Category: Economics

Perverse Incentives Lead to Useless Heart Surgeries


The old idea was this:  Coronary disease is akin to sludge building up in a pipe.  Plaque accumulates slowly, over decades, and once it is there it is pretty much there for good.  Every year, the narrowing grows more severe until one day no blood can get through and the patient has a heart attack.  Bypass surgery or angioplasty — opening arteries by pushing plaque back with a tiny balloon and then, often, holding it there with a stent — can open up a narrowed artery before it closes completely.  And so, it was assumed, heart attacks could be averted.

But, researchers say, most heart attacks do not occur because an artery is narrowed by plaque.  Instead, they say, heart attacks occur when an area of plaque bursts, a clot forms over the area and blood flow is abruptly blocked.  In 75 to 80 percent of cases, the plaque that erupts was not obstructing an artery and would not be stented or bypassed.  The dangerous plaque is soft and fragile, produces no symptoms and would not be seen as an obstruction to blood flow.

That is why, heart experts say, so many heart attacks are unexpected — a person will be out jogging one day, feeling fine, and struck with a heart attack the next.  If a narrowed artery were the culprit, exercise would have caused severe chest pain.

Heart patients may have hundreds of vulnerable plaques, so preventing heart attacks means going after all their arteries, not one narrowed section, by attacking the disease itself.  That is what happens when patients take drugs to aggressively lower their cholesterol levels, to get their blood pressure under control and to prevent blood clots.

Yet, researchers say, old notions persist.

”There is just this embedded belief that fixing an artery is a good thing,” said Dr. Eric Topol, an interventional cardiologist at the Cleveland Clinic in Ohio.

In particular, Dr. Topol said, more and more people with no symptoms are now getting stents.  According to an analysis by Merrill Lynch, based on sales figures, there will be more than a million stent operations this year, nearly double the number performed five years ago.

Some doctors still adhere to the old model.  Others say that they know it no longer holds but that they sometimes end up opening blocked arteries anyway, even when patients have no symptoms.

Dr. David Hillis, an interventional cardiologist at the University of Texas Southwestern Medical Center in Dallas, explained:  ”If you’re an invasive cardiologist and Joe Smith, the local internist, is sending you patients, and if you tell them they don’t need the procedure, pretty soon Joe Smith doesn’t send patients anymore.  Sometimes you can talk yourself into doing it even though in your heart of hearts you don’t think it’s right.”

Dr. Topol said a patient typically goes to a cardiologist with a vague complaint like indigestion or shortness of breath, or because a scan of the heart indicated calcium deposits — a sign of atherosclerosis, or buildup of plaque.  The cardiologist puts the patient in the cardiac catheterization room, examining the arteries with an angiogram.  Since most people who are middle-aged and older have atherosclerosis, the angiogram will more often than not show a narrowing.  Inevitably, the patient gets a stent.

”It’s this train where you can’t get off at any station along the way,” Dr. Topol said.  ”Once you get on the train, you’re getting the stents.  Once you get in the cath lab, it’s pretty likely that something will get done.”

 

For the full story, see: 

GINA KOLATA.   "New Heart Studies Question the Value of Opening Arteries."  The New York Times   (Sun., March 21, 2004). 


French Slow Innovation By Violating Apple’s Intellectual Property Rights

THE French take pride in their revolutions, which are usually hard to miss — mass uprisings, heads rolling and such.  So, with the scent of tear gas in the air this past month from the giant protests against a youth labor law, it was easy to overlook the French National Assembly’s approval of a bill that would require Apple Computer to crack open the software codes of its iTunes music store and let the files work on players other than the iPod.  While seemingly minor, the move is actually rather startling and has left many experts wondering (as ever):  What has possessed the French?

. . .  

If the French gave away the codes, Apple would lose much of its rationale for improving iTunes.  Right now, after the royalty payment to the label (around 65 cents) and the processing fee to the credit card company (as high as 23 cents), not to mention other costs, Apple’s margin on 99-cent music is thin.  Yet it continues to add free features to iTunes because it helps sell iPods.

Opening the codes threatens that link.  Apple would need to pay for iTunes features with profits from iTunes itself.  Prices would rise.  Innovation would slow.

Even worse, sharing the codes could make it easier for hackers to unravel Apple’s FairPlay software.  Without strong copy protection, labels would not supply as much new music.

