EconTalk

Rivers on polling

Mon, 21 Jul 2008 06:30:00 -0500

Doug Rivers of Stanford University and YouGov.com talks with EconTalk host Russ Roberts about the world of political polling. Rivers explains why publicly provided margins of error overstate the reliability of most polls and why it's getting harder and harder to do telephone polls. Rivers argues that internet panels are able to create a more representative sample. Along the way he discusses automated telephone polls, the Bradley effect, and convention bounce, and the use of exit polls in calling states in Presidential elections.

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: The Roper Center for Public Opinion Research The Economist/YouGov Poll. The Economist, weekly surveys About ideas and people mentioned in this podcast: Web Pages: The Law of Large Numbers. Java applet. Philip B. Stark. Central Limit Theorem. From Hyperstat Online, by David M. Lane. Introductory statistics textbook and online tutorial. The Central Limit Theorem Applet. R. Webster West. Knowledge Networks. Podcasts and Blogs: 538: Electoral Projections Done Right. Nate Silver. Pollster. Mark Blumenthal, Charles Franklin. Real Clear Politics. John McIntyre and Tom Bevan. Exit Polls, by Arnold Kling. EconTalk, November 5, 2004. Ayres on Super Crunchers and the Power of Data. EconTalk podcast. Sunstein on Infotopia, Information and Decision-Making. EconTalk podcast. Taleb on Black Swans. EconTalk podcast.

Podcast Readings

About this week's guest:

The Roper Center for Public Opinion Research
The Economist/YouGov Poll. The Economist, weekly surveys

About ideas and people mentioned in this podcast:

Web Pages:

The Law of Large Numbers. Java applet. Philip B. Stark.
Central Limit Theorem. From Hyperstat Online, by David M. Lane. Introductory statistics textbook and online tutorial.
The Central Limit Theorem Applet. R. Webster West.
Knowledge Networks.

Podcasts and Blogs:

538: Electoral Projections Done Right. Nate Silver.
Pollster. Mark Blumenthal, Charles Franklin.
Real Clear Politics. John McIntyre and Tom Bevan.
Exit Polls, by Arnold Kling. EconTalk, November 5, 2004.
Ayres on Super Crunchers and the Power of Data. EconTalk podcast.
Sunstein on Infotopia, Information and Decision-Making. EconTalk podcast.
Taleb on Black Swans. EconTalk podcast.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. Surprising aspects of polling, scientifics of polling. Telephone polling arose in the 1930s. From about the 1930s when polling started till the 1970s polling was done in person. Gallup sent people door-to-door. Method used was area probability sampling. With telephone polling it turned out there was no good listing of people. Random digit dialing. Worked pretty well. In last 10-15 years it began to run into trouble. People don't like being called; they do not like being called on their cell phones by strangers. Reduced cooperation. No longer feasible to get 70% of the people you call to be polled. Typical response rates now are 20% or maybe even less. Automatic dialers: typically 10-20 times as many phone numbers are selected as the number of interviews. Start to wonder if the people you are getting are representative; if you look at it they are not. Known that if you just call you get more women than men. End up with people with higher education, higher income, households where there are more people at home. Some people have a natural suspicion of polling saying that you don't sample everyone. Representative sample is statistically reliable even much smaller. A 1000-person random sample if there are no non-response problems. Doesn't depend on how big the population is. Ask 1000 people, get 95% confidence interval. If 50% are for Barack Obama, can be 95% confident that there are between 47% and 53%; still a 5% chance that it is outside that range. That's with a perfectly executed sampling plan. To be 99% confident, sample about 4000.
6:55	What's the problem? Magic of probability theory enables you to say, first, that if you take a big enough sample you'll get the right answer: Law of Large Numbers; and second, to quantify how big the error is: the Central Limit Theorem. Problem is the execution. You don't get 100% cooperation, predictable skews. People screen their calls; people who don't have phones; people with multiple phones who could get oversampled. Weighting helps address the skews, but if you don't weight on the right set of variables it can lead to systematic over- or under-estimates. Even if the weighting does correct the skews, it adds variability. Typical margin of error reported in the newspaper ignores the variability from weighting. Here's the idea. Suppose that in the population about 11% of adults are African American. In a typical telephone sampling, 4, 5, 6% is more typical. That means you have to double-weight the blacks in the sample to make the sample fraction about the same as the population. If the weighting is relatively small it doesn't add much variability. There are groups that are underrepresented by factors of 5-10. If you have a weight of 10 in a sample of 1000 that means 1 person is representing 10 people. If that one person's answer is recorded incorrectly it moves the whole sample by 1%, which will kill your margin of error. Two basic problems: weighting adds a lot of variability, probably about twice what the normal margin of error would suggest, twice what the sampling error would be with a simple random sample. Second, skews in the sample that are not taken out by weighting. Adds component that doesn't go down with increasing the sample size. Sampling over and over tells you size of sampling error but nothing about the skews. Skews that probably account for 80-90% in the polls represent the skews in the sample rather than the sampling errors. Poll in advance of New Hampshire primary, 100% got it wrong this year. If you have a lot of polls, you expect some to get it right. Approximately thirty polls in the week before the primary, not a single one had Hillary Clinton ahead of Barack Obama. Clearly something systematic was affecting all the polls. The people doing them were professionals using standard methods that usually work. Why didn't it work? We don't really know, but there appear to be a few things. Obama does very well with people with college degrees and graduate degrees, overrepresented by a factor of 2-3 and not enough weighting corrects for that. Hard to predict who will vote in a Presidential primary. About 90% of people called say they will vote but actual percentage is much smaller than that. Reported margins of error: given that African Americans, less educated people, higher educated people who don't want to bother, you have to weight. In a sample of 1000 one person represents too many. Don't the polls correct their margins of error for that distortion? No. Of 1300 polls in 2008 Presidential primaries, fewer than 50 reported anything other than the margin of error for a simple random sample with no weighting. Intellectually bankrupt, scandalous.
15:19	In a small state such as New Hampshire being sampled over and over harder to get people to answer the phone. Response rates are typically not reported and quite low. Some polls do well with low response rates, but you need a model. You can only correct for the factors you know in advance and for which you know the distribution. Age, race, gender, sometimes education; rarely income. Use weighting methods that are 60 years old, well behind better methods of weighting. For a long time there was a belief that random digit dialing was good enough. In the last 20 years most polls have gone to imposing quotas by gender and and primitive weighting to fix the other problems. Problems exacerbated in recent years and pollsters have not kept up. Likely voters: pollsters don't report actual responses because they want to weight them. What about likely voters? Standard is to ask questions about likeliness of voting. Problem is when people tell you they are going to vote, a lot of them won't vote. Turn-out rates in the mid-50% range for Presidential elections, under 40% for Congressional elections. Are polls fudged to look like other polls? Wouldn't say it's fudging. You have a choice of what weights to use. If you look at final polls, they are too similar relative to what we know their sampling variability is. That suggests that pollsters look at each other's weighting schemes. Roper Center, U. of Connecticut project: look at unweighted samples. Polls report their data to the Roper Center archive. People doing the polls, would not accuse them of dishonesty. It's certainly an art. People wish to be similar rather than different. But sometimes you want to stand out. Most of the New Hampshire samples were fairly small. One had a little over 100 Republicans, too small a sample so said let's ignore it. Wake up call for polling.
22:55	Internet polling: ESPN, David Ortiz, people vote multiple times. Disclaimers often say it's not scientific. Needn't be unscientific. People are used to automatic tellers at banks, punching in numbers on phone, etc., new technology is opportunity, with internet don't have to have a roomful of people on the phone. Problem ten years ago was that relatively few people on the Internet. With colleague Norman Nye, started company called Knowledge Networks, recruited a panel by telephone using random digit dialing, equipped them with hardware so that they could be covered. Reaction: not much bang for the random selection; and as time went on, more people on the Internet anyway. Good opportunity to have a different approach than using randomness. Randomness is great if it's feasible, but it's not truly random if you have a small response rate or if the people who respond are different from the population in ways that are not observable. Take a rigorous approach and use some things that didn't exist 25 years ago. Data bases, consumer files, that give you information on many dimensions about most people in the country. If you dial a phone number randomly, you don't know who you have missed. Could use these data bases. For political polling, start with a registered voter list--don't have to rely on self-reporting. Match that to a consumer file, age, gender, race from voter file; from consumer file income, home value, and so forth. That's the population we'd like to sample from. Target sample. Take a pool of about a million people who have opted in, agreed to be part of your Internet panel. Because it's so large, can find close matches to people selected off the voter list. Not a random sample, but insofar as the set of characteristics matched on is representative. Can often beat a random digit dialing with minimal response rate. More representative of the population: not just same number of women, young, blacks, but matched on more characteristics. In 2006 the average error was quite a bit less than the typical phone polling. Could have just been lucky: but then lucky 45 times. Had removed the biases better. Right now, if in telephone poll someone hangs up, they just call another random number. Effectively substituting another draw from the same skewed population; but should substitute someone with same characteristics as the person you missed. You don't know who you missed.
32:37	Every week for Economist magazine YouGov (Rivers's poll) runs a 1000 person poll of this style. For the election this year, running a number of large projects, sample sizes of 30,000-40,000 nationally, enabled to get state-by-state results. Pollster.com, Real Clear Politics report all the polls being done out there. Interactive Voice Response (IVR) does robo-calls, automated calls at random, answer questions by punching phone numbers, probably 80-90% of polls being done this year. Response rates are low but their record is not bad. Probably paid closer attention to questions of weighting. Can't even tell if respondent is male or female, older than 11. [Date of podcast recording: July 16-17, 2008, pre-conventions.] Who else does kinds of polls? Zogby, IVR, not good in 2006. Harris Interactive, but most Harris polls are telephone polls. Why does anybody run telephone style polls anymore? Associated Press and NY Times will not report a poll that uses a non-probability sampling method--i.e., something other than random digit dialing. Denial, being conservative. Full explanation put out there, newly developed methodology. Revealing weights is something of a trade secret; plus, if people saw they they might be horrified.
40:01	Real Clear Politics likes to average a bunch of polls. That may not be a more effective way of washing out errors if people are making the same systematic errors. If two polling methods used the same methodology of 500 people, averaging two would be better, essentially 1000 people. If they are not using the same methodology then averaging is no more reliable. If you have a reliable poll it should be weighted more than an unreliable one. But how can you get anyone to agree who should be weighted more than anyone else. Fivethirtyeight.com, 538, baseball statistics, historical accuracy weighting. Gallup poll shifts likely voter weighting, bump in methodology reflecting shift. Folklore, what happens the week before an election; when pollsters make errors they make stories ex post explaining themselves. "It's just a snapshot." There are cases where there is obvious movement but more frequently the polling methodology is off. Bradley effect: Tom Bradley running for governor of CA after being Mayor of L.A., number of cases where black candidates were ahead in the polls and then ended up losing or winning by less than the polls showed them. In 2008 Obama ahead in New Hampshire pre-election polls. Also called the Wilder effect, Doug Wilder who ran for Governor of Virginia in the mid-1980s, ahead in polls but won only narrowly. Do people tell you they will vote for a black candidate but then not do so? Study of many black candidates; conclusion that there was a systematic over-reporting but it disappeared about 10 years ago. Also looked at women candidates, Whitman effect after Christie Whitman. Is this anything other than an urban legend? A number of involved pollsters vigorously deny that there was an overstatement in the Bradley vote, but that it was a difference between the present and the absentee vote and Bradley lost the absentee. Democratic voters are pretty liberal, hard to believe they are averse to voting for a black candidate. Some experiments at Presidential level, darkening skin color; hypothetical Congressional election race against black and white candidates didn't really find any effects. Age, education effects are probably more important in explaining the New Hampshire polling problem. New Hampshire was unusual, and polls in other states not as far off. Election exit polling are better, but uniformly overstate Democratic vote.
51:29	Florida in 2000 was a bit of a debacle, networks predicted Gore; eventually retracted when it became clear that election was too close to call. Erroneous data feeds: data entry error. No network has made a miscall at the state level since 2000. Staff decision desks with a variety of inside and outside experts. Let's say a poll comes out 46-40 with a margin of error of 3%. Could be a dead heat by margin of error, with each getting 43%. Called a statistical dead heat. But your best guess is still that the leading candidate has a 6 point lead. If you are holding yourself to a 95% margin of error, you shouldn't say that one candidate is ahead of the other. You are equally likely to overstate as understate. Could equally well be 49%-37%. Many state polls are done with 400-500 voters. A lot are based on the robo polls, probably dial through almost everybody in a small state by the time an election occurs. Hard to believe that this method is reliable, but in fact they appear to have performed about in line with telephone polling. Convention bounce: phenomenon that almost always occurs after the convention of one party is that party's candidate gains in the polls. Because the out party always holds its convention first--that would be the Democrats this year--that will mean that the Democrats will have a gain till the Republican convention. Doesn't always happen, but could be bounce of 4-5 points, so net swing of 10 points. Love fest? Videos of candidates? More likely that those of the convening party is happy to participate and answer the phone, those of other party hide away. In the methodology of the Internet panel, controlling for the characteristics: reward people for participating in those polls. Send out an email: what percentage follow up and answer poll. Some people very active; others just 10% response rate. Try to control who gets the email invitation so that people who want to answer more polls get more without skewing the sample. Compensation given for people's time; in Internet world you have name and address. Using incentives might increase cooperation; but have to be careful. Are you an owner of x, y, or z? There are probably people out there trying to make a living off of filling out polls--can't earn much. Can do some validation.
1:01:47	Weekly survey for The Economist: what's surprising? Shift in partisanship. From the New Deal through the 1960s, Democrats had a massive lead in party identification, 18 points through 1970. Starting in the 1970s and going through the Reagan years, 2004, Republicans closed that lead. 80% of those Republican gains have been erased since 2004, including half in the fall of 2007 and spring of 2008. In principle should make this a terrible year for Republicans. Republicans nominated a candidate who is the least associated with the Republican administration than anybody you could think of; will be interesting to see if he gets associated with the administration over time. Also interesting this spring: last fall initially people didn't know Obama was black. By last December, blacks knew he was black and massively supported him. Among whites, Obama had the most amazing positives in years. In spring as Hillary Clinton ramped up the rhetoric those positive numbers went away. McCain's strategy. Polling on economics issues. Caplan at George Mason, Myth of the Rational Voter, claims that system works pretty well but voters aren't particularly well informed about economics. Standard views, trade, price ceilings, average voter wants to pass a law.

