What market design can do for you

Michael Giberson

Medicare pays medical equipment suppliers based on indexed-adjustments to a price list established 25 years ago. It is extremely unlikely that these prices are efficient. For the past 10 years Medicare has explored the possibility of pricing medical equipment via procurement auctions. Their procurement auction plan is fatally flawed.

What can market design do for you? Market design – that branch of economics that seeks to apply economic understanding to the task of creating or repairing markets – helps explain why the Medicare procurement plan will work badly and what can be done to enable it to work well.

At Freakonomics, Ian Ayres presents an op-ed co-written with Peter Cramton, “Fix Medicare’s Bizarre Auction Program,” that lays out two of the fatal flaws with the Medicare auction plan. The op-ed links to a brief analysis by Cramton and Brett Katzman of the issue.

(An overview prepared by staff of the U.S. House Energy and Commerce subcommittee describes the background and current state of Medicare’s payment system. Perhaps surprisingly, even the fatally flawed procurement auctions have produced cost savings of up to 56 percent on certain medical supplies, but that is more a measure of how bad the current method is rather than a recommendation of the proposed procurement auction.)

Is Texas CREZ a model for getting transmission lines built elsewhere in the country?

Michael Giberson

Current and anticipated changes in the patterns of electric power production and consumption drive the demand for new transmission lines to help get lower-cost power from generators to consumers. The biggest changes in power production have come from growth in renewable power supplies, so the expansion of transmission is seen as critical to the growth of renewable power. But siting transmission lines is tough in the best of cases; most of the time it seems nearly impossible to get new major transmission projects built.

The Texas CREZ process – a long-term effort to identify opportunities to develop additional renewable energy resources in the state by supporting expansion of the ERCOT grid to enable delivery of power into the state’s largest population centers – has frequently been seen as a model of sorts.  At least compared to similar ideas elsewhere, the CREZ lines are moving forward through regulatory and legal processes and beginning to be built.

Well, there has been some opposition, as detailed in a three-part series by Kate Galbraith in the Texas Tribune.

Waste heat into electric power?

Michael Giberson

I don’t understand the physics here – it’s some combination of quantum mechanics and carbon nanostructures – but according to this news release from the University of Arizona, it can turn waste heat into electric power. So far the interesting properties have been simulated in a computer model, but not demonstrated in a physical device.

Turning Waste Heat Into Power

UA physicists have discovered a new way of harvesting waste heat and turning it into electrical power. Taking advantage of quantum effects, the technology holds great promise for making cars, power plants, factories and solar panels more efficient.

Follow the link for more. The underlying research is forthcoming in ACS Nano: Justin P. Bergfield, Michelle A. Solis and Charles A. Stafford, “Giant Thermoelectric Effect from Transmission Supernode.”

China’s central government-based energy conservation policies

Michael Giberson

Tom Friedman wants to laud the China’s political leadership for their ability to get big things done economically while distancing himself from government’s authoritarian controls on politics. As mentioned in the prior post, Craig Pirrong responds that “it’s a package deal. Governments who think about people purely instrumentally, who think that they can push them around to achieve this economic result or build that glittering piece of infrastructure have a tendency of engaging in brutal behavior.”

But even if we ignore the oppressive nature of the government with respect to political freedoms, as Friedman would like to do, we can’t ignore the oppression that is inherent in the the government’s ability to get big things done economically.  A recent example: China’s efforts to control energy consumption.  From the Associated Press via CNBC (September 8, 2010):

BEIJING – Chinese steel mills and mobile phone factories are being idled and thousands of homes in one area are doing without electricity as local governments order power cuts to meet energy-saving targets set by Beijing.

Rolling blackouts and enforced power cuts are affecting key industrial areas. The prosperous eastern city of Taizhou turned off street lights and ordered hotels and shopping malls to cut power use. In Anping County southwest of Beijing, an area known as China’s wire-manufacturing capital, thousands of factories and homes have endured daylong blackouts over the past two weeks.

“We can’t meet deadlines for some orders and will have to pay penalties,” said Han Hongmai, general manager of Anping’s Jintai Metal Wire Co. “At home we can’t use the toilet” on blackout days due to lack of power for water pumps, he said.

While the U.S. and Europe struggle with flagging economies, the power outages are symptomatic of China’s torrid growth and officials’ capricious use of their powers to meet the authoritarian government’s goals….

It’s not the first time something like this has happened.

In 2007, gasoline shortages disrupted the economy after refiners cut production in response to price controls. The next year, parts of China shivered through blackouts in bitter winter cold after the government froze power prices, prompting utilities to cut expenses by letting coal stockpiles run low.

This year’s power cuts began after Beijing announced in August that an energy efficiency campaign suffered a setback as a stimulus-fueled building boom drove growth in steel, cement and other heavy industry….

[Greenpeace's Yang Ailun] said environmentalists welcome moves to close antiquated factories because that improves overall efficiency. But she said temporary blanket cuts come at a high social cost and the government should be taking more long-term steps such as changing energy pricing to encourage conservation.