 

For the full commentary, see:

Austan Goolsbee.  "ECONOMIC SCENE; In iTunes War, France Has Met the Enemy. Perhaps It Is France."  The New York Times  (Thurs., April 27, 2006):  C3.

Over-regulating Lenders is a Recipe for Stagnation

MICROFINANCE is based on a simple idea: banks, finance companies, and charities lend small sums — often no more than a few hundred dollars — to poor third world entrepreneurs. The loan recipients open businesses like tailoring shops or small grocery stores, thereby bolstering local economies.

But does microfinance, in fact, help the poor?

To help answer this question, I visited Hyderabad, India, in June.  . . .

. . .

My visit suggested that microfinance is working, but it is often more corporate, more commercial and under more attack than I had expected.

. . .

Near Hyderabad, in the state of Andhra Pradesh, political opposition to microfinance has begun. State officials have fed negative stories to the media. They charge that microfinance debts have driven some people to ruin or perhaps suicide. They call Spandana’s programs “coercive” and “barbaric.” They question whether the “community pressure” behind repayment is sometimes too severe.

The motives behind this campaign are twofold. The state is not a neutral umpire but rather has its own “self-help group” banking model, which lends at the micro level. Spandana and some of the other private microfinance groups are unwelcome competition. More generally, opposition to money lending has been frequent in the history of both India and the West. Not every loan will have a positive outcome, and it is easy to focus on the victims. Not all Indians have accepted the future of their country as an open commercial society with winners and losers.

. . .

The Indian political authorities must decide whether they will allow new businesses to spread, even when commercialization leads to some disappointments or competes with a state interest. The stipulation that no one can be harmed by progress is a sure recipe for stagnation.

 

For the full commentary, see: 

Tyler Cowen.  "ECONOMIC SCENE; Microloans May Work, but There Is Dispute in India Over Who Will Make Them."  The New York Times  (Thurs., August 10, 2006):  C4. 

 

Doctors Face Perverse Incentives and Constraints

Kevin MD’s blog provides an illuminating discussion of how hard we make it for good people to practice medicine.  The case discussed involves an MD who is successfully sued for not performing a heart cath on a patient, even though two previous treadmill tests did not reveal any problems.  (The heart cath procedure itself has a nontrivial risk of death and other serious complications.)   

The discussion in the Kevin MD illustrates the difficult incentives and constraints faced by the conscientious physician. In terms of a patient’s health, a cost/benefit analysis may imply that a medical test should not be performed, but in terms of an MD’s income, and legal liability, a cost/benefit analysis may imply that a medical test should be performed. 

Something is wrong with our reward structure and legal institutions, when MD’s who make the right medical call for the patient, are "rewarded" by earning less, and by increasing their chances of being sued.

 

Read the full discussion at:

http://www.kevinmd.com/blog/2006/06/liable-for-not-doing-heart-cath-on-49.html

 

For convenience, here is the opening entry in the discussion:

Continue reading “Doctors Face Perverse Incentives and Constraints”

More and Better Jobs Gained by ‘Insourcing’ than are Lost to ‘Outsourcing’

  N. Gregory Mankiw, former chair of W.’s Council of Economic Advisors. The media, most Democrats, and some Republicans, skewered Mankiw in 2004 for simply and clearly stating the truth about outsourcing. Source of photo:  online version of the NYT article cited below.

 

In December 2005, the McKinsey Global Institute predicted that 1.4 million jobs would be outsourced overseas from 2004 to 2008, or about 280,000 a year.  That’s a drop in the bucket.  In July, there were 135.35 million payroll jobs in the United States, according to the Bureau of Labor Statistics.  Thanks to the forces of creative destruction, more jobs are created and lost in a few months than will be outsourced in a year.  Diana Farrell, director of the McKinsey Global Institute, notes that in May 2005 alone, 4.7 million Americans started new jobs with new employers.

What’s more, the threat of outsourcing varies widely by industry.  Lots of services require face-to-face interaction for people to do their jobs.  That is particularly true for the biggest sectors, retail and health care.  As a result, according to a McKinsey study, only 3 percent of retail jobs and 8 percent of health care jobs can possibly be outsourced.  By contrast, McKinsey found that nearly half the jobs in packaged software and information technology services could be done offshore.  But those sectors account for only about 2 percent of total employment.  The upshot:  “Only 11 percent of all U.S. services job could theoretically be performed offshore,” Ms. Farrell says.