Posted by Russ Roberts at http://www.econtalk.org/archives/2008/07/rivers_on_polli.html.

Hanushek on Education and School Finance

Mon, 14 Jul 2008 06:30:00 -0500

Eric Hanushek of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the strange evolution of school finance in the last four decades. In particular, the courts have played an important role in recent years in mandating expenditure increases for public school systems. Hanushek talks about why this has come about and the lack of effect these expenditures have had in affecting student achievement.

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Time: 1:07:18

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: Eric Hanushek's Home page Courting Failure: How School Finance Lawsuits Exploit Judges' Good Intentions and Harm Our Children, Hanushek, Eric A., ed. Stanford: Education Next Books, 2006. Chapters downloadable. Previous podcasts with Eric Hanushek About ideas and people mentioned in this podcast: Books: The Joy of Freedom: An Economist's Odyssey, by David R. Henderson On Education. Part VII in Can Capitalism Survive, by Benjamin Rogge. On Econlib. Related analysis for college level. Articles: "Public Schools", by John E. Chubb. Concise Encyclopedia of Economics. Web Pages: Lyrics to John McCutcheon's "Kindergarten Wall" The Nation's Report Card. NAEP (National Assessment of Educational Progress) Kipp Academies, private schools Podcasts and Blogs: Easterly on Growth, Poverty, and Aid. EconTalk podcast.

Podcast Readings

About this week's guest:

Eric Hanushek's Home page
Courting Failure: How School Finance Lawsuits Exploit Judges' Good Intentions and Harm Our Children, Hanushek, Eric A., ed. Stanford: Education Next Books, 2006. Chapters downloadable.
Previous podcasts with Eric Hanushek

About ideas and people mentioned in this podcast:

Books:

The Joy of Freedom: An Economist's Odyssey, by David R. Henderson
On Education. Part VII in Can Capitalism Survive, by Benjamin Rogge. On Econlib. Related analysis for college level.

Articles:

"Public Schools", by John E. Chubb. Concise Encyclopedia of Economics.

Web Pages:

Lyrics to John McCutcheon's "Kindergarten Wall"
The Nation's Report Card. NAEP (National Assessment of Educational Progress)
Kipp Academies, private schools

Podcasts and Blogs:

Easterly on Growth, Poverty, and Aid. EconTalk podcast.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. School finance: changes in America in last quarter century, particularly in the courts. Presumption: Most schools get their money from property taxes: wealthier districts spend more, poorer districts spend less. More revolutionary lately. Over some 40 years changes. State pays for some parts of school finance and localities other parts. States also provide extra money for kids who may be more difficult to educate: poorer areas, special education kids. Get a lot of variation after that from property tax. Late 1960s in California, lawsuit, Serrano v. Priest, challenging property tax method of funding. Made originally under the 14th Amendment of the Constitution, equal protection clause, disadvantaged kids treated unequally. Ruled to not be a Federal matter; devolved to be a State matter. Typical State Constitutions have clauses such as the State should provide a thorough and efficient system of public schools, or free and open schools, perhaps up to a certain age.
4:29	How did this open the door and what happened? Lawsuit went back to the State courts which ruled it was a real issue: Beverly Hills spending a lot more than Baldwin Park was unconstitutional by the State Constitution. Led to large number of other States emulating the CA policy. All but 4-5 States had lawsuits. Originally started out as equity cases: districts should provide equal educational opportunities; courts immediately defined this as equal amounts spent in different districts, usually by the State picking up a larger share, usually through State income taxes which are redistributed back to various localities. Lawsuits wanted more money spent on education, used constitutions to lever more spending; aimed to bring the bottom up to the level of the top and get more total spending. After about 15-20 years it turned out that States divided fairly evenly between those that said the existing State spending was unconstitutional and those that said it was constitutional. Where it was unconstitutional, some States started taking money from high-spending districts and giving it to low-spending districts--which was not the goal of the original promoters. In the late 1980s new kind of lawsuit: "adequacy lawsuits," money might be equitably spent but there is just not enough to provide a good education for everybody. Courts are on slightly thin ice from a Constitutional standpoint: courts started to appropriate funds explicitly or implicitly, which is a role reserved for legislative and executive branches of these States. In 1990s several cases found inadequate spending, kids not doing well enough, so courts should step in and force the States to put more money into the schools. NY City lawsuit stands out: lawsuit went on for a number of years, decided 2002 or so, campaign for fiscal equity, funding in NYC was above the national average by a fair amount but had kids who weren't performing very well. It was decided that the State should put in a nearly 50% increase. Legislature not likely to go along with that; courts are making decisions on this one area and not considering other uses of government funds or even private funds. Amounts to $19,000/student per year in NY City as opposed to a national average of $8000/student. Got reduced by NYS Court of Appeals but left on the table the idea that the courts could appropriate funds if they didn't think the outcomes were good enough. Brought down to a mere $2 billion dollars per year. Elliot Spitzer campaigned on idea that he would get the State to put more money into NY City schools. Constitutionality has been left unchallenged.
14:03	Russ, Lexington, MA, busing program, inner city African American students bused to the suburbs. In some cities courts took over the schools. Outgrowth of 1954 Brown v. the Board of Education, de jure segregation in the South; went on to consider de facto segregation in the North. Those cases have pretty much died out because either the schools have shown they have done what was required; or because it has been ruled that such racially-based busing is unconstitutional. St. Louis and Kansas City: courts did more than just bus kids. Realized that people could avoid racial balancing by moving out of these districts, labeled white flight. Courts didn't enter in on forcing Lexington-Boston busing. Some voluntary programs used. In Kansas City, the plaintiffs argued that the only way to get true racial balance was to attract white students back into the districts--had to make the Kansas City schools so good that you would attract them there. For a while, Kansas City was the highest spending district in the nation. Dream your biggest dream and the State will pay for it. Took the funding opportunity to build magnificent facilities--swimming pools, zoological parks; put little into better teachers; got no gains in student achievement. Courts have limited power to judge student achievement making arguments about how much should be spent. Accountability: no feedback loop. No incentive to fix it.
21:11	Best understood by sketch of how these court cases go. Standard: plaintiffs come in and present data on how a portion of each State's kids are not learning what we'd hope for. No Child Left Behind aids. Then say: the only way to solve this is to provide more funding. But no lawsuit on school finance has ever presented evidence that some other State that had a favorable ruling had experienced achievement gains. You would think the courts would ask for this evidence. Instead rely on simple assumption that more money will help the schools. Some classic stories: Kansas City; also St. Louis, large additional funding but no evidence that kids were doing better. Wyoming and New Jersey. Wyoming: now one of the top five spending States, court case in 1996, plus had natural gas money so nobody was hurt too much. National testing indicates that Wyoming has retrogressed relative to the rest of the nation. Bad harvest excuse like that given by the Soviet Union. New Jersey: poster child for school finance cases. Courts have been involved there for some 35 years now. Abbott v. Burke, judge declared 28 districts to be special need, these districts should be able to spend as much as the highest spending districts in the entire State. Huge jump, to $19,000 per student in the Abbott districts. Fourth grade reading scores were up relative to previous levels for one year. No evidence that these kids have otherwise improved. Pre-school education, after-school programs, smaller class sizes.
28:19	What are the judges thinking? Emotionally attracted to the idea that more is better? Teachers and administrators benefit from higher salaries, so they must like it. Must be some other voices who like it. Achievement of U.S. students is low relative to the world; persuasive part of these court cases is that achievement is not what is hoped. Court cases don't say what they are thinking, but interpretation is that the legislature just isn't doing enough. Our state should have a better education system and if the legislature can't do it, I'm going to do it. Reality is that they do not have many levers. Can't enforce achievement so they fall back on general argument that we believe if we spend more we get higher quality. If we invest more we will do better. Seems reasonable: more spending on education should mean more education. Easterly podcast: overseas, sometimes teacher doesn't show up. What's going on the U.S. system? Simplest answer: few incentives to improve achievement if you get the increase in funding. If students improve, a teacher doesn't get a pay increase, just personal satisfaction. Teacher salaries are unrelated to student performance. We know teachers are important, so we should pay them more. Straightforward; but bad teachers want more money just as much as good teachers. Incentive is to spend time getting higher salaries, which does not come from more achievement. Majority of people who argue for more funding for the schools start with statement: If money is spent well we will get better achievement. Tautological. Money is not directed toward being spent well in this sense. Scientific evidence that a program put in place leads to higher achievement, use that as justification for more funding. Reality is that States often don't choose the program used to justify the funding or don't implement it the same way.
37:12	Differences across States: Wyoming, what about other States or over time? Zero effect. There have been a number of studies. More money hasn't led to better outcomes. This is not to say that it cannot or doesn't do so. Problem is for it to happen systematically or occasionally. Argument against vouchers is that if parents were free to leave the school system they'd take money with them, and the outcome will be worse. Like saying that if you allow foreign cars to be sold in the U.S., U.S. carmakers will have less money--true; but if you then go on to argue that because they have less money they will make worse cars, you ignore the effect of competition. Ford and Chrysler also keep money away from GM. The most money for the one entity kills all the incentives. Has there been other kinds of flight--home schooling, private schools? Private school proportion has gone down largely because of the collapse of the Catholic schools in the U.S. Increase in other religious schools and sectarian schools. What has happened is first, home schooling--about 1 and a half percent now. Spelling bees. Introduction of charter schools: public schools allowed to chart their own plan, apply to State to be allowed to do something else. Buys them out of some things like having to hire union teachers. Semi-market. Complaint is that we have to provide a level playing field for the public schools! One guy's allowed to get out from under the burden. If one guy's got a broken in a race, you have to break the other guy's leg. Mississippi, Washington, D.C. Fairly new, hard to know how it will work out. Innovative ways to deal with disadvantaged students. Kipp Academies, pretty set program involving socialization of students with real emphasis on outcomes. Under 150 of them. A number of one-off schools and groups. Some terrible, some very good, some excellent. Terrible ones get market signal--probably have trouble keeping their students. Charter schools tend to close down more frequently--may not be run well, may have financial problems; fairly new. Parental role: why do parents dutifully, religiously, regularly send their kids back to schools that fail their children? You don't know what the alternatives are; there may not be any alternatives.
48:56	Empirical work: quality of charter schools in Texas. Parents did in fact pull their kids out of bad charter schools at a significantly higher rate than bad public schools. Market didn't shut the schools down because new students came in. Hard because the schools tell the parents that they are doing well. Hard for a parent to know what Algebra II should look like. Some information from testing but imperfect information. As a nation we like public schooling. We like the idea of everyone going to a common school, learning about our history and culture. Takes a lot to convince parents that the public schools are not doing a good job. Romance about the public school system. Many public schools that are phenomenal and are doing a great job. American public schools do foster creativity, less regimented about what students learn. American system is a little happy-go-lucky but it may open students' brains to non-traditional stuff relative to being drilled as in many foreign schools. Increased attention recently to non-cognitive skills, creativity. In firms we want employees to be skillful, come to work on time, and to have good ideas, identify with the goals of the firm. Absolves the school system in part. We don't know how to measure things like creativity much less how to structure schools to create more of that. No evidence that putting more money into the schools will create more creativity; don't want to create less cognitive skills in the process. Classic East Asian example: preps and tests starting in kindergarten. U.S. might simply have a different way that the labor market responds to people. New firms reward ideas in an instant for creative ideas. In Korea if a person is at a low level in a firm has a new idea he's as likely to be fired as promoted. Incentives to be creative aren't there. More math and science skills in some less developed countries correlates to faster growth.
58:13	Many cultural factors affect creativity. Interesting that schools haven't killed it off. John McCutcheon song, learn to sit at desk all day. David Henderson, Joy of Freedom. Quadratic equation may not be used by most. California [July 11, 2008 is taping date, Hoover Institution] regularly hires East Asian engineers. Displacing California-educated people.
1:00:07	Policy recommendations that might improve achievement: want to have very good systems of accountability, measure value-added of schools through achievement. Want to provide direct incentives to reward people in institutions that provide more value added. Choice, because parents enter into decisions. Want to use the funding system in a way that rewards performance. Tricky. Want to provide equity in funding to ensure that kids that come to school less prepared are given the resources to succeed. That means that the funding system should in part provide extra resources to kids that come in with greater needs. But at the same time want to provide greater performance. Money should go with performance, not with failure. First reaction now is that the worse a school does the more resources it gets. If you improve you might lose this aid. Semantic quibble with word "we." There is no "we." Optimism for real change: Better information and accountability; and more choice. Either fails by itself; need both. Teachers unions systematically less interested in innovation.

