Economics – Page 243 – artdiamondblog.com

Market Prices Send “the Right Signal to the Customer to Save Energy”

In the passage quoted below, the “commission” refers to China’s “National Development and Reform Commission.”

(p. A6) The commission estimates China’s energy efficiency is about 10% below that of developed countries because of obsolete technology. But many experts say Beijing’s policy priorities are a bigger obstacle.
Worries about social unrest and inflation led Beijing to put the brakes on pricing overhauls, at tremendous cost to state refiners PetroChina Co. and China Petroleum & Chemical Corp., known as Sinopec.
“Market prices are a very important and key issue because they send out the right signal to the customer to save energy,” said Yang Fuqiang, vice president of the Energy Foundation in Beijing.

For the full story, see:
David Winning. “Why Energy Efficiencies Prove Elusive in China.” Wall Street Journal (Tues., Nov. 6, 2007): A6.

Why We Need Some Savvy Entrepreneur to Start a Garage-Rating Business

“Henry Schneider found few competent, honest mechanics.” Source of caption and photo: online version of the NYT commentary quoted and cited below.

(p. C1) . . . , Mr. Schneider drove home to Connecticut and undertook a devilish little test.
Over the next few months, he took the Subaru to 40 garages, loosening the battery cable and draining some coolant before each visit. He even wrote himself a script and memorized it, to make sure he was telling every garage the same thing. “We bought the car recently, and we should have had it looked at before we bought it, but we didn’t,” he would say. “It hasn’t started a few times. Can you check that out?” He also asked for a thorough inspection.
Mr. Schneider was trying to answer a question that has occurred to pretty much all drivers who have ever been given the unsettling news that a car needs more repairs than they had expected: Does it really? Or is the garage just looking to make some extra money off me?
. . .
At only 27 of the 40 garages did mechanics tell Mr. Schneider that he had a disconnected battery cable, the very problem to which he had pointed them by saying his car didn’t always start. Only 11 mentioned the low coolant, a problem that can ruin a car’s engine. Ten of the garages, meanwhile, recommended costly repairs that were plainly unnecessary, like replacing the starter motor or the battery. (Tellingly, his results were in line with what the Automobile Protection Association found when it performed its experiments in Canada.)
In all, only about 20 percent of the garages deserved a passing grade. “And that’s with a pretty low bar,” Mr. Schneider told me. “I’m even allowing them to have missed a blown taillight that should have been caught.”
. . .
. . . , Mr. Schneider didn’t set out to study cars. His original goal was to examine the health care system. But he couldn’t very well give himself a heart murmur and then visit 40 cardiologists.
“It turns out it’s hard to get objective measures of people’s bodies,” as Thomas Hubbard, a Northwestern University professor who has also studied the economics of reputation, put it. “It’s a lot easier to get objective measures of people’s cars.”
. . .
Until some savvy entrepreneur starts a garage-rating business, the best solution may be the oldest one: asking for a recommendation from someone who is knowledgeable enough to distinguish between good service and bad. Just remember that a lot of people don’t know quite as much about cars — or their mechanic — as they think they do.

For the full commentary, see:
DAVID LEONHARDT. “ECONOMIC SCENE; When Trust In an Expert Is Unwise.” The New York Times (Weds., November 7, 2007): C1 & C9.

(Note: ellipses added.)

“Schneider sabotaged his dad’s old station wagon to test the honesty of mechanics.” Source of caption and photo: online version of the NYT commentary quoted and cited above.

Southwest Airline Manages Risk Through Oil Price Hedges

Source of graphic: online version of the NYT article quoted and cited below.

(p. C1) Southwest Airlines, in danger for much of this year of losing its quirky dominance in the domestic airline industry, could soon be standing, once again, head and shoulders above the competition.
Better service? Happier and more productive workers?
Not this time. The reason for Southwest’s rapidly increasing advantage over other big airlines is much simpler: it loaded up years ago on hedges against higher fuel prices. And with oil trading above $90 a barrel, most of the rest of the airline industry is facing a huge run-up in costs, and Southwest is not.
Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years.
Other major airlines passed on buying all but the shortest-term insurance against high fuel prices, allowing Southwest executives a bit of schadenfreude.

For the full story, see:
JEFF BAILEY. “An Airline Shrugs at Oil Prices.” The New York Times (Thurs., November 29, 2007): C1 & C10.

‘A Southwest Airlines worker fueled a plane. Southwest’s chief said the hedges against rising fuel costs “bought us time to retool our company.”” Source of caption and photo: online version of the NYT article quoted and cited above.