“What they are doing now is relying too much on harsh administrative orders,” she said.

In some ways, the power cuts are backfiring. Han, the manager in Anping, said his wire factory coped by purchasing its own generator. So it still uses power — but from a source that might be dirtier and less efficient.

Energy is politically sensitive for Beijing, which is trying to clean up the battered Chinese environment and rein in growing demand for imported oil and gas, which it sees as a strategic weakness.

So because “energy is politically sensitive for Beijing,” orders go out to cut consumption and the consequences – for anyone not having political connections in Beijing – be damned.

I don’t mean to suggest that rolling blackouts are kind of brutality, just evidence of how things get done when central governments have the ability that Thomas Friedman lauds to just do it. To be clear, there is nothing inherently Chinese in this example. Governments the world over, when they have the kind of unconstrained power that Beijing does, impose themselves in these same ways.

Tom Friedman wants us to get big things done

Michael Giberson

I don’t read Tom Friedman’s columns in the New York Times, but apparently Craig Pirrong does, and I read Pirrong’s Streetwise Professor blog, and Pirrong’s latest post on Friedman reminds me again why I don’t read Tom Friedman’s columns. At least I generally avoid Friedman except when someone else calls attention to a particularly egregious column full of Tom-Friedmanisms.

Once again Friedman visits China, marvels at their ability to get things built, turns his gaze back to our own hallowed shores and – writing with an almost audible sigh – wishes Americans would just pull together and tackle the big problems and do big things. You know, like they used to do back when we were kids, and we had the space program and built highways and such.

Pirrong notes Friedman’s wish to admire the Chinese system’s ability to get things done while disclaiming any admiration for the still repressive nature of the Chinese government. After blasting Friedman’s column apart – not difficult, actually, since it wasn’t much of a coherent whole in the first place – Pirrong concludes:

Sorry, Tom, but it’s a package deal.  Governments who think about people purely instrumentally, who think that they can push them around to achieve this economic result or build that glittering piece of infrastructure have a tendency of engaging in brutal behavior.

… Friedman is just another example in a depressingly long line of soi disant intellectuals who are enamored with authoritarians red or brown; who marvel at their gargantuan achievements; and who somehow believe that the bloody and brutal behavior of such authoritarians is some sort of minor bug that can be eliminated while retaining the supposed economic benefits.

That was a lie in the 1930s.  It was a lie in the 1940s.  It was a lie in the 1960s and 1970s.  And it is a lie now.

NHL’s experiments in hockey

Michael Giberson

Stephen Dubner at Freakonomics points to a Macleans story on some wild experimentation going on in the National Hockey League: shallower nets, moving the second referee off the ice, moving the face-off circles, three-on-three and two-on-two shootouts, and more. The article said:

The unusual nature of some items tested at the camp reminded Simon Fraser University business professor Lindsay Meredith of the freewheeling “skunk works” divisions that tech companies create to investigate advanced projects. “Any major corporation should have some kind of skunk works—a bank, a university, whatever,” he says. “An enterprise of that size and sophistication would be foolish not to.”

FIFA, you listening?

(Related: an April 2009 story in the Financial Times about an “experiments in business” course taught by Freakonomics co-author Steve Leavitt and John List at the University of Chicago.)

Cargo bikes in Copenhagen

Michael Giberson

I could have used a Copenhagen cargo bike (see video at linked post) last year when I occasionally carried my son’s baritone horn up to school for him. Come to think of it, I could probably still make use of a cargo bike.  Better yet, my son could make use of a cargo bike!

Want more cargo biking? Here is a link to the “cargo bike culture” posts at Copenhagen Cycle Chic. Or check out the images and video at the website of Larry vs. Harry (designers/manufactures of the Bullitt cargobike).

Cargo bike picture

A photo from the Larry vs. Harry archive

Estimating job losses due to the deepwater drilling moratorium – was the good news simply assumed?

Michael Giberson

Last week I pointed out that, “Temporary policies have temporary effects – and sometimes that is good news,” pointing to an Obama administration report that found job losses due to the temporary ban on deepwater drilling were smaller than expected.

But possibly the government reached their happy results more or less by assumption rather than by analysis.  In particular, on p. 17 of the report it discusses adjustments made to the “standard multiplier analysis” that was employed to translate reductions in spending into job losses.  The state that “We start with a multiplier that is based on empirical evidence of how changes in spending affect the entire economy,” but then make two changes to the standard analysis, one because the policy was temporary in nature and the other to account for some offsetting policy changes.

