists substantiate hypotheses, it's only natural, as well as correct, to deal with policy issues that have been tested many times over. In this case, it will be relatively easy to determine which policies have potential pareto improvements. It's easier to evaluate policy on something we know happens, like second hand smoke hurting nonsmokers, than to deal with global warming.

Inevitably, there will come about a political issue that deals with a scientific claim or concern that hasn't had the time to be tested over and over. This case is tricky. Just like economists apply their BCA to policy alternatives, determining which ones are viable, the scientists should evaluate their claims and present their findings clearly to policymakers. The scientists would only present findings which had a substantial amount of research to back them up. If there weren't any filters, policymakers would be swimming in possible scientific problems in the world and the policies to fix them.

It is important to note that scientists are not policymakers. However, that doesn't mean their findings aren't important to the elected officials. Ideally, the politicians would be as well informed as possible. That education would come from scientists and economists, and public opinion.

For policy alternitives when scientists disagree, economists should look at each possibility, applying their BCA to each possibility. This would help the politician clarify what he's accomplishing/hurting when he chooses a policy. Once again, ideally, the scientists would do experiments to substantiate one of the claims instead of handing a policymaker 20 sheets of possible outcomes from global warming, and how to stop them. I think in the end, we can't know everything, so, hopefully, the elected officials make the best decision they can, and we hope our o-zone sticks around till we're gone.

Property Taxes

In the February 19th Denver Post, they have an article about the "Sky-high" property taxes igniting voter outrage. They discuss the issue of the three legged stool of which tax revenues come from, income, sales and property taxes. The Supreme Court of Texas ruled that the current property tax for the state is unconstitutional and the legislators must come up with a new policy by June 1st. Other states are having concerns about raising property taxes, such as Indiana and Idaho.

Property taxes have a key role in supporting public schools and safety, but many feel that this part of tax revenues is being stretched too far. I remember when I lived in Illinois; we had elections about 6 times a year to raise property taxes for the local schools. Ads were run on the TV saying that if you didn't vote for the schools than you were hurting the kids. Now if anyone would take a tour of the schools and see the automatic drinking fountains, sculptures, or automatic toilets, I would hope they would ask "is this where my money went?". These taxes were passed several times in the first 4 years but I believe that people became aware of the significance of their money and how it is being spent. So many times, people go off of what they hear on TV or from a friend. Until YOU research it and find the benefits you can gain from that decision vs. the costs of making that decision, you may be voting for something you don't want.

Things back in IL had to get so ridiculous before people felt the need to look into what was going on with policies that were being passed. This article shows that property taxes are very controversial and people are getting to the point where the costs of owning a home are greater than the benefits they feel they are receiving.

Monday, February 27, 2006

Economics of getting elected for Mitt Romney

A debate has been going on for a couple of days over at one of the nation's most popular conservative blogs about Mitt Romney's chances of becoming the next President. For those who don't know, Mitt Romney is the Governor of Massachussetts (R), and it is widely believed that he will run for the Republican nomination for President in 2008. He is also Mormon, which has sparked a debate in the media over whether or not he can get elected. Bloggers at RedState have decided in the past couple of days to debate whether he can get elected, or if his Mormonism would turn off voters. This particular blogger, I believe, hits the nail on the head in his diary, which seems pretty consistent with Public Choice Theory.

Public Choice Theory states that in elections, the median voter decides the outcome of elections in single issues or candidates (where one issue is voted on at a time). Other factors play into this because of log-rolling and the fact that candidates vote on many more than one issue. In virtually any U.S. election, elected candidates do vote on multiple issues, in fact, quite a few. This means that in an election of two candidates, the one whose multiple issue stances come closest to the median voter's stances gets elected. In the U.S., this happens twice - once in the primaries and once in the general election.

For Romney, this means that he has to identify with the median voter in both the Republican primary, and then the general election, which is what RedState has been discussing. This diarist understands that as long as Romney tries to identify with voters through issues, he stands a decent chance of being elected in both elections. However, if he tries to identify with them through his religion, he will fail to do so because most American's aren't Mormon. Even Christians who try to identify with other Christians face a tough time. In the 2000 election, while Bush certainly mentioned that he was a Christian, he focused on how his Faith changed his life much more than the mere fact that he was a Christian. Meanwhile, other Christians with similar conservative viewpoints, ones perhaps closer to the median conservative voter, garnered very few votes as they touted mostly the fact that they were Christian, such as Gary Bauer and Alan Keyes, though Keyes was a bit more conservative than the median. Bush's Faith advertisement identified with more people, including Christians themselves. A similar move by Romney could do him well, as many people can identify with Faith as well as the issues for which he stands.

Democrat means a better way?

Recently Virginia Governer Tim Kaine has been pushing the idea of "better governance" for the nation citing many cases where the outcome of an event has been less than mediocre. Iraq, Katrina and Oil were all subjects of attack for Kaine in his response to the State of The Union speech by President Bush. He even goes so far as to suggest that current action on these subjects is inefficient. However, what is confusing in his statements is the indiscernability regarding his position of framework from which he is working.

Suggesting that something isn't working is very easy to do. The hard part comes when trying to reallocate the resources in a pareto improvement. The thing that Governor Kaine doesn't seem to realize is that "Efficient" is not synonymous with "Popular." Lately it seems more to me that politicians of every shape and size are willing to criticize actions of the "other" party before recognizing that thier role from an economic efficiency framework is to correct market failures! Not voice opinion that has nothing to do with their role in government.

The partisan lines have more than been drawn in regard to the efficiency of the government. Republicans believe that the current allocation of resources is doing quite well, while democrats suggest otherwise. Political involvement in regard to the subject of dependence on foreign oil is not a discussion of efficiency, it is a discussion of political nature. Right now, and for some time to come, petroleum based products are a fully functional and market based choice. I just don't undestand how partisan politics has any place in the pareto-optimal allocation of resources for our nation.

Tuesday, February 07, 2006

Global Warming Science & Policy

Dr. Roy Spencer:
"I have some familiarity with these restrictions on government employees, as they were a major reason I resigned from NASA over four years ago. But back then, the shoe was on the other foot. NASA knew I was not supportive of the popular gloom-and-doom theory of global warming, and before any congressional testimony of mine on the subject, I was 'reminded' that I could speak on the science, but not on policy matters. Well, it turns out that expert witnesses on this contentious subject are almost always asked by a senator or congressman, 'What would you do about policy if you were me?' When the question came, I dutifully dodged it.

I am not sure, but disobeying my superiors would probably have been grounds for dismissal, if they wanted to press the point. In Jim Hansen's case, even if this was theoretically possible, I suspect the political fallout would be enormous, as he as done more than any scientist in the world to impress upon the public's consciousness the potential dangers of global warming.

Hansen is a smart, productive public servant that is on a crusade for what he believes in. I understand why he believes as he does -- but I still disagree with his conclusions, both scientific and policy wise.

For example, Hansen has been able to devise a scientific scenario whereby all warming in recent decades can be attributed to mankind. I believe, however, he has ignored possible natural mechanisms, for instance a change in cloudiness during the same period of time."
How should we evaluate policy alternatives when scientists disagree? In considering this question, I wonder if it is important to take note that scientists are not elected to Congress, nor to the Presidency?

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