Incentives Matter: Capital Punishment Deters Murders

Source of graph: online version of the WSJ commentary quoted and cited below.

(p. A13) Recent high-profile events have reopened the debate about the value of capital punishment in a just society. This is an important discussion, because the taking of a human life is always a serious matter.
Most commentators who oppose capital punishment assert that an execution has no deterrent effect on future crimes. Recent evidence, however, suggests that the death penalty, when carried out, has an enormous deterrent effect on the number of murders. More precisely, our recent research shows that each execution carried out is correlated with about 74 fewer murders the following year.
For any society concerned about human life, that type of evidence is something that should be taken very seriously.
The study examined the relationship between the number of executions and the number of murders in the U.S. for the 26-year period from 1979 to 2004, using data from publicly available FBI sources. The chart nearby shows the number of executions and murders by year.

For the full commentary, see:
ROY D. ADLER and MICHAEL SUMMERS. “Capital Punishment Works.” The Wall Street Journal (Fri., November 2, 2007): A13.

“The No. 1 Need that Poor People Have is a Way to Make More Cash”

Moving water is easier with the 20-gallon rolling drum. Source of photo: online version of the NYT article quoted and cited below.

(p. D3) . . . , the Cooper-Hewitt National Design Museum, . . . , is honoring inventors dedicated to “the other 90 percent,” particularly the billions of people living on less than $2 a day.

Their creations, on display in the museum garden until Sept. 23, have a sort of forehead-thumping “Why didn’t someone think of that before?” quality.

. . .

Interestingly, most of the designers who spoke at the opening of the exhibition spurned the idea of charity.

“The No. 1 need that poor people have is a way to make more cash,” said Martin Fisher, an engineer who founded KickStart, an organization that says it has helped 230,000 people escape poverty. It sells human-powered pumps costing $35 to $95.

Pumping water can help a farmer grow grain in the dry season, when it fetches triple the normal price. Dr. Fisher described customers who had skipped meals for weeks to buy a pump and then earned $1,000 the next year selling vegetables.

For the full story, see:

DONALD G. McNEIL Jr. "Design That Solves Problems for the World’s Poor." The New York Times (Tues., May 29, 2007): D3.

(Note: ellipses added.)

The photo on the left shows a woman safely drinking bacteria-laden water through a filter. The photo on the right shows a "pot-in-pot cooler" that evaporates water from wet sand between the pots, in order to cool what is in the inner pot. Source of photos: online version of the NYT article quoted and cited above.

Chinese Price Ceilings on Diesel Fuel Cause Shortages

“Looking for usable coal at a cinder dump in Shanxi Province in China. Inadequate coal in the north limited power production.” Source of the caption and photo: online version of the NYT article quoted and cited below.
The article quoted below uses the word “tariff” in the sense of “price.”

(p. C4) HONG KONG — The Chinese government issued an “urgent notice” on Wednesday to the country’s power generators, coal companies and railways to address an electricity shortage that has led to rationing in more than a third of China’s provinces in recent weeks.
The rationing, mostly achieved by telling factories that their power will be shut off for a day or two each week, coincides with the annual frenzy of factory production to meet orders before shutting down for the Chinese New Year holidays, which fall in early February this year.
. . .
Power executives and government statements attributed the electricity shortfall this winter to a confluence of problems. Many of the problems appear to have their roots in the government’s imposition of a long list of price controls in recent months in an attempt to tamp down inflation, which reached 6.9 percent at the consumer level in November.
Trucks did not deliver adequate coal stockpiles to power plants before winter snows arrived in northern China, partly because of nationwide diesel shortages. Refiners had cut back on the production of diesel because price controls were forcing them to sell the diesel for slightly less than the cost of the crude oil needed to make it.
. . .
Low electricity tariffs, particularly for residential users, have been another problem.
The central government issued an official “suggestion” to provincial governments last fall that they not allow increases in electricity tariffs charged to customers, as part of national price controls.
Provincial governments have responded by freezing tariffs, and even reducing them in the case of Guangdong Province in southeastern China, the home of much of the country’s export-oriented light industry.
The low tariffs have made it uneconomical for oil-fired plants to operate, and many have stopped doing so.
“It makes absolutely no sense for anyone to run a diesel- or oil-fired plant. They’re all shut down,” said a power company executive in China who asked not to be identified because of the sensitivity of commenting on regulatory policies.
The executive added that even when ordered by the government to resume operating at a loss, many state-owned oil-fired plants had not done so, scheduling maintenance and repairs instead.