Posted by Russ Roberts at http://www.econtalk.org/archives/2008/07/hanushek_on_edu_2.html.

Munger on the Political Economy of Public Transportation

Mon, 07 Jul 2008 06:30:00 -0500

Michael Munger of Duke University talks with EconTalk host Russ Roberts about Munger's recent trip to Chile and the changes Chile has made to Santiago's bus system. What was once a private decentralized system with differing levels of quality and price has been transformed into a system of uniform quality designed from the top down. How has the new system fared? Not particularly well according to Munger. Commuting times are up and the President of Chile has apologized to the Chilean people for the failures of the new system. Munger talks about why such changes take place and why they persist even when they seem inferior to the original system that was replaced.

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Time: 56:07

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: Michael Munger's Home page Previous podcasts with Mike Munger. About ideas and people mentioned in this podcast: Books: The State, Chapter 5 from Selected Essays, by Frédéric Bastiat. On Econlib. Contains quote, par. 5.20. Curb Rights: A Foundation for Free Enterprise in Urban Transit, by Daniel B. Klein, Adrian Moore, and Binyam Reja. At amazon.com. The Problems of Cities, Pt. VII, Ch. 1 from Can Capitalism Survive? by Benjamin A. Rogge On Econlib. Articles: "Transantiago's Underlying Problem,", Libertad Desarollo, No. 852, December 2007. "Public Choice Theory", by Jane S. Shaw. Concise Encyclopedia of Economics. "Vilfredo Pareto". Biography. Concise Encyclopedia of Economics. Web Pages: Douglass North's home page Michelle Bachelet, President of Chile. at Wikipedia. Podcasts and Blogs: In Chile, Commuters Sue City over Transit System, by Julie McCarthy. All Things Considered, October 8, 2007, NPR. Behavioral Politics, by Arnold Kling. On EconLog. Don Boudreaux on Energy Prices. EconTalk podcast. Ethanol discussion. The Economics of Organ Donations. EconTalk podcast.

Podcast Readings

About this week's guest:

About ideas and people mentioned in this podcast:

Books:

The State, Chapter 5 from Selected Essays, by Frédéric Bastiat. On Econlib. Contains quote, par. 5.20.
Curb Rights: A Foundation for Free Enterprise in Urban Transit, by Daniel B. Klein, Adrian Moore, and Binyam Reja. At amazon.com.
The Problems of Cities, Pt. VII, Ch. 1 from Can Capitalism Survive? by Benjamin A. Rogge On Econlib.

Articles:

"Transantiago's Underlying Problem,", Libertad Desarollo, No. 852, December 2007.
"Public Choice Theory", by Jane S. Shaw. Concise Encyclopedia of Economics.
"Vilfredo Pareto". Biography. Concise Encyclopedia of Economics.

Web Pages:

Douglass North's home page
Michelle Bachelet, President of Chile. at Wikipedia.

Podcasts and Blogs:

In Chile, Commuters Sue City over Transit System, by Julie McCarthy. All Things Considered, October 8, 2007, NPR.
Behavioral Politics, by Arnold Kling. On EconLog.
Don Boudreaux on Energy Prices. EconTalk podcast. Ethanol discussion.
The Economics of Organ Donations. EconTalk podcast.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. Trip to Chile, markets and incentives. Snowing in the mountains of Santiago. Traffic's pretty bad. What should we do through contracts and markets and what should we do through the public sector? Santiago is actually a little east of Washington, D.C., in the eastern time zone. Chile's been a laboratory for privatization. U. of Chicago trained some Chilean economists in the 1960s and 1970s, professors today. Center-left coalition today has accepted a lot of the pro-market reforms, but have they bought into them or are they just waiting? Chile used to have an almost private mass transit system. In 1975, built a subway, metro system, one of the biggest in Latin America. Santiago not quite as dense as NYC but close. On the surface, had a private bus system. No public subsidies, but system operated in the black. Consertacion [Consertacion Nacional Democratica, political party] looked at that and saw profits. Took a system that was $60 million per year in the black; now it loses 10 times more than it was making. How many passengers? Ridership has gone slightly down. Could argue that they were catering to mostly the rich, and by publicizing they would serve a larger audience. There had been different classes of service--now everybody has the same class of service. Commute times tripled, which is why people stopped using mass transit. Now people use cars. People didn't move out or stop working; they are driving cars on crowded streets. Key difference in the routes: used to be redudancy in the system. Always possible to get to work on time, and low variance. Now up to 2 hours but it may take 4 hours.
8:36	Incentives that the bus drivers themselves face. Natural experiment in the use of incentives. Before they were paid by the number of drivers they could pick up. Looked like the Chariot race in Ben Hur. Problem with the old system. Accidents, a few fatalities, usually only wounded people. Concertacion and President Bachelet saw both profits and drivers' greed as dual problems. Human transubstantiation. Pay is now not by passengers but by arriving on time. No incentive to pick up passengers if they are running after the bus; but also no incentive to stop if he's running late. Widely verified; Chilean listeners invited to write in. People respond to incentives not just in markets but in any setting they find themselves in. Mistake that the government of Chile made was they thought the problem is: in a market people are greedy, so let's take them out of the market. Paying drivers by schedule meant at a minimum they weren't going to go out of their way to pick passengers up. Also, changed style of buses. Buses used to be nimble; some old, belched black smoke. Government bought new buses, 4 or 5 times as long, articulated, bends in the middle, bendy bus. Four doors, only front door goes in to the driver to pay him. Driver doesn't get paid by how many pay him, but only by time. People scampered in the back doors; driver couldn't spend time going to the back to insist that they pay. Drivers routinely watch people get in the back doors. 100-foot long buses. St. Louis, light rail system, fad, too expensive to build a subway, packed for Cardinals games but empty during the middle of the day, between 9 and 4. The buses in Chile seem to be packed all the time; not nearly enough bus stops. 6 million people in urban Santiago, bus is losing $100/per person per year, for the privilege of not riding the bus. President has said "We owe the people of Santiago an apology, particularly the poor people." A lot of people actually lost their jobs. But less inequality, so happier.
18:29	Return to technical details. Map of the routes. Used to be the bus routes and the metro routes from where people live to where they work and were parallel. Cost per passenger for buses is still about ¼ of the cost per passenger for the metro. What the city did was eliminate almost all the bus routes that parallel the metro. Wait for bus; get off bus; wait for metro, which is crowded and might have to wait; then get off the metro and get on a bus with more waiting. Instead of looking at what people wanted, say as evidenced by what the map had evolved to look like, they drew it as what they thought it should look like from a planning perspective. Metro could not be more full but it still loses money. Could raise fares; could raise time. Also, new big bendy buses are six or eight inches wider than the lanes of Santiago. So accidents still happen often. Chile is not corrupt. It just seemed more rational--could put more people on them; wait longer and have fewer buses. How many private companies before? 3000. Probably some were small companies. Proportion of ridership from large companies? Probably mostly from a few largest companies. 4.8 million are from areas around Santiago areas. Express buses without stopping even with amenities like food and coffee; plus local buses that stopped at every corner.
24:49	Political economy. Private system that existed before had some visible negatives. Too many buses, inefficiencies. Political attractiveness to "publicize," "nationalize," "citicize" the system. Against the law now to own a private bus service. Maybe the system now actually does work--fed bad info. Why doesn't government return to the former system? Markets provide two things: information, and the incentive to do things in a particular way rather than some other way. Hard now for planners to go back, to know where to put routes now. Think what we need now is a reform. Unless you think of the market alternative you endlessly reform. Greed and profit. At least the current system solves that. Harper's Magazine ask readers to coin words. Everybody responds to incentives, including politicians. Puzzle: you've done something really dumb and people are mad about it. Go to unclog the sink drain. Take stopper out, etc., but forget to reattach the pipe. Floods vanity below the sink. Usually easy to put it back the way it was. What politics seems to do is to leave it disconnected. Different mental model: suppose you think water flows different ways because of different systems. Could think: This is public water and it will go where it should go. Even if you left it disconnected and lined it up just right it might mostly drain. Ethanol problem: corn prices have gone up. A lot of people say that's a mistake; but it's not repealed yet. The people who are making money from it don't want to repeal it. Bad policy might persist because people get emotionally attached or because the people who have benefited from the new regime are resistant in ways that wouldn't have existed in the old regime. Pareto superior policy: no one is better off from the new bus system in Chile. Volvo, the bus maker, is helped but not really a stake holder. Public choice approach, look at interest groups. The people in the government sincerely want to improve their society.
35:32	Are there any voices to go back to the old system? No. It would be political suicide. But why? Voters are tormented by the current system. Take the former Soviet Union, 1917 revolution, at the time greeted as a great success. "I've seen the future and it works." But it didn't work. Couldn't feed their people, bad weather for 70 years, poor incentives for their farmers. Suppose for the moment that some would have agreed that the system was horrible. System was corrupt, and they saw that and were aware of it. Causation wrong, thought corruption caused the difficulties rather than the system causing the corruption. But Chile is a democracy. Why can't a politician say "I have one issue: I'm going to go back to the bus system when it worked well"? Why wouldn't that strategy win? How many cities in the U.S. have private bus systems. But that's different--Chile's had the experience. They don't think of the old system as being private. They think of it as the old system. Ude, Chicago School based party in Chile, does promote return to the private system. Possible that the average citizen would just like the new system to improve. Bastiat: The State: each of us can ride at the expense of all of us. ["The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else."--Bastiat] Curb Rights, Dan Klein, about taxis more than buses, distinction gets blurred when talking about multiple people. Bus systems have almost no riders. Why don't we allow private buses? Pat answer: People don't have the experience. Mental models. But people have the experience of private sector in other things that work great. No one says we should have government movies. Airports: private bus system only in certain places and they get a monopoly. The way you would introduce private buses would start with a private entrepreneur proposing it, and then there would be objected. Brown cloud over the mountains: inversion of clouds like in Mexico City, so more car driving is probably not ideal. Was also complaint about old buses. But that's a separate problem, environmental regulations.
46:00	More on mental models: comments invited. Organ sales. We have a system in the U.S. where we lament that there are not nearly enough organ donors. Somebody who needs something offers a certain amount and someone who has it asks himself if that amount is worth it. After a death, millions thrown away. Cannot write a contingent contract allowing sale of your organs after death. You are welcome and encouraged to give it away. Mental model: it creeps people out. Incentives. Wrapped up in this is that a lot of the time our objections to incentives are an objection to wealth. We go from "You shouldn't have to do that" to "You shouldn't be able to do that." Moral hazard problem. More people would put it on their driver's licenses if there were a flat fee of $1000. Might take more than $1000, might be $100,000. We'd find out with a price system. Right now a liver is more than a million.
51:07	Economic education. If people think about the consequences of their actions are it will increase their demand for good policies. The mental model concept suggests that is a pipe dream. A lot of people with half an hour might at least say they are unsure of their previous beliefs. Failure of the Soviet Union: People did learn the lesson that social planning doesn't work really well. But they only learned it in certain situations, not for the bus situation. But the people in Santiago said it was a problem of social justice. Same solutions are being imported under the social justice agenda. All that's different is the rationale. Interesting that there is still an entrepreneurial opportunity for that politician. Douglas North.

