John kindly pointed out that the scumbags (technical term) at this high quality (sarcasm) 'news' aggregation site stole my post from last week with no attribution. Funnily enough when I just went to the site to find the url, the lead story is John's post from three hours ago!
AND...if you go to their News page, almost all of the content is from me and John.
So I sent a message to their general enquiries email address (admin@YourInvestingFoundation.com):
"Please stop copying our content without attribution. If this continues you are going to make me mad. And you wouldn’t like me when I’m mad."
--David Banner (The Hulk)
Feel free to spam them yourself.
I seem to be on an explaining basic principles kick the last few days.
I saw this story on CNBC this morning:
The Dow Jones industrial average just did something it has never done in its 121-year history.
The 30-stock average is now up more than 5,000 points in a year, marking its biggest annual-points gain ever. This following a 140-point rally Monday which sent it to an all-time high.
Sounds impressive. And it is. But let's take a look at two time periods:
According to MacroTrends.net, from January 2017-November 2017, the DJIA (that's the acronym for the Dow Jones Industrial Average for those of us in the know...), rose from 20,181.82 to 24,272.35. That's an increase of 4,090.43 points.
Cool. But what does 4,090.43 points really mean? I have no idea. It's some sort of an index based on the value of 30 stocks, defined by some group who like to do those sorts of things.
But is 4,090.43 a big increase?
Take another randomly chosen time period, say, January 2009-November 2009. In that randomly chosen period, the DJIA increased from 9,345.00 to 11,793.12. That's an increase of 2,448.12 arbitrary points.
It looks like 2017 beats 2009, right?
Not quite.
Because the starting point in January, 2009 was much smaller than the starting point in January 2017, if we convert the changes to percentage terms, in the first 11 months of 2009, the DJIA increased by 26.2%. In 2017, the comparable percentage was 20.3%.
Given the choice would you rather earn 26% on your investments or 20%?
Both are good.
But you would draw the wrong conclusion if you just looked at the absolute point change, rather than percentages.
I was an assistant professor at East Carolina University from 1995-2000. I have been on the faculty at Ohio State since 2000. In 2017, they are the #2 and #4 party schools in the country.
Coincidence?
No point to this post (like most of my posts) but I just found this amusing, and it's summer, and I like to use profanity, and I think Chris Christie embodies everything wrong with politics right now, and he doesn't care so why should I?
Gov. Chris Christie’s trip to a closed state beach during the state government shutdown didn't go over well, according to a Monmouth University poll released Monday.
Almost all respondents — 86 percent — saw the pictures. When asked to describe it, the most popular word New Jerseyans used was "disgusted," at 7 percent, with "anger" and "disbelief" a close second. Other popular words: "Selfish," "hypocrite" and "arrogant." Less than 10 percent either said something positive or that they weren't bothered by it.
And then there was this: "Another 6% of those polled simply used some form of profanity to express their sentiments about Christie's beach day," said the news release circulated with the poll.
Hello,
John Whitehead is happy to report that he is no longer a part-time academic administrator (i.e., Economics Department Chair). If your email is regarding department business, please redirect it to our new chair Todd Cherry at cherrytl at appstate.edu.
John Whitehead is also happy to report that he is on Off-Campus Scholarly Assignment (i.e., sabbatical) in Fall 2017 and back to teaching, research and service in Spring 2018. If your email is about non-department business, he'll reply ASAP (or maybe not).
Thanks,
John Whitehead
P.S. For the remainder of his academic career, John Whitehead will refer to himself in the third person.
From the Moment of Happiness Daily Quotation:
“Nothing is more graceful than habitual cheerfulness, which is always founded upon a peculiar relish for all the little pleasures which common occurrences afford.”
-- Adam Smith, The Theory of Moral Sentiments
All of the little pleasures ... for example, I think I just saw a video of an economist, dressed as Justin Trudeau, singing Rush.
From the inbox:
I just read your article in REEP with the survey of environmental economists. I look forward to using it in my class next term – I usually start class off with a survey of the students, and it will be fun now to compare their answers to those of the profession.
Thanks for the article! ...And I really need to remember to check your blog more often… I always mean to do that, and then just somehow it gets away from me… but that’s a great resource too!
Right now the article is free and at the top of the "most read" list here: https://academic.oup.com/reep.