For the full story, see:
KEITH BRADSHER. “Pinched by Price Controls, Power Plants in China Scale Back.” The New York Times (Thurs., January 24, 2008): C4.
(Note: ellipses added.)

Raghuram Rajan on the Current Economic Downturn and the Subprime Mortgage Mess

“Traders in the oil futures pit of the New York Mercantile Exchange on Tuesday” (January 22. 2008). Source of caption and photo: online version of the NYT commentary quoted and cited below.

Raghuram Rajan is mentioned in the article quoted below. I first ran across him as the co-author of a book that was billed as applying Schumpeterian ideas of creative destruction to issues of economic growth and development.

Then, at the American Economic Association meetings in New Orleans in early January, I was on my way to a History of Economics Society reception, when I stumbled by chance into a modest reception in which Rajan was giving an informal speech on the subprime mortgage crisis.

It was such an interesting presentation, that I ended up totally missing the History of Economics Society reception. Rajan argued that the main problem was one of misguided incentives. Bonuses at top investment firms like Merrrill Lynch and JPMorgan Chase, are supposed to go to those whose investments produce high returns, with modest risks. The problem with the complicated securities based on the subprime mortgages was that they produced high returns, but the risks were actually also fairly high. The high-flying investors probably had some knowledge of this, but the public did not. In most years the investors could invest in the high return, but high risk, securities, and collect huge bonuses. But now the chickens have come home to roost.

Rajan suggested that the answer would be a change in the way in which the traders are given bonuses. Instead of handing them out annually, let them become vested only after observing the investment’s track record for several years. If the investment goes south before the bonus is vested, the trader does not get the bonus. This would provide an incentive and reward for those who accurately accessed the risk of their investments.

(p. A1) . . . , Wall Street hasn’t yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Moody’s Economy.com. They’re not being dishonest; they just haven’t untangled all of their complex investments.

“Part of the big uncertainty,” Raghuram G. Rajan, former chief economist at the International Monetary Fund, said, “is where the bodies are buried.”

As Mr. Rajan pointed out, this situation is more severe than the crisis involving Long Term Capital Management in the late 1990s. That was a case in which a limited set of bad investments, largely at one firm, had the potential to drive down the value of other firms’ holdings in the short term. Those firms then might have stopped lending money because they no longer had the capital to do so. But their own balance sheets were largely healthy.

This time, the firms are facing real losses, which will almost certainly curtail lending, and economic growth, this year.

For the full commentary, see:

DAVID LEONHARDT. “ECONOMIC SCENE; Worries That the Good Times Were Mostly a Mirage.” The New York Times (Weds., January 23, 2008): A1 & A23.

(Note: ellipsis added.)

The Schumpeterian book co-authored by Rajan, is:

Rajan, Raghuram G., and Luigi Zingales. Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity. New York: Crown, 2003.

Free Market Can Provide Better, Cheaper Health Care

"Eve Linney, 5, who had an infected finger, went with her family last week to a walk-in clinic at a Duane Reade drugstore on Broadway in Manhattan. Her father, John, is at the counter." Source of caption and photo: online version of the NYT article quoted and cited below.

Clayton Christensen and co-authors in Seeing What’s Next, make a plausible case for the improvement of health care through disruptive innovation. A key aspect of their vision is the increasing role of nurse-practitioners in taking on increasingly routinized tasks, a development they see as generally both effective, and cost-efficient.

The article excerpted below suggests that this trend is promising, if it does not get killed by the government, and by organized medical doctors protecting their turf from competition.

(p. A1) The concept has been called urgent care “lite”: Patients who are tired of waiting days to see a doctor for bronchitis, pinkeye or a sprained ankle can instead walk into a nearby drugstore and, at lower cost, with brief waits, see a doctor or a nurse and then fill a prescription on the spot.

With demand for primary care doctors surpassing the supply in many parts of the country, the number of these retail clinics in drugstores has exploded over the past two years, and several companies operating them are now aggressively seeking to open clinics in New York City.

. . .

More than 700 clinics are operating across the country at chain stores including Wal-Mart, CVS, Walgreens and Duane Reade.

New York State regulators are investigating the business relationships between drugstore companies and medical providers to determine whether the clinics are being used improperly to increase business or steer patients to the pharmacies in which the clinics are located.

And doctors’ groups, whose members stand to lose business from the clinics, are citing concerns about standards of care, safety and hygiene, and they have urged the federal and state governments to step in to more rigorously regulate the new businesses.

. . .