Posted by Russ Roberts at http://www.econtalk.org/archives/2008/07/munger_on_the_p.html.

Kling on Hospitals and Health Care

Mon, 30 Jun 2008 06:30:00 -0500

Arnold Kling of EconLog talks with EconTalk host Russ Roberts about the death of his father and the lessons to be learned for how hospitals treat patients and our health care system treats hospitals.

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Time: 59:26

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: Arnold Kling's Home page Crisis of Abundance: Rethinking How We Pay for Health Care, by Arnold Kling. At amazon.com. Insiders, Outsiders, and Voting Behavior. EconLog, Apr. 26, 2008. Arnold's father's views. "How to Fix Healthcare Delivery", by Arnold Kling. The American, June 17, 2008. About ideas and people mentioned in this podcast: Books: Skin in the Game: How Putting Yourself First Today Will Revolutionize Health Care Tomorrow, by John Hammergren and Phil Harkins. At amazon.com. Articles: "The Way We Age Now", by Atul Gawande. New Yorker, April 30, 2007. "Public Choice Theory", by Jane Shaw. Concise Encyclopedia of Economics. "Coordinating Care A Perilous Journey through the Health Care System", by T. Bodenheimer. Mar 6, 2008. New England Journal of Medicine (registration required). Podcasts and Blogs: EconTalk podcasts on Health.

Podcast Readings

About this week's guest:

Arnold Kling's Home page
Crisis of Abundance: Rethinking How We Pay for Health Care, by Arnold Kling. At amazon.com.
Insiders, Outsiders, and Voting Behavior. EconLog, Apr. 26, 2008. Arnold's father's views.
"How to Fix Healthcare Delivery", by Arnold Kling. The American, June 17, 2008.

About ideas and people mentioned in this podcast:

Books:

Skin in the Game: How Putting Yourself First Today Will Revolutionize Health Care Tomorrow, by John Hammergren and Phil Harkins. At amazon.com.

Articles:

"The Way We Age Now", by Atul Gawande. New Yorker, April 30, 2007.
"Public Choice Theory", by Jane Shaw. Concise Encyclopedia of Economics.
"Coordinating Care A Perilous Journey through the Health Care System", by T. Bodenheimer. Mar 6, 2008. New England Journal of Medicine (registration required).

Podcasts and Blogs:

EconTalk podcasts on Health.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. Father's medical care at the end of his life. One thing to see statistics that suggest things are wrong with the American health care system, Hanson podcast, but quite another thing to see that up front. Father diagnosed with cancer of the esophagus late last year; political scientist, wouldn't live to the next election. But he probably died from an infection contracted in the hospital. Pain in ankle in early January, goes for x-ray; fell and broke hip. Emergency room; pin put in. Advised to walk around. History of cardiac problems, so put there, kept flat on his back and developed bed sores; died three months later. Sent to many different units in the interim. Incredible equipment, well-trained and caring people; but system failure and break-down.
5:13	Specialization; nature of health care system is that is not designed but it is tampered with. In the modern hospital, well-informed specialists, but lack of a generalist--someone in charge of the whole patient. Family members end up playing the role of general advocate. The specialization we observe is not particularly healthy and is not perhaps what we would observe in a less-interventionist system. Hammergren and Harkins' book quote: Doctors trained as individuals, rewarded for outcompeting classmates and colleagues, taught to be skeptical of others. Doesn't lend itself to team-oriented behaviors. Don't need team for broken leg or strep throat. Complex patients such as those with diabetes or late stage cancers do. Spontaneous order, corporate order, breakdown of order. Gas station example: lots of people, still no wait, got gas. Not a breakdown of order as in the late 1970s. Find order on Public Choice Theory, could go to Concise Encyclopedia of Economics, David Henderson, ed. planned that (corporate order). Wikipedia, Google, unplanned (spontaneous order). In health care, the complexities are overwhelming the spontaneous order. Body is a complex system. Hayek observation: by spontaneous order we don't mean a world with no planning--planning often takes place within corporate structure--the question is who does the planning. In the U.S. we've put up barriers that make it hard for the corporate order to work. Feedback mechanisms make it so that you don't get lemonade from the pump at the gas station--could sue them, they could go out of business. In hospital, no feedback if as a result of one specialist curing a heart attack he gives the patient an infection.
15:33	Simple business process level: people who have been in a business world. Freddie Mac--buys mortgages from lenders and issues securities. Regional staff would sign contracts. Years later it would turn out that Freddie Mac was supposed to receive a lot of money, but only the regional staff knew. Ordinary business fixes this or the company goes out of business. Felt by company though not the customers; if customers feel it, they go somewhere else. In health care, a business consultant would suggest all kinds of reorganizations, process changes, etc. that would produce better outcomes. Why doesn't this happen? This problem is relatively new. Patients are older and there are more often multiple causes. [Podcast taped June 18, Tim Russert passed away from a heart attack a few days ago.] Diabetes; chronic illness; more things people expect to be treated for--child doesn't sit still at school. Lone wolf or specialized doctor, though, hasn't changed. Need for more team-oriented approach with patient at center. Skyscraper has architect and project manager. That role is missing in health care. Could just be it's really hard. Making a car is a complex process; it's become a more team experience with a goal of preventing defects. Washington U., St. Louis, excellent, research hospital, Chuck Knight, head of Emerson, emergent not top-down corporate culture. Why is it that when you walk into a hospital today as an elderly person you don't get an advocate--a shepherd? Family member plays that role but is emotional and doesn't know the hospital structure. Maybe it's not productive or too expensive, patients won't pay for it. Tradition is that a doctor should be in charge. Would be very resource costly. Who pays for it? Hospital administration consists of people making sure the hospital gets paid: Medicare or private insurance. Customer is Medicare or the customer. Medicare, Washington, DC, has other goals, doesn't think. Pay for performance: define what's a good outcome and good procedures and reward hospitals and doctors for doing that. Reporting problem. Father's death certificate lists esophageal cancer. But he probably died of infections. Hospital didn't want to get dinged. Reports get manipulated when you try to manage from a long distance.
27:24	Political and economic interface: moral quandary. Want people to be taken care of but the political process, either via the electorate or by special interests, we've moved into an imperfect system. How do you get from there to, say, a second-best, more effective solution? Basic moral quandary of health care: we instinctively want it to be free but we understand that the providers need to be paid. Moral repugnance to charging someone money if he is in distress. Usury laws developed from this. Set up a layer of insulation. In industrialized world, health care spending paid for by other parties. Here about 40% government. Patient is not the customer for that portion. Goal: remove some of that insulation. Lasik surgery, typically not covered by insurance or welfare programs; Lasik has gotten cheaper and better, profit motive, self-paid, advertising. Doesn't seem to be a powerful model that people have noticed has worked. Also: doctors are kings in the current system; main focus politically is to make sure they get paid. One excuse people give for health care being different is that it is complex. Computers are also complex; there are devices that work--competition, brand names, review articles. Could work in health care but we don't use them, not paying for it. Neat to see how resistant people are to the notion of paying for health care. A lot of the health care services we buy, such as Lasik or colonoscopy screening, are not in moments of distress. Elective. Even in distress you have more choices about how it can be dealt with. Temptation to say health care demand curve is vertical. People put off colonoscopy screenings because they are unpleasant; turned out for Russ to not be so horrible, took pills not liquid. Is it imaginable to get to a different world? Bootlegger and Baptist problem. A lot of general propaganda saying that good health insurance covers more. Economist would say it should cover less, just catastrophic insurance.
39:54	The uninsured. You hear that they are at risk. Employer-provided health insurance is unraveling, huge wage differentials, people who are healthy leave to become consultants and have more take-home pay. Medicare, bankrupt. Enormous structural deficits forecast as population ages. Not much of a crisis in the sense that we'll do something different--lower benefits, raise tax rates. The problem that looms is the political fight. Stein's Law: something can't go on forever. Health care spending rising relative to GDP has to stop eventually if only on arithmetical impossibility. Longevity is going up. Most tempting way to resolve it is to keep clamping down on reimbursements to doctors under Medicare. Net result is doctors are leaving the system. Headed toward a two-tier system. Question of how we get there. People who use the government funds get poorer choices, fewer doctors; others pay more and more and have more choices. Medicare is government program deals with the elderly; Medicaid deals with the non-poor elderly.
46:02	Most doctors don't feel like kings. Disillusioned, angry, bitter. Medicare bureaucrat or lawyer suing them is the king. Hammergren and Harkins' book quote: Average physician statistics, burdensome system for doctors. Why is it that we don't have this shepherd or project manager in charge? Doctor doesn't want to give up control. Have to reconcile their desire to have a more sensible workload with the need to be in control, allow others to be in charge of, say, prescriptions. Could have a doctor who is more of a generalist. Everyone is within his own silo, his own unit. Atul Gawande, a doctor, article: patient goes to doctor, has tumor, but instead gerontologist's first question is for patient to take off her shoes and look at her toenails. Can't clip her toenails, so at risk of falling down and being unable to get up. Need more gerontologists. In fact the number is decreasing. Shannon Brownlee's book, Overtreated. Take off your socks is not a procedure, so doctor's can't bill for it as a procedure. We are treating doctors based on what they do rather than the outcomes. We pay them by the code, by filling out the forms properly. We've created a breakdown.
54:29	Arnold's father as political scientist. Believed in interest-group politics, viewed it as the rational core. Baseball fans in St. Louis: 8th inning, close game, less than two out: squeeze bunt here? That's the way the game's supposed to be played. Viewed interest groups as the way the political game's supposed to be played. Saw it as the natural order of things. Don't expect that if your favorite white knight or African American knight is elected that things will change. People on the insider of politics scratch each others' backs; on the outside. Libertarians like those who throw brick through the window; but maybe you can affect the system more by joining them.

