Pursuit of Truthiness

my gut tells me I know economics

Archive for October 2012

How Useful Is Economics?

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Given that I am studying and teaching economics for a living, it is probably worthwhile to try to sum up why it is useful (besides that it gives me a job).

How To Run A Government

Economics has a lot to say about which government policies will make people better off or worse off. This is a big reason I got interested in economics, but its not very practical for the vast majority of people, who have essentially no influence over government policy (and in fact it is economists who are famous for arguing, perhaps incorrectly, that votes don’t matter).

Understand How The World Works

It’s always nice to just understand more, but in particular I think some insights are likely to make you happier. For instance, you may worry about not being a good person because you are selfish, but economics argues that in market settings being selfish often helps others too. Several insights of economics make you appreciate other people more: knowing that their specialization and labor is what makes the world, and you, so rich- people of different countries, religions, et cetera cooperate to make everything from your  computer to your pencil. Whenever I get annoyed at the crowd in a coffeeshop or on the subway, economics reminds me that if it weren’t for the other customers, there would be no coffeeshop or subway. Learning about subjective value helps you not to look down on others so much for “bad taste” in music, books, et c.

Practical Skills

Econometrics (basically our word for data analysis) is the main practical skill of economics. It is a great tool for figuring out how the world works. I use it for academic research, but many private sector realize the value of econometrics (though they may call it analytics or data science or forecasting or something else). Another skill that only a few economists really master is mechanism design, which has been used to sell ads and spectrum and allocate kidneys, students, and medical residents.

Save Money

A lot of people get the idea that economics is about “how to make money”, but anyone seeing my paychecks would realize I’m not the one to teach that. We do have some things to say about how not to throw money away though. By learning about the Efficient Markets Hypothesis and investing in broad index funds, you will avoid losing money to fund managers fees and brokerage trading costs, and avoid the possible catastrophic failure of an undiversified portfolio. Sometimes you can use efficient markets to save time as well. If I want to know whether the recent jobs numbers were better than expected, I could read a lot about it, or just look at how the stock market reacted in the 15 minutes afterward. If I want to know who is going to win the US presidential election, I could follow the news for hours and hours and make a guess, or just look on Intrade for one minute.

Act Rationally

Economics teaches a model of how “rational people” act. This helps you notice when you are departing from the model of rationality and think about doing things differently. For instance, write off sunk costs and make decisions at the margin.

All in all, I’m not sure if economics is the most useful subject to learn (what are other contenders?), but it does seem to have a fair amount of practical utility.

Written by James Bailey

October 26, 2012 at 8:24 pm

The Optimal Amount of Hipsterdom is Increasing

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For a radio station to be profitable, they have to play things there is a large audience for. Since most radio stations only have a few hundred thousand people in range, they need to play popular music in order to get a few thousand listeners.

In the age of the internet, its easy to make your music accessible worldwide, so you can still reach a huge audience even if only 1% of the population likes your music. This much-discussed phenomenon of the “long tail“, and it is one reason that it is easier to listen to obscure bands than it used to be.

Add to this the way the concerts have always worked. Going to see a popular band is expensive, going to see an obscure band is cheap. I can go see Rush for $200, or the Mountain Goats for $20.

The demand for hipster music is downward sloping: when technology makes listening to obscure bands cheaper and easier, more people will do it. And technology has in fact made this cheaper and easier. Thus, the optimal amount of hipsterdom has increased.

Written by James Bailey

October 12, 2012 at 11:42 am

Libertarianism in X words

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x=4 Socially Liberal, Economically Conservative

x=3 Screw the Government!

x=2 Anything Voluntary

x=1 Freeeedom!!!!

Written by James Bailey

October 4, 2012 at 3:14 pm

Research Findings

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Given that my main job for the last ~6 months has been to do economic research, I thought it might be worth summarizing what I have found so far.

My first paper, “The Effect of Health Insurance Benefit Mandates on Premiums“, finds that recent increases in health insurance premiums can be largely attributed to states requiring health insurance plans to cover more and more things. Previous research had found mixed evidence for this. Strangely, most previous papers examined the premiums on individual health insurance, even though the vast majority of Americans have group health insurance (usually through their employer).

These findings take on new importance due to the individual mandate. Previously, states passed benefit mandates not because they were necessary, but in order to satisfy certain interest groups; before 1965 most states had no benefit mandates. But once everyone is required to have “health insurance”, we need to decide what plans must include in order to count as “health insurance”. My paper suggests that it might be a good idea to keep these “Essential Health Benefits” relatively narrow.

My second paper, “Who Pays the High Health Costs of Older Workers? Evidence from Prostate Cancer Screening Mandates“, focuses in on one specific mandate that mostly benefits men over 50. I find that the cost of this mandate is passed on to men over 50 in the form of lower wages. Some men also lose access to employer insurance altogether.

Some of the general lessons from my work so far:

1) There are no free lunches: getting higher benefits means incurring higher costs

2) Laws passed with good intentions can backfire, hurting the very people they are intended to help

3) Employer-based health insurance messes up labor markets

My future work will examine point 3 in more depth. I will examine the good (or perhaps bad) things that happen when people get access to affordable health insurance that isn’t tied to their employment.

Written by James Bailey

October 4, 2012 at 12:36 pm