Category: Economics

The Centrally Planned Economy: “Why doesn’t Wuhan have heating?”

WuhanHeatless.jpg
Li Qiao tries to stay warm in unheated apartment in Wuhan. Source of image: online version of WSJ article cited below.

(p. B1) WUHAN, China — As a winter wind howled through this central Chinese city, university lecturer Li Qiao settled down in his two-bedroom apartment for what should have been a cozy evening of reading. Around his apartment were signs of China’s new prosperity: a color television, refrigerator, washing machine and air conditioner. The only thing missing: heating.
Even though winter temperatures in Wuhan dip into the 30s with occasional snow, virtually none of the city’s homes are heated. “The cold is cutting into my bones,” lamented Mr. Li, who was bundled up in a down coat and a quilt, with an electric heater blowing warm air toward him. “Why doesn’t Wuhan have heating?”
Mr. Li isn’t the only one asking. Heating systems are one of the last areas that remain under China’s former centrally planned economy, with government regulators still setting the thermostat for homes, classrooms and offices across the country. Under the policy, which dates back to Mao Zedong in the 1950s, the government provides heat in the northern half of China, and, to save money, it provides no heat in the southern half. As a result, northerners often wilt in steaming apartments, while those in southern provinces shiver through the winter.
With no heat, even residents of modern cities like Shanghai spend much of the winter trying to get warm.
. . .
(p. B2) Mr. Li, the university teacher, and his wife ward off the cold air that seeps into their apartment at the university with an electrical heater, a hot-air fan and a wall unit air-conditioner that also blows out heat. At night, they wriggle into long underwear before piling under two sets of thick quilts. Although he has a three-hour lunch break, Mr. Li seldom goes back to his apartment, opting instead to hole up in his heated office.
His students aren’t so lucky. Classrooms aren’t heated, so they listen to his lectures swathed in down jackets, caps and gloves. Some students even carry hot-water bottles to keep their hands warm and cushions to place on the icy chairs.

For the full story, see:
Cui Rong. “China’s Winter of Discontent; Mao-Era Policy Provides Heat Up North but None in South; Shivering Citizens Are Fed Up.” The Wall Street Journal (Tues., March 14, 2006): B1 & B2.

Source of graphic: online version of WSJ article cited above.

Ethanol Serves Agricultural Lobby

 

The U.S. imposes a 54-cent-a-gallon tariff on Brazilian ethanol, to discourage competition with domestic ethanol, which receives a 54-cent subsidy from taxpayers. The European Union just slapped new duties on Pakistani ethanol.

This should lay bare the fraud that what’s going here has anything to do with energy security. It has only to do with the agricultural lobby masquerading its interests behind foolish and misleading rhetoric about energy security.

Take the pressure for flex-fuel mandates, requiring auto companies to build cars capable of running on 85% ethanol. Unmodified cars can already burn fuel comprised 10% of ethanol. If we were honestly keen on diversifying supply and squeezing out imported oil, we’d throw open our dense coastal markets to ethanol producers in Brazil, India, Pakistan, Nigeria and Thailand, displacing perhaps 10 billion gallons of current gasoline use without any vehicle modification or taxpayer subsidy at all.

 

For the full story, see:

HOLMAN W. JENKINS, JR.  "BUSINESS WORLD; What’s Wrong with Free Trade in Biofuels?"  The Wall Street Journal  (Weds., February 22, 2006):  A15.

 

Paternalistic FDA Violates Patients’ Freedom to Choose

The notion that the FDA should “err on the side of safety” sounds like a tautology but is an affront to patients with incurable or poorly treatable diseases: For them, there is no safety in the status quo, and we only damage them further with paternalistic public policy that prevents individuals from exercising their own judgment about risks and benefits. If the FDA must err, it should be on the side of patients’ freedom to choose.

For the full commentary, see:
HENRY I. MILLER. “Paternalism Costs Lives.” The Wall Street Journal (Thurs., March 2, 2006): A14.