Economists have also found that jobs or sectors susceptible to outsourcing aren’t disappearing.  Quite the opposite.  Last fall, J. Bradford Jensen, deputy director at the International Institute of Economics, based in Washington, and Lori G. Kletzer, professor of economics at the University of California, Santa Cruz, documented the degree to which various service sectors and jobs were “tradable,” ranging from computer and mathematical occupations (100 percent) to food preparation (4 percent).

Not surprisingly, Mr. Jensen and Professor Kletzer found that in recent years there has been greater job insecurity in the tradable job categories.  But they also concluded that jobs in those industries paid higher wages, and that tradable industries had grown faster than nontradable industries.  “That could mean that this is our competitive advantage,” Mr. Jensen says.  “In other words, what the U.S. does well is the highly skilled, higher-paid jobs within those tradable services.”

There is evidence that within sectors, lower-paying jobs are being outsourced while the more skilled ones are being kept here.  In a 2005 study, Catherine L. Mann, senior fellow at the Institute for International Economics, found that from 1999 to 2003, when outsourcing was picking up pace, the United States lost 125,000 programming jobs but added 425,000 jobs for higher-skilled software engineers and analysts.

 

For the full commentary, see:

DANIEL GROSS. "Economic View; Why ‘Outsourcing’ May Lose Its Power as a Scare Word." The New York Times, Section 3 (Sun., August 13, 2006):  5. 

25% Increase in Oil by 2015

OilPriceGraphic.gif  Source of graphic:  online version of the WSJ article cited below.

 

Despite fears of "running out" of oil, Cambridge Energy Research Associates’ new analysis of oil-industry activity points to a considerable growth in the capacity to produce oil in the years ahead.  Based upon our field-by-field examination of current activity and of 360 new projects that are either underway or very likely, we see capacity growing from its current 89 mbd to 110 mbd by 2015, a 25% increase.  A substantial part of this growth reflects the advance of technology, i.e., the rapid growth in "non-traditional" hydrocarbons, such as from very deep offshore waters, Canadian oil sands, and liquids made from natural gas.  (We are not counting in this increase the additional supplement that will come from ethanol and other fuels made from plants.)

There are important qualifications, however.  First, this is physical capacity to produce, not actual flows, which, as we have seen over the last year, can be disrupted by everything from natural disasters to government decision, to conflict and geopolitical discord.  Second, while prices are going up rapidly, so are costs;  and shortages of equipment and people can slow things down.  Third, greater scale and technical complexity can generate delays.  Still, a 25% increase in physical capacity by 2015 is a reasonable expectation, based upon today’s evidence, and that would go a long way to meeting the growing demand from China, India and other motorizing countries.

Admittedly, it may be hard to conceive of this kind of increase when oil prices are climbing the wall of worry, when each new disruption reverberates around the world, when Iranian politicians threaten $100 or $250 oil in the event of sanctions, and when so many geopolitical trends seem so adverse.  All this underlines the fact that while the challenges below ground are extensive, the looming uncertainties — and risks — remain above ground. 

 

For the full commentary, see:

Daniel Yergin.  "Crisis in the Pipeline."  The Wall Street Journal  (Weds., August 9, 2006):  A10.   

U.S. Economy Can Prosper, Even if G.M. Does Not

The fragility of success for large corporations is documented in the early chapters of the Foster and Kaplan book that is mentioned below. 

(p. 1)  THE announcement last week that General Motors would cut 25,000 jobs and close several factories is yet another blow to the Goliath of automakers and its workers.  But only if you work for G.M. is the company’s decline a worry.  For consumers, the decline can be seen as a symbol of healthy competition.

G.M.’s sales, market share and work force have all been falling for a generation, even as the quality of its vehicles has gone up.  Why?  Because its competitors’ products have improved even more.  Today’s auto buyers enjoy an unprecedented array of well-built, well-equipped, reasonably priced vehicles offered by many manufacturers.

. . .

(p. 3)  . . .  even if a new generation is drawn to G.M.’s products, recovery of its former position seems unlikely.  Other brands have improved, too:  J.D. Power estimates that for the auto industry overall, manufacturing defects declined 32 percent since 1998 alone.