(p. A16) Patients, however, have flocked to the clinics, according to a new industry group, the Convenient Care Association.

“I think it’s great you don’t have to make an appointment. That could take weeks,” said Ezequiel Strachan, 33, who lives in Manhattan and walked into the clinic at the Duane Reade store at 50th Street and Broadway on a recent morning for treatment of a sore throat. “People here value their time a lot.”

The average waiting time for an exam at such clinics nationwide is 15 to 25 minutes, according to the Convenient Care Association.

The association estimated that 70 percent of clinic patients have health insurance and are using the clinics because of convenience. For them, costs may not be much different from those at doctors’ offices, because the same insurance co-payments apply. But uninsured patients could reap substantial savings.

In New York City, one in five residents lacks a regular doctor and one in six is uninsured, according to a recent survey by the city’s Department of Health and Mental Hygiene, and overcrowded emergency rooms are often their first resort for routine care.

. . .

MinuteClinic officials insisted that there was nothing improper in the relationships between providers and the drugstores and that medical care is not being compromised.

“We are transparent with regulators,” said Michael C. Howe, the chief executive of MinuteClinic, which is based in Minneapolis and operates more than 200 clinics nationwide. using the motto “You’re Sick, We’re Quick.”

Mr. Howe said the concerns of doctors’ groups and other critics “are being raised by voices of people who have not really studied the model.”

Preliminary data from a two-year study of claims from MinuteClinic by a Minnesota health maintenance organization, HealthPartners, which was released to The Minneapolis Star Tribune in July, showed that each visit to the retail clinic cost an average of $18 less than a visit to other primary-care clinics, but that pharmacy costs were $4 higher per patient.

Duane Reade, New York City’s largest drugstore chain, which opened four clinics in Manhattan in May, plans to open as many as 60 more across the city in the next 18 months. A key difference at the Duane Reade clinics is that they use doctors, while nurse practitioners and physician assistants typically provide the care at most retail clinics.

For the full story, see:

SARAH KERSHAW. "Tired of Waiting for a Doctor? Try the Drugstore." The New York Times (Thurs., . August 23, 2007): A1 & A16.

(Note: the title of the online version is "Drugstore Clinics Spread, and Scrutiny Grows." Ellipses added.)

"Dr. Maggie Bertisch saw Eve while her mother, Claire, waited." Source of caption and photo: online version of the NYT article quoted and cited above.

Perverse Incentives Undemine Air-Travel Efficiency

Source of graph: online version of the WSJ article quoted and cited below.

Why not solve the problem discussed below by privatizing airports, which would then have a profit-maximizing incentive to reduce congestion by charging more for landing rights? And if the prices were bid high enough, that, in turn would provide an incentive to build more airports.

(p. A1) The nation’s air-travel system approached gridlock early this summer, with more than 30% of June flights late, by an average of 62 minutes. The mess revved up a perennial debate about whether billions of dollars should be spent to modernize the air-traffic control system. But one cause of airport crowding and flight delays is receiving scant attention. Airlines increasingly bring passengers into jammed airports on smaller airplanes. That means using more flights — and increasing the congestion at airports and in the skies around them.

At La Guardia, half of all flights now involve smaller planes: regional jets and turboprops. It’s the same at Chicago’s O’Hare, which is spending billions to expand runways. At New Jersey’s Newark Liberty and New York’s John F. Kennedy, 40% of traffic involves smaller planes, according to Eclat Consulting in Reston, Va. Aircraft numbers tell the tale: U.S. airlines grounded a net 385 large planes from 2000 through 2006 — but they added 1,029 regional jets — says data firm Airline Monitor.

As air-travel woes have spread, some aviation officials and regulators, including the head of the Federal Aviation Administration, have begun saying delays could be eased if airlines would consolidate some of their numerous flights on larger planes.

Just two problems with that. One is that airlines like having more flights with smaller jets. The other is that passengers like it, too.

. . .

Former American Airlines boss Robert Crandall says Congress should let the FAA go back to controlling slots, matching scheduling to capacity. Airport overcrowding is "fixable, but it’s not fixable without major policy change," the former AMR Corp. CEO said at a recent conference.

Another proposal: Change the structure of landing fees. Airports now set them by weight. A small jet pays a smaller landing fee than a large plane, even though its use of the runway is the same. Why not charge a flat fee per landing, suggest some economists — or even charge the small jets more, to encourage airlines to shift to fewer flights on larger jets?