EU Free Market Undermined by National Protectionism

BRUSSELS — After French and Dutch voters killed the EU constitution last year, its framers fretted that Europe couldn’t function without their bloated document. That was always laughable. But driven by economic insecurity, those failed referendums, particularly in France, ended up calling into question the very foundation of the EU, a common and free market.
It didn’t take politicians long to take this message to heart. In recent weeks, the idea and reality of a single European market has come under threat. From France to Spain, from Luxembourg to Italy and even newcomer Poland, economic nationalism is gaining strength, evoking memories that the European project was created expressly to bury. Neelie Kroes, the EU’s competition commissioner, told me that these developments “risk taking Europe into a 1930s-style downward spiral of tit-for-tat protectionism.” This sensible Dutchwoman is not prone to hyperbole, and hardly alone in voicing the concern.
This winter, France made 11 sectors, from data security to (bizarrely) casinos, off limits to foreign buyers. And together with Luxembourg, Paris opposed a mooted merger between the world’s biggest steel companies, Mittal and Arcelor. (The protectionist furies so far haven’t managed to sink Mittal’s hostile bid.)
Prime Minister José Louis Rodríguez Zapatero also wants to keep the energy sector in Spanish hands. When Germany’s E.On moved to trump a rival Spanish bid from Gas Natural for the utility Endesa, Mr. Zapatero gave the regulator wider powers to block the takeover.
The most audacious national block was yet to come. Two weeks ago, France stepped in to stop Italy’s Enel from acquiring Suez by forcing through a shotgun wedding between the publicly owned Suez and state-owned Gaz de France. This tie-up epitomized Prime Minister Dominique de Villepin’s notion of “economic patriotism.” The Italians saw only economic protectionism, which the country’s central bank governor, Mario Draghi, said was “doomed to failure.” But Rome can’t easily claim the moral high ground, having shielded its banking sector for more than a decade.
The single market isn’t doing well on other fronts either. Last month, the European Parliament, with lawmakers following orders from their capitals, emasculated legislation that would have freed up the EU’s services market. A free market for services, by some estimates, would have added 0.7% to Europe’s GDP and created some 600,000 jobs.

For the full commentary, see:
DANIEL SCHWAMMENTHAL. “Common Market? Think Again!” The Wall Street Journal (Mon., March 13, 2006): A19.

In Canada: Dog Health Care Better than Human Health Care?

VANCOUVER, British Columbia, Feb. 23 – The Cambie Surgery Center, Canada’s most prominent private hospital, may be considered a rogue enterprise.
Accepting money from patients for operations they would otherwise receive free of charge in a public hospital is technically prohibited in this country, even in cases where patients would wait months or even years before receiving treatment.
But no one is about to arrest Dr. Brian Day, who is president and medical director of the center, or any of the 120 doctors who work there. Public hospitals are sending him growing numbers of patients they are too busy to treat, and his center is advertising that patients do not have to wait to replace their aching knees.
The country’s publicly financed health insurance system — frequently described as the third rail of its political system and a core value of its national identity — is gradually breaking down. Private clinics are opening around the country by an estimated one a week, and private insurance companies are about to find a gold mine.
Dr. Day, for instance, is planning to open more private hospitals, first in Toronto and Ottawa, then in Montreal, Calgary and Edmonton. Ontario provincial officials are already threatening stiff fines. Dr. Day says he is eager to see them in court.
”We’ve taken the position that the law is illegal,” Dr. Day, 59, says. ”This is a country in which dogs can get a hip replacement in under a week and in which humans can wait two to three years.”
. . .
The median wait time between a referral by a family doctor and an appointment with a specialist has increased to 8.3 weeks last year from 3.7 weeks in 1993, according to a recent study by The Fraser Institute, a conservative research group. Meanwhile the median wait between an appointment with a specialist and treatment has increased to 9.4 weeks from 5.6 weeks over the same period.
Average wait times between referral by a family doctor and treatment range from 5.5 weeks for oncology to 40 weeks for orthopedic surgery, according to the study.

For the full article, see:
CLIFFORD KRAUSS. ” Canada’s Private Clinics Surge as Public System Falters.” The New York Times (Tuesday, February 28, 2006): A3.

Tom Friedman’s The World is Flat, is Worth the Wait


Source of the graphic is page 1 of: MICHAEL O’CONNOR. “Library may help turn borrowers into buyers.” Omaha World-Herald (Saturday, March 4, 2006): 1 & 2.
If you live in Omaha, and want to check out a copy of Thomas Friedman’s pro-trade and globalization best-seller The World is Flat, it looks as though you’re going to have to wait awhile. While you’re waiting, you may want to read his earlier, and in some ways better, The Lexus and the Olive Tree. It is better in its discussion of the importance of Schumpeterian creative destruction, and better in terms of the coherence and flow of the argument.
See:
Friedman, Thomas L. The Lexus and the Olive Tree. New York: Anchor Books, 2000. [ISBN # 0-385-49934-5]
Friedman, Thomas L. The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar, Straus and Giroux, 2005.