Posted by Russ Roberts at http://www.econtalk.org/archives/2008/06/kling_on_hospit.html.

McKenzie on Prices

Mon, 23 Jun 2008 06:30:00 -0500

Richard McKenzie of the University California, Irvine and the author of Why Popcorn Costs So Much at the Movies and Other Pricing Puzzles, talks with EconTalk host Russ Roberts about a wide range of pricing puzzles. They discuss why Southern California experiences frequent water crises, why price falls after Christmas, why popcorn seems so expensive at the movies, and the economics of price discrimination.

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Time: 1:15:54

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: Richard McKenzie's Home page Why Popcorn Costs So Much at the Movies and Other Pricing Puzzles, by Richard McKenzie. About ideas and people mentioned in this podcast: Articles: "The Pitfalls of Identifying Price Discrimination," by John Lott and Russell Roberts. Economic Inquiry, 1991. "Price Controls", by Hugh Rockoff. Concise Encyclopedia of Economics. "Monopoly", by George Stigler. Concise Encyclopedia of Economics. Price discrimination discussion. "Elasticity and Its Expansion", by Morgan Rose. On Econlib. Web Pages: Roadway deaths up after 9/11 due largely to local driving On Flying vs. Driving after 9-11. U. of Michigan News Service, Nov. 17, 2004. Art de Vany, Writings and Interviews. Gordon Tullock. Home page. Podcasts and Blogs: Boettke on Katrina and the Economics of Disaster. EconTalk podcast. Peltzman on Regulation. EconTalk podcast.

Podcast Readings

About this week's guest:

Richard McKenzie's Home page
Why Popcorn Costs So Much at the Movies and Other Pricing Puzzles, by Richard McKenzie.

About ideas and people mentioned in this podcast:

Articles:

"The Pitfalls of Identifying Price Discrimination," by John Lott and Russell Roberts. Economic Inquiry, 1991.
"Price Controls", by Hugh Rockoff. Concise Encyclopedia of Economics.
"Monopoly", by George Stigler. Concise Encyclopedia of Economics. Price discrimination discussion.
"Elasticity and Its Expansion", by Morgan Rose. On Econlib.

Web Pages:

Roadway deaths up after 9/11 due largely to local driving On Flying vs. Driving after 9-11. U. of Michigan News Service, Nov. 17, 2004.
Art de Vany, Writings and Interviews.
Gordon Tullock. Home page.

Podcasts and Blogs:

Boettke on Katrina and the Economics of Disaster. EconTalk podcast.
Peltzman on Regulation. EconTalk podcast.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. Southern California is prone to periodic water crises, droughts. It doesn't rain much there. Isn't that the source of the problem? Only rains about 11 inches a year, desert climate. But it also doesn't rain Mercedes Benz or Snickers in CA. Maybe the price has something to do with it. Price changes with supply and demand for those products. If you have unusual droughts in southern CA, the price is not allowed to rise--it is government controlled, so likely to get these shortages. Public officials appeal to people to cut back on water. Cuts consumption maybe 3-5%. If you hear other people cutting back you might even increase your consumption because there is more available; or might take water now before they send out the water police. Georgia. In Irvine you got a ticket for leaving your garage door open too long. Association contract rules. Grass police. The way your yard looks can affect the surrounding neighborhood but not widely enforced. Irvine does prove that perfection is overrated. Company town, medium strips mowed and edged.
6:50	Water problem: Last week talked about peak oil; a lot of people see it as an engineering problem but it's an economics problem. Everything is scarce. No incentive for people to conserve. Gasoline situation--with price controls in early 1970s we had long lines and shortages. Tankers even changed course and went to Europe because they found they could get a better deal there. Even fistfights at gas stations. A ten-year-old girl started selling $10 coupons in advance and then disappeared--might be apocryphal story. It doesn't matter whether we are running out of oil soon or in 50 years or a thousand years--there isn't enough oil to go around at a zero price. It is the role of price that makes it plentiful. If you control the price you will get less supply and more people standing in line. Wait time can even mean people are paying a higher price. Higher income earners in the 1970s paid teenagers to stand in line for them. Friedman: people haven't so much learned that price controls are bad so much as they just still remember the disruptions of the 1970s.
13:06	Flooding. Recent Iowa floods. In the event of floods should we feel sorry for those who are flooded? those who are nearby but not flooded? If you expect floods in the flood plain, you expect the value of property to be suppressed. The price differential should approximate the difference in losses when floods come. If the differential is too low people will continue to buy the hillside houses. If you have a flood that is not as serious as expected, the people in the flood plain got a benefit and those on the hillside paid too much. So, who you feel sorry for depends on what was anticipated. Suppose we start taxing the people on the hillside and use it to relieve those in the flood plain. Depreciates value of hillside property, more people will want to live in flood plain and will build bigger houses there and stocking them with better furniture; likely to have more newsworthy floods. Often people know that a flood is coming; if they know their damages will be covered by those on the hillside they have less incentive to pack up their belongings. John Stossel report on buying a house on NJ coast and puzzled to be covered against hurricanes by Federal subsidy even though hurricanes are known to come around. Law of unintended consequences. Benefits of these programs get capitalized and end up helping nobody. Can end up with no gains to the property owners. Anticipated flow of benefits of $20,000 by government would get captured in the value of the properties.
22:29	Taxicab market in Manhattan, have to have a medallion, license. Getting a medallion gives you the right to pick up people; increasing number of medallions penalizes those who previously saved. Gordon Tullock: transitionary gains trap. Farm subsidy: many farmers bought their land at prices inflated by anticipating the government subsidies lasting into the future. 9/11 issue: Terrorists have probably killed more Americans since 9/11. When they flew the planes into the towers people feared flying; wait times have gone up with inspections. So more people drive; and since highways are more deadly than flying you anticipate more deaths. Three Cornell economists found that highway travel went up and estimated that 1250 adults died in first 12 months after 9/11 who wouldn't have. High price of gasoline implies fewer accidents. Administration has to be careful about raising alert status because it lengthens lines and increases jitters, drives people to the highways, and cause more deaths. Alert is kept at orange all the time. Sign: Free beer tomorrow. Dwight Lee, U. of Georgia, Athens, GA, anecdote: Russ flew to Atlanta shortly after 9/11. Shuttle from airport was probably more dangerous than the flight. TSA is careful about how it allocates its resources: checking grandmothers and babies also lengthens lines. But its rules get well known, so people can take advantage of that, too. Judicious use, management problem to use rules without discretion. Not much incentive to reduce the length of the lines. You can't complain to them or they'll strip search you.
33:52	Why are there so many sales after Christmas? Standard answer: trying to get rid of particular inventories, maybe for tax purposes. But we observe storewide sales. Buyers typically aren't wrong about everything a store stocks, much less year after year. Many of these sales are planned--buyers place their orders back in July. Two different markets: urgency before Christmas; less urgency after Christmas. Inelastic demand before Christmas, more responsive after Christmas. Good form of price discrimination. Russ and John Lott, cost differences. Price discrimination is not necessarily the monopoly bad it's seen as. Car dealership podcast. Sign in a dealership: "If you want to haggle we'll raise the price so you can bargain it down and get a bargain." What is price discrimination? Firm has to have some pricing power, monopoly power. Item can't easily be resold or price discrimination would break down. Christmas would require a time machine to resell. If you start lowering your price after Christmas, can move date forward into pre-Christmas sales. Gift cards let receivers get some of the benefit of the sale. Definition is charging two different people different prices for the same good. Retail business is extremely competitive, same with restaurants. If you suggested to them that they have market power they would respond that it's unlikely. Response: fixed on idea of price competition being the only meaningful source competition. Schumpeter point: because there are economic profits to be made you have all of these goods to be made and people willing to risk a sizeable investment. Variety of goods. What if all the economic profit would evaporate once somebody created a product? Incentive for innovation. Non-price competition is important. Availability. Important way that stores compete is by keeping their shelves stocked. We are accustomed to seeing stock on the shelves. Stores don't want to run out of key items before Christmas, so overstock intentionally in advance. Airline ticket prices that go up at the last minute give a service to some people rather than just reserve the tickets and lose the money if not enough people buy them.
47:22	World of pricing is complicated. Even the players in the business don't understand it but are driven by competition to come up with a good strategy. Popcorn. Why is popcorn expensive? Standard answer is that movie theaters are monopolists and once you walk through the turnstile they can charge whatever they want. But then why not charge even more than they do? Movie industry is selling a bundled experience: movie and other things. Interplay between the take the studio gets, the movie price, and the popcorn price. This kind of pricing strategy is used at Starbucks, McDonalds, etc. A small bag of popcorn is about $1.37 an ounce for a small bag in southern CA, much more than filet mignon at Costco, about on a par with sirloin at Outback. As you go to the medium or the big tub, where you might even get less popcorn because the medium bag is flexible and can be stuffed. The medium is 50 cents more than the small bag and the tub is a dollar more but you get free refills. A lot of movie-goers don't seem to be aware of the refills. If you consume 3 tubs the cost of the popcorn goes way down. If they are making a good deal of profit from concessions they have an incentive to keep the price of tickets down so they can raise the price of popcorn. They bid for movies; typical contract gives about 70% of the gate receipts to the distributor. If they have a movie they think will be a blockbuster they'll bid more, even though the ticket price might remain the same. The reason they are willing to bid so much is their high margins from concessions once people are inside.
56:10	You don't have to go back to a theater that charges an unreasonable price. Theaters compete. Part of high margin may be that they are competing on getting access to the best movies. Part may be that the costs are not obvious. Labor cost, opportunity cost of space, people do bring in their own items in their pockets or eat before they come. Complex issue that looks like exploitation but is more complicated. Cost of popping the popcorn at home is about 50 cents; labor cost of their time, clean up, smuggle it into the theater adds up. Would it be better if you had a lot of popcorn vendors lined up along the walls? Fewer theaters would result. Money to be had in theaters creates market for good movies. Financial health of theaters. Theaters compete with sporting events, DVDs, home theaters. Thrill of seeing a movie with a bunch of people, and the unique flavor of movie popcorn. Smellable, audible edible. Some theaters will pop a bunch of popcorn just to get that smell. Concession counter is idle in one-screen theaters, but with multiple screens it is always busy. Empirical evidence. Multiscreen theaters should drive down the cost to the consumer, expect to see the relative price of popcorn falling over time. Efficiency gains are revealed in the film budgets. Strange that the price of popcorn and tickets are bundled that way. Would expect that movies would get more expensive over time--as we get wealthier we demand better movies; are we paying for them through the higher price of popcorn?
1:06:42	Supreme Court antitrust decisions have affected the distribution. Art de Vany, Hollywood Economics. 1948 decision, vertical integration and movies. Risky business, hard to predict what movies will succeed, extreme kurtosis. Hopeless ignorance of the future. Movies are inherently unique products. Depends on buzz and also what else comes out the same weekend. Prices don't vary for movies because theaters are concerned about jacking up the price and causing lower buzz and less attendance down the road. "Sex and the City" movie line three blocks long. If you have an actor who can guarantee success that actor is in a good position to charge a very high price. Women's dry cleaning costs more than men's--looks like price discrimination but there are lots of actual cost differences. These puzzles are very complicated. Economics gives you a thoughtful framework. Women are more likely to return their dry-cleaning for damages or re-cleaning than men. Keep drilling down. The arguments that people think are the right argument are not always right. Coupons, Procter and Gamble coupon cartel to suppress distribution of coupons, taken to court.

Posted by Russ Roberts at http://www.econtalk.org/archives/2008/06/mckenzie_on_pri.html.

Don Boudreaux on Energy Prices

Mon, 16 Jun 2008 06:30:00 -0500

Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about the recent surge in energy prices. They talk about why prices have risen, the implications for America's standard of living and the implications for public policy.

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: Don Boudreaux's Home page About ideas and people mentioned in this podcast: Books: The Price of Everything: A Parable of Possibility and Prosperity, by Russ Roberts. At amazon.com. "Opening Day," the first chapter of The Invisible Heart, by Russ Roberts. Contains the pistachio/oil analogy. The Coal Question, by William Stanley Jevons. On Econlib. Articles: "Oil Prices", by Robert P. Murphy. On Econlib. "Natural Resources", by William Baumol and Sue Anne Batey. Concise Encyclopedia of Economics. "Property Rights and Natural Resource Management", by Richard Richard and John Baden. Literature of Liberty, vol. ii, no. 4, pp. 5-44. September-December 1979. On Econlib. "The Real Oil Problem", by Morris Adelman. Regulation, Vol. 27, No. 1, pp. 16-21, Spring 2004. "Price Controls", by Hugh Rockoff. Concise Encyclopedia of Economics. "Leon Walras". Biography. Concise Encyclopedia of Economics. "Carl Menger". Biography. Concise Encyclopedia of Economics. Podcasts and Blogs: McCraw on Schumpeter, Innovation, and Creative Destruction. EconTalk podcast. Yandle on Bootleggers and Baptists. EconTalk podcast. Grab Bag: Munger and Roberts on Recycling, Peak Oil and Steroids. EconTalk podcast.

Podcast Readings

About this week's guest:

Don Boudreaux's Home page

About ideas and people mentioned in this podcast:

Books:

The Price of Everything: A Parable of Possibility and Prosperity, by Russ Roberts. At amazon.com.
"Opening Day," the first chapter of The Invisible Heart, by Russ Roberts. Contains the pistachio/oil analogy.
The Coal Question, by William Stanley Jevons. On Econlib.

Articles:

"Oil Prices", by Robert P. Murphy. On Econlib.
"Natural Resources", by William Baumol and Sue Anne Batey. Concise Encyclopedia of Economics.
"Property Rights and Natural Resource Management", by Richard Richard and John Baden. Literature of Liberty, vol. ii, no. 4, pp. 5-44. September-December 1979. On Econlib.
"The Real Oil Problem", by Morris Adelman. Regulation, Vol. 27, No. 1, pp. 16-21, Spring 2004.
"Price Controls", by Hugh Rockoff. Concise Encyclopedia of Economics.
"Leon Walras". Biography. Concise Encyclopedia of Economics.
"Carl Menger". Biography. Concise Encyclopedia of Economics.