Yet another idea is to tie landing fees to the level of demand through the day, so they’d cost more at peak hours. This would encourage airlines to spread out flights and use bigger planes, says Dorothy Robyn, a consultant at Brattle Group and former aviation adviser in the Clinton administration. She says the current system "guarantees overuse of the air-traffic-control system because airlines aren’t charged the true cost."

For the full story, see:

SCOTT MCCARTNEY. "FREQUENT FLYING; Small Jets, More Trips Worsen Airport Delays FAA Likes Bigger Craft But Passengers, Airlines Prefer Busy Schedules." The Wall Street Journal (Mon., August 13, 2007): A1 & A13.

(Note: ellipsis added.)

Subsidized Bread Leads to Long Lines, and Corruption

"A vendor sold bread on Wednesday in a poor section of Cairo, where lines are long and customers pushy." Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A4) Much of what ails Egypt seems to converge in the story of subsidized bread. It speaks to a state that is in many ways stuck in the past, struggling to pull itself into the future, unable, or unwilling, to conquer corruption or even to persuade people to care about one another.

How do you take a broken system that somehow helps feed 80 million people and fix it without causing social disorder? That is a challenge for Egypt at large, and for this little bakery where Mr. Muhammad ekes out a living, with a cigarette hanging from his lips and an angry crowd demanding his bread.

. . .

“The most corrupt sector in the country is the provisions sector,” said a government inspector who asked not to be identified for fear of punishment. His job is to go to bakeries to ensure they are actually using the cheap government flour to produce cheap bread that is sold at the proper price.

The inspector explained why the system was so open to abuse. The government sells bakeries 25-pound bags of flour for 8 Egyptian pounds, the equivalent of about $1.50. The bakeries are then supposed to sell the flatbread at the subsidized rate, which gives them a profit of about $10 from each sack. Or the baker can simply sell the flour on the black market for $15 a bag.

If the inspector, who said he was paid $42 a month, certifies that after three months the baker has faithfully used the flour to bake bread, the baker gets a refund of about $1 a bag. A baker who goes through 40 sacks a day over the three-month period gets back 18,000 pounds (around $3,300) — a nice sum, this inspector said, which could easily be shared with an underpaid inspector.

. . .

Over the course of an hour one recent day, 14-year-old Mahmoud Ahmed managed four trips to the counter. His job, he said, was to ensure a steady stream of bread for a nearby food vendor, who then resold it in sandwiches. It appeared that the baker let him push his way to the front to get bread before others. Was there a deal going? Mahmoud would not say.

Down the road, five blocks away, a 12-year-old, Muhammad Abdul Nabi, was selling bread, the same kind of bread, from a makeshift table for more than double the price at the bakery. But there were no lines.

For the full story, see:

MICHAEL SLACKMAN. "CAIRO MEMO; Egypt’s Problem and Its Challenge: Bread Corrupts." The New York Times (Thurs., January 17, 2008): A4.

(Note: ellipses added.)

"Fresh baked for less than a penny, and that’s just the start of the complications." Source of caption and photo: online version of the NYT article quoted and cited above.

“More Effective Economics Training Would Yield Enormous Dividends”

Source of the cartoon: online version of the NYT commentary cited below.

I agree with Franks, in the commentary excerpted below, that there is much room for improvement in the teaching of principles of economics. But I doubt that economics is alone in the dismal performance of students, six months after having completed the course.

My own views on improving the principles course, by including more content related to innovation and entrepreneurship, can be found in my article referenced at the end of this entry.

WHEN I began teaching economics in the 1970s, I noticed that people were generally disappointed when they learned what I did for a living. When I began asking why, many said something like this: “I took Econ 101 years ago, and there were all those horrible equations and graphs.”

Their unpleasant memories were apparently justified. Studies have shown that when students are tested about their knowledge of basic economic principles six months after completing an introductory economics course, they score no better, on average, than those who never took the course.

In other sectors of the economy, such dismal performance might provoke malpractice suits. But in the university system, students and their parents put up with this situation year after year.

. . .

Given the importance of the economic choices we confront, both as individuals and as a society, more effective economics training would yield enormous dividends. And in light of the low bar established by traditional courses, there seems little risk in trying something different.

For the full commentary, see:

ROBERT H. FRANK. "Economic View; The Dismal Science, Dismally Taught." The New York Times, SundayBusiness Section (Sun., August 12, 2007): 4.

(Note: ellipsis added.)

For my article on how to improve the principles course, see:

"The Neglect of Creative Destruction in Micro-principles Texts." History of Economic Ideas 15, no. 1 (2007): 197-210.