“Unlike Pilots, Doctors Don’t Go Down with Their Planes”


(p. C1) With all the tools available to modern medicine — the blood tests and M.R.I.’s and endoscopes — you might think that misdiagnosis has become a rare thing. But you would be wrong. Studies of autopsies have shown that doctors seriously misdiagnose fatal illnesses about 20 percent of the time. So millions of patients are being treated for the wrong disease.
As shocking as that is, the more astonishing fact may be that the rate has not really changed since the 1930’s. “No improvement!” was how an article in the normally exclamation-free Journal of the American Medical Association summarized the situation.
. . .
But we still could be doing a lot better. Under the current medical system, doctors, nurses, lab technicians and hospital executives are not actually paid to come up with the right diagnosis. They are paid to perform tests and to do surgery and to dispense drugs.
There is no bonus for curing someone and no penalty for failing, except when the mistakes rise to the level of malpractice. So even though doctors can have the best intentions, they have little economic incentive to spend time double-checking their instincts, and hospitals have little incentive to give them the tools to do so.
. . .
(p. C4) Joseph Britto, a former intensive-care doctor, likes to compare medicine’s attitude toward mistakes with the airline industry’s. At the insistence of pilots, who have the ultimate incentive not to mess up, airlines have studied their errors and nearly eliminated crashes.
“Unlike pilots,” Dr. Britto said, “doctors don’t go down with their planes.”

For the full story, see:
DAVID LEONHARDT. “Why Doctors So Often Get It Wrong.” The New York Times (Weds., February 22, 2006): C1 & C4.

Vouchers Enable Choice, Competition, and Learning

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John Tierney. Source of image: online version of NYT article cited below.
The New York Times Op-Ed education columnist offers a provocative evaluation of how Milton Friedman’s educational voucher proposal is working in Milwuakee:

The Journal Sentinel, which endorsed John Kerry in 2004, has parted company with the Democratic Party on the voucher issue. It backed Republican efforts this year to expand the program, which has led to the creation of dozens of new private schools in Milwaukee.
“We’ve seen what school choice can do,” said Gregory Stanford, an editorial writer and a columnist at the paper. “It’s impressive to go around to the voucher schools and see kids learning. Their parents are much more satisfied with these schools. And the fears that the public schools would be hurt have turned out to be wrong.”
In fact, the students in public schools have benefited from the competition. Two studies by Harvard researchers, one by Caroline Hoxby and another by Rajashri Chakrabarti, have shown that as the voucher program expanded in Milwaukee, there was a marked improvement in test scores at the public schools most threatened by the program (the ones with large numbers of low-income students eligible for the vouchers).
The competition spurred the public system to shift power from the central administration to individual schools, allowing councils of parents and teachers to decide who should teach there, instead of forcing the schools to accept incompetent teachers just because they had seniority.
“Poor teachers used to shuffle from one school on to another in what we called the dance of the lemons,” says Ken Johnson, the head of the school board. “But we couldn’t let that continue once our students had the option to go somewhere else. We had to react to students’ needs. We had to start seeing them as customers, not just seat-fillers.”
Some of the new voucher schools have flopped — but the advantage of a voucher program is that a bad private school can be shut down a lot faster than a bad public school. And while critics complain that there still isn’t definitive evidence that voucher students are doing better over all in their new schools, the results so far in Milwaukee and other cities are more than enough to declare vouchers a success.
“All the good research, including the voucher opponents’ work, shows that kids who accept vouchers are doing at least as well as their public school peers,” says Joseph Viteritti of Hunter College. “That’s remarkable, considering how much less money is being spent on the voucher students.”
In Milwaukee, where the public system spends more than $10,000 per student, private schools get less than $6,400 for each voucher student. But when you see what can be done for that money, you realize what’s wrong with Democrats’ favorite solution for education: more money for the public-school monopoly.
. . .
The school principal, Denise Pitchford, worked in the public schools, but she took a pay cut in exchange for less red tape. “I wanted the flexibility to give immediate personal attention to every student,” she said. “To me, it represented less money but a better opportunity.” Just like the whole voucher program.

For the full story, see:
JOHN TIERNEY. “City Schools That Work.” The New York Times (Tues., March 7, 2006): A25.
Note: This article was reprinted under the title “Vouchers Offer Many Positives.” in: Omaha World-Herald (Weds., March 8, 2006): 7B.