There is also great pressure to hold prices down, which is bad for companies like G.M. with vast amounts of overhead.  According to the consumer price index, new cars and light trucks today cost less in real-dollar terms than in 1982, despite having air bags, antilock brakes, CD players, power windows and other features either unavailable or considered luxury options back then.

This means that during the very period that General Motors has declined, American car buyers have become better off.  Competition can have the effect of ”creative destruction,” in the economist Joseph Schumpeter’s famous term, harming workers in some places, while everyone else comes out ahead.

. . .

As it continues to shrink, G.M. may serve as an exemplar of what the world economy will do in many arenas — knock off established leaders, while improving quality and cutting prices.  In their 2001 book ”Creative Destruction,” Richard Foster and Sarah Kaplan, analysts at McKinsey & Company, documented how even powerhouse companies that are ”built to last” usually succumb to competition.

Competition can be a utilitarian force that brings the greatest good to the greatest number.  Someday when the remaining divisions of General Motors are bought by some start-up company that doesn’t even exist yet, try to keep that in mind.

 

For the full commentary, see: 

GREGG EASTERBROOK.  "What’s Bad for G.M. Is . . ."  The New York Times, Section 4  (Sunday, June 12, 2005):  1 & 3.

(Note:  the ellipsis in the title is in the original title; the ellipses in the article, were added.)

 

The full reference to the Foster and Kaplan book, is:

Foster, Richard and Sarah Kaplan.  Creative Destruction:  Why Companies that Are Built to Last Underperform the Market—and How to Successfully Transform Them.  New York:  Currency Books, 2001.

 

Static Assumptions Undermine Economic Policy Analysis


Over 50 years ago, Schumpeter emphasized that static models of capitalism miss what is most important in capitalism.  Yet static analysis still dominates most policy discussions.  But there is hope:


(p. A14) A bit of background:  Most official analysis of tax policy is based on what economists call "static assumptions."  While many microeconomic behavioral responses are included, the future path of macroeconomic variables such as the capital stock and GNP are assumed to stay the same, regardless of tax policy.  This approach is not realistic, but it has been the tradition in tax analysis mainly because it is simple and convenient.

In his 2007 budget, President Bush directed the Treasury staff to develop a dynamic analysis of tax policy, and we are now reaping the fruits of those efforts.  The staff uses a model that does not consider the short-run effects of tax policy on the business cycle, but instead focuses on its longer run effects on economic growth through the incentives to work, save and invest, and to allocate capital among competing uses.

 

For the full story, see:

ROBERT CARROLL and N. GREGORY MANKIW.  "Dynamic Analysis."  The Wall Street Journal  (Weds., July 26, 2006):  A14.


Audacity and Scale of Hurricane Katrina Waste and Fraud Are Amazing

Photo scanned in from my paper copy of the NYT issue cited below.  Compare the version above to the cropped version that appeared in to online version below–whether deliverate or innocent, the effect of the cropping is to reduce the visual magnitude of the scene (and hence reduce the evidence of the magnitude of the waste).

 

(p. A1)  WASHINGTON, June 26 — Among the many superlatives associated with Hurricane Katrina can now be added this one:  it produced one of the most extraordinary displays of scams, schemes and stupefying bureaucratic bungles in modern history, costing taxpayers up to $2 billion.

A hotel owner in Sugar Land, Tex., has been charged with submitting $232,000 in bills for phantom victims.  And roughly 1,100 prison inmates across the Gulf Coast apparently collected more than $10 million in rental and disaster-relief assistance.

There are the bureaucrats who ordered nearly half a billion dollars worth of mobile homes that are still empty, and renovations for a shelter at a former Alabama Army base that cost about $416,000 per evacuee.

And there is the Illinois woman who tried to collect federal benefits by claiming she watched her two daughters drown in the rising New Orleans waters.  In fact, prosecutors say, the children did not exist.

The tally of ignoble acts linked to Hurricane Katrina, pulled together by The New York Times from government audits, criminal prosecutions and Congressional investigations, could rise because the inquiries are under way.  Even in Washington, a city accustomed to government bloat, the numbers are generating amazement.

"The blatant fraud, the audacity of the schemes, the scale of the waste — it is just breathtaking," said Senator Susan Collins, Republican of Maine, and chairwoman of the Homeland Security and Governmental Affairs Committee.