While sitting at home recovering from my recent neck surgery I had plenty of time to watch the NCAA Basketball Tournament (AKA March Madness, AKA Crap Shoot). To occupy some of my time I entered some of the big (free, non-gambling, for entertainment purposes only) online bracket challenges. The ESPN Mike and Mike tournament challenge had roughly 500,000 entrants (actual number unknown because it stops counting at 400,000+). Here are my results:
RANK | R64 | R32 | S16 | E8 | F4 | NCG | CHAMPION | TOTAL | PCT | |
---|---|---|---|---|---|---|---|---|---|---|
2,281 | 260 | 180 | 200 | 160 | 320 | 320 | UNC | 1440 | 99.5 |
Just sayin'.
I know this isn't environmental, but it's policy related, and I find the health insurance policy debate interesting, and I think market-based policy can go a long way toward solving environmental issues and health care, and just because it's not environmental hasn't stopped us from posting about it before, and it's my blog and I'll blog if I want to.
Let me start by reminding everyone that despite the current administration's hard push to make me liberal, I really want to be conservative (at least economically conservative). For the most part that means I want to let markets do their thing, because I think markets do a lot better job of allocating scarce resources than any person, or government or agency can.
But that doesn't mean there is no role for government in a conservative economist's world. Just as the role of a mechanic is to fix an engine when it isn't running properly, a role of the government is to fix a market when it isn't running properly. So how should the government fix health insurance?
Read on:
The problem with health insurance markets is not that there is too much government intervention, the problem is that in the absence of regulation, the market can't function the way it should due to something called adverse selection. Adverse selection occurs when a buyer or a seller knows more about what they are buying or selling than their selling or buying counterpart knows.
In the case of health insurance, a buyer may know the likelihood that they are going to need medical care, but the seller has to guess at that likelihood (that's the job of actuaries). So if a seller offers insurance at a certain price, buyers have to decide whether that price is worth it, and that depends on the likelihood of getting sick (which the buyer is likely to have a better estimate of than the seller), and the buyers tolerance for taking risk.
But the risk piece is less of an issue because most buyers know that the government will act as an insurer of last resort. If a sick person shows up at the emergency room, they will not be denied service (damned Hippocratic Oath). So even without insurance, health care is available for those who choose to take the risk.
Who then will choose to not buy health insurance? Those who have a low expectation of getting sick, and those who can't afford coverage. Let's take a look at a simple example to see why this is a problem.
Suppose there are three people in our health insurance market (I told you it was simple). We are going to call these three people H,M and L for high, medium, and low risk of getting sick.
For each of these three people there are three possible health outcomes in a given year, and we can represent these outcomes by the cost of treatment. The three possible outcomes are $0, $1,000, or $10,000. The table below lays out the probabilities of each person getting sick in a particular year:
$ - | $ 1,000.00 | $10,000.00 | |
H | 10% | 30% | 60% |
M | 10% | 60% | 30% |
L | 90% | 5% | 5% |
The high risk person has a 90% chance of incurring at least some health expenses this year, a 60% chance of incurring the worst loss ($10,000) and only a 10% chance of no loss. If we multiply the probability of each loss by the expense if that loss occurs, we find that a seller of insurance would expect person H to cost us $6,300 in an average year. As the seller, in order to maintain a viable insurance plan, I will have to charge at least $525 per month ($6,300/12) to H to make sure I bring in enough money to pay the expected medical expenses year after year.*
Now suppose we add the medium risk person, M, to our market. The medium risk person still has a 90% chance of getting sick this year, but the expected cost is only $3,600 (0.6*1,000+0.3*10,000). As the seller, if we have both H and M buying insurance, our expected expenses in any particular year are $4,950 per person (the average of $6,300 for H and $3,600 for M). So now I can charge premiums of $412.50 per month to both H and M and still break even**.
But at $412.50, person M is paying $4,950 per year in premiums, but M's expected loss in any particular year is only $3,600. So M has to decide whether to roll the dice on taking a big loss ($10,000) without insurance with 30% probability, or buy insurance and take an expected loss each year but have coverage each year in the event of the worst outcome. This will depend on M's tolerance for risk.
But what happens if we are able to get the low risk person to buy insurance too? The low risk person has a 90% chance of no loss at all, and an expected loss of 'only' $550 each year. If the seller can get the low risk person to buy insurance along with H and M, the expected expenses to the seller now drops to $3,483 per year, or $290 per month.
The insurer can now charge premiums of $290 per month to L, M and H and expect to break even in a given year. This also means that insurance is much more attractive to person M, because now the annual premium of $3,483 is below the expected loss of $3,600.