Podcasts and Blogs:

McCraw on Schumpeter, Innovation, and Creative Destruction. EconTalk podcast.
Yandle on Bootleggers and Baptists. EconTalk podcast.
Grab Bag: Munger and Roberts on Recycling, Peak Oil and Steroids. EconTalk podcast.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. The Price of Everything. Oil prices and price of gasoline. Demand for gasoline, tipping point: people think there is a psychological barrier after which people will cut back. Unlikely. Oil companies are profit-maximizing. If people didn't respond to prices, why wouldn't they just keep raising prices till people did start to respond? Demand curves slope downward to the right. At lower prices maybe the ways in which people are less noticeable but still there. Common perception is that demand curves are vertical: when price goes up people still drive, but they drive less. SUVs aren't selling very well; people might even move closer to work. Short run response will be different from the long run response. If people don't notice then maybe you can raise prices. Competition would tend to keep prices down. If competition causes gas prices to fall, it much be that people notice. Common mistake: price responds to consumer demand and producers' supply; and also has a feedback effect. Price has been rising over the last couple of years possibly because demand is increasing. In that case we expect prices to go up and for people to consume more. Error is to believe that it violates the law of demand for prices to go up and consumption to increase. What's happened in the U.S. is that our economy has slowed--still growing but at a slower pace--but other countries like China still have rapidly growing economies which is overcoming our slowdown. Want lower prices, not regulated; but having high prices doesn't mean our economy is being harmed. If in response to our prosperity we drive up the prices of energy, education, and housing, it means our economy is doing well, not poorly. Sign of prosperity.
8:42	Julian Simon points out that the one resource that has consistently risen in real value over time as opposed to falling in value (people find more oil, tungsten, alternatives) is human labor. Labor is a resource. The increased value of human labor over time reflects the increased productivity of labor; similarly for oil price rise its increased value reflects its increased productivity. Classic problem in economics: a fixed pool of a resource, the price should rise steadily over time, depending on assumptions of industry; but in a competitive industry its price will rise roughly at the rate of interest. Owners of the resource will take it out of the ground, sell it, and invest their money, getting interest, which by increasing the supply of the resource tends to drive its price down. Path of price has to be roughly equal to the rate of interest. Store it in the ground if price is rising faster than the rate of interest. Standard view is that it's natural for the price of oil and other resources to rise steadily over time. In actuality real world doesn't behave that way. Standard reason it doesn't is that in all of those models, the price of extraction is fixed. Certain technology for discovery and extraction. But in fact the prices of these technologies decline over time through ingenuity, so the prices of many natural resources fall over time.
14:04	Morris Adelman, MIT, article, predictions that supply of oil would soon run out, quote: "This time the wolf is here." Nothing in the current situation to suggest it is any different from the panic of the 1970s or early 1980s. Technically it's not true that the supply of oil is fixed. Can buy synthetic fuel oil at your local station. Also there is oil in shale which can be extracted. How we define what is oil has some variance. But put that aside. Imagine a mosquito coming down onto a blood-filled balloon. Should she worry that she will run out? If the balloon is the size of a marble, maybe. If it's the size of an Olympic sized swimming pool, no. We don't know how much oil there is. We keep finding more oil, better ways to extract it, consistent with the hypothesis that it could be the size of twenty Olympic sized swimming pools. Long term trend of reserves keeps climbing. It's not an unlimited resource but it acts like it is. Remaining reserves same as they were 30 years before despite using it. Have more inventories in the ground. Proved or known reserves are used to scare people. Analogous to how much food you have in your cupboard. No point to discovering more oil till prices start to rise or when the known reserves shrink, you go out and discover more.
22:35	Pistachio nuts, from The Invisible Heart: If you love pistachio nuts and are given a room full of them, you can invite all your friends; but you have to litter the room. Would you ever use them all up? Eventually the room would start to fill up with shells. Peak oil idea, that we are somehow now on the downward trend, non-economic concept. As the shells start to accumulate, there's always one more even in a bowl as you start to look, but after a while the price will rise. People want to hurry that along: rather than relying on the natural role of prices. We bet on ethanol since in the public mind we are running out of oil, we have to have alternatives. What are the alternatives? It comes totally naturally to the economy. We don't have to hurry it along. We are more likely to make a mistake if we try to hurry it along. Think of ethanol; synfuels, sinfuels. Decentralized, emergent incentives to invest are powerful incentives. Before oil there was coal. Jevons, Walras, Menger, co-discoverers of the marginal concept. Early doomsday story: From Jevons's The Coal Question--quote: "We cannot long continue" our current rate of progress. He determined there was no way oil could replace coal. When you look back on it 150 years later it's an absurd claim. In order for China and India to have an effective demand for oil they have to give up something for it. They are producing valuable things for this oil. We are made wealthier as a consequence. So our increased cost of acquiring oil is offset to some extent by the goods and services produced by these countries. Most of those gains though are captured by the oil producing nations.
31:18	People are alarmed all the same. Highlights human foible that we assume tomorrow will be like yesterday. Extrapolate to $5/gallon next year. But as in the past, innovation will help. Made this assumption about housing prices till a few years ago. Before George Bush the first people worried that he would do something to raise oil prices because oil prices were "way too low." We can imagine futures but not the future. Can never really get it right. Could people in 1950 imagine what was available in 1975? None of the advances were planned. Schumpeter, creative destruction: it's the very nature of creativity to be creative. All we know is that in the past genuine creativity has taken place and has genuinely increased the standard of living. We're confident it will yield something. But hard to debate because we don't know what will be yielded. Pistachio story: eventually we will leave oil in the ground. But that could be wrong, too. We could find such inexpensive ways to produce it that we just use it all up and turn to a (then cheap) alternative. But people have the view that the sky's always falling. We have probably evolved to be natural pessimists. In a world of strict resource constraints it's better to squirrel things away. Modern great society (Hayek's term) is different. Legitimate fear is that these fears will get translated into government policies. Bootleggers and the Baptists: let's make fuel out of food. Bootleggers, the corn farmers, make out like bandits from this fiasco. Policy has really bad unintended consequences. Even those originally behind it have started to have second thoughts; people who depend on corn have had to pay much more and are poorer. How long will it take for the government to change its policy? Private sector fixes errors quickly--new Coke, Edsel, Corfam. Sugar quotas in the U.S. benefit few and cost everyone more, but the quotas persist.
42:42	Perfect political storm right now: people are worried about global warming; people are worried about instability in the Middle East--immense feeling that something has to be done. If we could and if we could do it wisely, good idea. Unlikely that we can do it wisely. Should we sue foreign countries for not producing oil--as George Will pointed out, we'd have to sue ourselves for not drilling in nature preserves. What should our role as economists be? What ought we encourage? What should citizens ask of their politicians? Laissez faire doesn't lead to a perfect world either? On economic grounds, what would good policies be? Get rid of a lot of environmental restrictions on drilling. 1979 was last time of oil spill in Gulf of Mexico. Technology of protecting against spills has improved. Why can't we drill in ANWAR? Encouraging: lack of encouragement for price controls. Always a temptation to use price controls to make consumers happy; but also have a movement to raise prices. Politicians propose gas tax holiday; others propose very high gas taxes. Carbon tax issue: externality, global warming argument is that therefore we should raise taxes; even on pure static wealth conditions, we don't know that the taxes are not too high. Hard to do convincing calculations of whether the taxes are too high or too low or just right. Is the tax return to Uncle Sam higher than the profits made by oil companies for each gallon of oil? Might not be true. Right now oil companies are making record profits. None of this means that oil companies should be protected or coddled or that they are special. What do they do with the money? Give some to stockholders (Russ must own some via mutual shares); if you are really worried, buy their stock. Some goes to finding new oil. Not much goes to building new refineries--very expensive right now to build new ones so they expand existing ones.
53:05	It should be pointed out that these protections come at a cost. Thomas Sowell: reality is not optional. Limit drilling in ANWAR and off the cost and have different standards across states. Andy Morriss, Cafe Hayek reference, with co-author, article showing that market for gasoline has become very fragmented which makes it more expensive because of loss of economies of scale as different states make different rules. Prices reflect that underlying reality. Indian and Chinese demand for oil, our increased wealth that allows us to want and afford more SUVs are all part of that underlying reality. Some comes from distortions, but intervening to change the price is like shooting the messenger.
56:17	Julian Simon, more optimistic view, The Ultimate Resource, we should always take into account that we can rely on our brains. The human mind is the ultimate resource. Simon's empirical work. The State of Humanity, pollutants, tuberculosis, malaria, cholera, polio--in the developed world we've mostly wiped those things out, the very kind of pollutants that actually killed people. How free is our environment from things that kill, or cause major discomfort? Neighborhoods in U.S. today are the equivalent to sanitary operating rooms compared to 100 years ago. Capitalism is cleaning our environment. We're privileged to be able to worry about the pollutants we today worry about. Ironic that people worry about how dangerous current conditions are though our lifespans continue to increase. Nurse email to Boudreaux upbraided him for pointing out that more people die of cancer today than 100 years ago by noting that we live longer. You are going to die of something and you hope it will be relatively painless and a long time from now; and we've gotten better and better at that.

Posted by Russ Roberts at http://www.econtalk.org/archives/2008/06/don_boudreaux_o_1.html.