 

For the full story, see:

ERIC LIPTON.  "’Breathtaking’ Waste and Fraud in Hurricane Aid."  The New York Times  (Tues., June 27, 2006):  A1 & A13. 

 

  Cropped version of the photo run in the online version of the NYT article cited above.

Source of the graphic:  the online version of the NYT article cited above.

Five More Hours Per Week of Leisure Time in 2003 Than in 1965

The easiest way to measure leisure is to take survey data on how many hours a week people spend at work and subtract.  Since 1965, the number of hours the average American works for pay has not changed much.  By this simple measure, then, leisure has also stayed the same.

But are we really working as much as ever?

”All time away from work is not equal,” Erik Hurst, an economist at the Graduate School of Business at the University of Chicago, said in an interview.  Some time off is actually just more work.

To put it in economic terms, we spend some time off the job in consumption (watching TV, hanging out with our friends, reading for pleasure) and some in production (cooking dinner, cleaning the house, doing household repairs).  Some activities, like sleeping and eating, fall somewhere in between, while others, including child care and gardening, combine pleasure and production.

The difference is not just that we enjoy some activities and dislike others.  It is that we could, in theory, pay someone else to do the production for us.  A cook or a restaurant can make dinner, but nobody else can play golf or watch TV for you.

. . .

Americans are not, in fact, working as much as they used to.  They are just getting paid for more of the work they do.  Using several different definitions of leisure, Professor Hurst and Mark A. Aguiar, an economist at the Federal Reserve Bank of Boston, analyzed time-use surveys done from 1965 to 2003.  Whether they defined leisure narrowly or broadly, they got a consistent result.

”Leisure time — measured in a variety of ways — has increased significantly between 1965 and 2003,” they write in ”Measuring Trends in Leisure:  The Allocation of Time Over Five Decades,” a Boston Fed working paper.  . . .  Using the most restrictive definition, which includes only ”entertainment/social activities/relaxing” and ”active recreation,” the economists found that leisure had increased 5.1 hours a week, holding demographics like age constant.  (Without that control, leisure has grown 4.6 hours.)  Assuming a 40-hour work week, that is like adding six weeks of vacation — an enormous increase.

”I was surprised by the magnitude,” Mr. Aguiar said in an interview, though the general trend agrees with earlier research.

 

For the full commentary, see: 

VIRGINIA POSTREL.  "ECONOMIC SCENE; The Work You Do When You’re Not at Work."  The New York Times  (Thursday, February 23, 2006):  C3.

 

A PDF of the NBER draft of the Aguiar and Hurst paper can be found at: 

http://faculty.chicagogsb.edu/erik.hurst/research/aguiar_hurst_leisure_nber_submit_final.pdf

Road Opens a Year Early: Contract Included Incentives


OmahaExpresswaySmall.jpg With monetary incentives to finish early, Hawkins Construction Company finishes westbound lanes a year ahead of schedule.   Source of photo:
http://www.omaha.com/index.php?u_pg=1636&u_sid=2214442&u_rnd=7720251

 

The long delays, and lack of visible progress in expanding 132nd, near our house, became a running joke—but the wasted travel time was not funny.  Similar road construction delays were occuring all over town, to the point where it looked as though the issue might threaten the mayor’s re-election.  So he got serious, and in new road contracts, included substantial monetary incentives for finishing the job ontime, and even more incentives to finish it early.  The expressway pictured above is one of those built under the new contract.  Maybe incentives really do matter?

 

(p. 1A)  An electronic sign above West Dodge lured drivers with a simple message:  "Expressway Open."

The real draw was the quicker commute drivers encountered Thursday evening during the first rush hour after the opening of the West Dodge Road Expressway.

After two years of construction, the expressway’s westbound bridge opened to traffic at 10:35 a.m. Thursday, more than a year ahead of schedule.

A steady flow of traffic streamed across the bridge Thursday evening.

"It was wonderful," said commuter Jean Crouchley.

 

For the full article, see:

MICHAEL O’CONNOR AND RICK RUGGLES.  "A Concrete Example of Progress; Motorists Expect Daily Drives to be Quicker with New Route."  Omaha World-Herald (Friday, July 28, 2006):  1-2.

(Note: The online version of the article had the title: "Making quick work of commute on Expressway.")