But why in the world would person L ever buy insurance? L has to pay $3,480 in premiums per year but only expects to have $550 in health expenses. It makes no sense for person L to buy insurance unless L is oddly and incredibly risk averse. But if person L drops out of the insurance market, the seller goes back to a situation where they have to charge premiums of $412.50 per month to expect to break even, Without L in the pool, premiums rise.
To make matters worse, there seems to be an inverse correlation between income and health outcomes. That means H is likely to be lower income than L. So as L drops out of the insurance market, the premiums rise for H and M and because of this negative correlation between income and health, H and M are less likely to be able to afford insurance. This is a primary reason why health insurance markets don't really work like we would expect.
So how can we make sure affordable insurance is available for everyone?
Require everyone to have insurance (whether you want it or not). This makes sure that all of the L people are included in the risk pool and it should lower premiums overall.
This is the much talked about Affordable Care Act insurance mandate.
The problem with the ACA mandate is that the penalty for not participating was set way too low. Suppose in our example above, we put an insurance mandate in place, requiring H, M and L to either buy insurance for $290 per month or pay a $1,000 fine each year. H and M will still buy insurance because $290 is below their expected losses from health expenses, but L will likely opt to pay the fine because $1,000 plus the expected $550 health costs are still lower than the annual premium. So L still drops out of the insurance market, and the sellers have to raise their premiums to cover H and M, otherwise the the seller will stop offering insurance because they can't make a profit. But the higher premiums might make M drop out of the market too which raises the premiums for H.
How then do we fix the ACA?
Scrapping the mandate is not the efficient answer. Scrapping the mandate will cause premiums to go up because low risk people (young and/or rich) will choose to not insure, roll the dice, and rely on savings, the government and bankruptcy to cover expenses if they crap out.
To me the fixes to the ACA are straightforward:
It's piece 3 where I think conservatives can really rally. Right now there are heavy restrictions on who can sell insurance to whom. Most insurance markets are at the state level. Loosen these regulations. Make sure that insurers have to compete for business nationwide. Competition lowers prices.
More competition combined with everyone being in the pool will lower insurance premiums.
Alternatively we could talk about single payer.
But that wouldn't be very conservative of me.
*The way it really works is that we have a lot of H people, and we charge them all the expected expense. Some will get sick and some won't so on average we break even. This is called risk pooling.
**Obviously I would charge a little more than that to cover administrative expenses and earn a profit, but you get the point.
I'm not sure why we haven't thought of this before, but we need a category for just plain odd statements from politicians/policy makers. Thankfully, George W. Bush** has given us the perfect title for the category:
Former President George W. Bush reportedly thought President Trump's inauguration speech "was some weird shit."
Bush attended Trump's inauguration, sitting near former President Clinton and Hillary Clinton as well as former President Obama and Michelle Obama.
According to a new report by New York magazine, three people present at the event say they heard Bush say "That was some weird shit" after the swearing in ceremony concluded.
Scott Pruitt, the head of the Environmental Protection Agency, is facing criticism over his decision not to ban a controversial farm pesticide. Pruitt insists his move is based on “sound science,” but it overrides his own agency’s research showing chlorpyrifos pose a health risk to children and farm workers, possibly inhibiting brain development.
That was some weird shit.
In case you needed reminding, it’s a bad time to be a scientist in the US. If you work for a federal research group, you’ve been muzzled, had your funding cut to historically low levels, and been told by a committee of anti-intellectual parrots that you’re constantly lying.
Earlier this month, the word “science” was removed from the Environmental Protection Agency’s (EPA) mission statement under the auspices of a man who doesn’t think carbon dioxide warms the planet. Now, it seems that the Department of Energy’s (DoE) climate change research office has banned the use of the phrase “climate change”.
As reported by Politico, a supervisor at the DoE’s Office of International Climate and Clean Energy told the staff in no uncertain terms that the phrases “climate change”, “emissions reduction”, and “Paris agreement” are not to be used in written memos, briefings, or any form of communication.
That was some weird shit.
I have a feeling this could quickly become our most populated category of post.
*Does anyone else find it funny when legitimate journalists have to write titles with words like 'shit' in them, and thy choose to just use an asterisk 'sh*t'? I know that they are supposed to write at a 3rd grade level, but I'm pretty sure even a 3rd grader can figure out what the word is supposed to be.
**I love the irony in the same man who once said ""And so the fact that they purchased the machine meant somebody had to make the machine. And when somebody makes a machine, it means there's jobs at the machine-making place." and "Too many good docs are getting out of the business. Too many OB-GYNs aren't able to practice their love with women all across this country," and so many others, says Donald Trump's inauguration was weird shit. I guess weird shit knows weird shit.