Farmer Ed Wiederstein Opposes Farm Subsidies

Opposing government subsidies to one’s own group is a good way to make enemies. Few have the guts or principles to do so. So it is worth pausing to salute farmer Ed Wiederstein:

. . . Ed Wiederstein of Audubon, Iowa, said direct payments reduce motivation for farmers to be self-sufficient and often give money to people who don’t need it.
“Do I deserve money from the government to, supposedly, support me any more than the Ace Hardware man in downtown Audubon, or the feed store, the local newspaper, the local flower shop or the funeral home?” Wiederstein said. “Is what they do really any less important than what I do?
“There are a lot of farmers with a million-dollar net worth receiving thousands of dollars of support. Somehow, that picture just doesn’t look right.”
Rep. Jerry Moran, R-Kan., called Wiederstein an “outside thinker.”
Peterson told Wiederstein, “If you were up in western Minnesota, you might run into some trouble right now.”
A number of people said there should be less reliance on price guarantees and more on entrepreneurship and the creativity of American farm families.

For the full story, see:
“Farm subsidies, imports debated at Ag Committee meeting.” Omaha World-Herald (Monday, March 6, 2006): 8B.

Lazear, New Chair of Council of Economic Advisors, Emphasizes Labor Market Flexibility


Ed Lazear was a labor economist at the University of Chicago during the time that I was a graduate student there, circa 1975-81. Sometimes in collaboration with the late Sherwin Rosen, he created models of the labor market that suggest ways of understanding otherwise puzzling labor market phenomena, for example in suggesting that CEOs might be highly paid to provide an incentive for all those who participate in the ‘rank-order tournament’ that results in the choice of CEO (see the Lazear-Rosen paper cited below).
Here is a brief excerpt from remarks by Ed Lazear following his being sworn in as Chair of the President’s Council of Economic Advisors on 3/6/06:

Healthy productivity growth over the past few years has been followed by impressive job creation and reductions in unemployment rates to levels that are low by historical standards. And we continue to improve. Much of the strength of the U.S. economy results from flexibility in labor and capital markets, and from keeping tax rates low.



For the full remarks, see: http://www.whitehouse.gov/news/releases/2006/03/20060306.html (Thanks to Gary Blank for providing me this link.)
One of Lazear’s most interesting papers:
Lazear, Edward, and Sherwin Rosen. “Rank-Order Tournaments as Optimum Labor Contracts.” Journal of Political Economy 89, no. 5 (1981): 841-864.

The Market Rewards the Unprejudiced

 

  Source of book cover image: Amazon.com.

 

In his doctoral disseratation on the economics of discrimination, Gary Becker argued that those who discriminate in the labor market pay a price for their prejudice in the form of having to pay higher wages. Those who do not discriminate have open to them an additional pool of workers, whose talents will contribute to the firm’s bottom line. GE’s Jack Welch recounts a story that supports Becker’s claims:

 

(p. 212) Another idea I’ll leave behind is one that developed when I was visiting Japan in the fall of 2000. I had been going there for years and found it difficult to get the best male Japanese graduates (p. 213) to join us. We were having increasing success, but still had a long way to go. Finally, it dawned on me. One of our best opportunities to differentiate GE from Japanese companies was to focus on women. Women were not the preferred hires for Japanese companies, and few had progressed far in their organizations. Again, I got revved up. Fortunately, we had Anne Abaya, an ideal Japanese-speaking U.S. woman in a senior position at GE Capital. She agreed to go to Tokyo to become head of human resources for GE Japan. I gave her a million dollars for an advertising campaign to position GE as "the employer of choice for women. What I didn’t know was how much talent we already had in place. In May 2001, when Jeff and I were on a Japanese business trip, we had a private dinner with 14 of our high-potential women. They ranged from CFO of GE Plastics Japan, general manager of sales and marketing of GE Medical Systems Japan, marketing director of GE Consumer Finance Japan, to the heads of human resources for GE-Toshiba Silicones and GE Medical Systems. Jeff and I had never been with a more impressive young crowd. It confirmed for me how big the opportunity could be.

 

Source:

Welch, Jack. Jack: Straight from the Gut. New York: Warner Business Books, 2001.

 

For the revised version of Becker’s dissertation, see:

Becker, Gary S. The Economics of Discrimination. 2nd Rev. ed., Economic Research Studies. Chicago: University of Chicago Press, 1971.