An important reason why a temporary moratorium will have a smaller effect is that firms are likely to be reluctant to lay off workers when they know the suspension is temporary. For instance, as described in the previous section, nearly all of the rig operators and contractors we spoke with stated that they have retained most of their workforce during the moratorium. One might expect that supplier firms may engage in similar behavior. Large firms that have ample access to financial capital will be better able to pay their employees during the moratorium than more financially constrained firms. Large companies with multiple clients will also be more likely to switch workers into temporary work of another sort while waiting for drilling operations to start again. At the same time, small firms with less financial capital will likely experience relatively larger employment losses. (p. 17)

Clearly, then, the administration believes the more general point made in the earlier post and by the group of economists writing in the Wall Street Journal: temporary policies have smaller effects than long lasting policies (did they included this adjustment in the administration’s analyses of “cash for clunkers”?).

We do not know with precision exactly how much smaller the economic effect might be, relative to the standard multiplier. Because of this, we use a range of multipliers, producing a range of possible job impacts. Specifically, we assume that the appropriate multiplier with which to analyze the impact of the deepwater drilling moratorium will be between 40 and 60 percent of the effect estimated by a full multiplier. (p. 18)

And so their estimate of only 8,000 to 12,000 jobs lost rather than their unadjusted estimate of near 20,000. In July the Department of Interior had estimated that 23,000 jobs would be lost due to the moratorium.  So, in effect, the difference between the Inter-Agency Task Force estimate released last week and the Department of Interior estimate put forward in July – the “good news” – is achieved primarily by assumption.

For a detailed examination of the methods used in the Inter-Agency Task Force report see the analysis of LSU professor Joseph Mason, “Critique of the Inter-Agency Economic Report….”

Queue jumping privileges for CNG-fueled taxis in Dallas

Michael Giberson

Dallas has implemented a policy giving natural gas-fueled taxis rights to jump to the head of the queue at the city’s Love Field Airport. Independent cab drivers in the city are protesting. (They also filed a lawsuit. A judge has denied the drivers a temporary injunction while the case it litigated.)

The privilege is intended to reduce air pollution in the city, and it probably will reduce air pollution a tiny bit.  Likely it will motivate the use of additional CNG taxis at Love Field.  Still, it seems like an awkward attempt at cleaning the air.

Supremo vs. Invisible Hand: Battle over New Zealand earthquake recovery approach

Michael Giberson

Post-earthquake in New Zealand, a battle emerges over the best system for rebuilding: Supremo vs. the Invisible Hand.

Supremo has its backers:

[Construction economist John Jackson said:] Rebuilding should be led by a “supremo”, such as a senior military officer with engineering corps experience, as was chosen for Darwin, and New Orleans after Hurricane Katrina.

Prime Minister John Key has appointed Christchurch MP Gerry Brownlee as the minister responsible for earthquake recovery. New legislation announced this week would give ministers special powers to waive or relax existing laws.

However, Jackson said a non-political leader based in the city was needed. “We have to have someone who is on the spot to allocate resources, especially labour, and make sure there is no ripping off and price-gouging,” he said.

“They have to be able to override any petty restrictions.”

The Invisible Hand has a supporter, too:

[Economist Eric Crampton wrote:] Price gouging may be the best mechanism for ensuring a speedy recovery….

Let’s start by thinking back to the morning of the earthquake. Some of us had planned ahead and had water reserves stored in the garage; others didn’t. Some people had pressing needs for water – people who needed clean water for mixing infant formula – and others of us wanted to be able to do the dishes.

When the stores opened that morning they had only a fixed supply of bottled water available. How should they have allocated that very scarce supply among all the potential customers?

The method they chose, by and large, was first-come, first-served. But is that the method most likely to ensure that the woman needing clean water for mixing baby formula would get some while folks like me, who only needed it for doing dishes, didn’t? That seems pretty unlikely.

Instead, it went to the people who were best able to queue. …

It would be a fine world if we could rely solely on the goodness of folks’ hearts – and we’ve seen an awful lot of such goodness in response to the quake. But I didn’t see any water on any shelves of any stores we went into that morning.

Rationing the fixed supply of bottled water that happened to be available the morning after the quake might seem like a zero-sum game, but as Crampton points out with respect to skilled labor, prices both help allocate currently available resources and motivate a longer-term response:

Thinking about reconstruction, some of us have really pressing construction needs while others of us have minor property damage such that waiting for repairs isn’t overly burdensome.

If nobody raises prices, then scarce builders are allocated on a first-come, first- served basis.

If prices rise, then folks like me with minor cracking on a few interior walls will wait until prices come down again to have things fixed.

The most pressing needs get first attention when prices allocate scarce supply; that doesn’t work as well under first-come, first-served.

Price increases also draw in supply from further afield. We’ve heard a lot over the last couple of years about skilled tradespeople moving to Australia in pursuit of higher wages. Right now, their services would really be appreciated here in Christchurch.

But if the prevailing wages prior to the quake were enough to send them off to the West Island, a price freeze here is unlikely to draw them back. If they look back across the Tasman and instead see hourly rates double what they’d been earning prior to moving to Australia, they might consider spending a few months back home helping out.

John Jackson and Canterbury Employers’ Chamber of Commerce chief executive Peter Townsend argued that some grand supremo might be needed to ration out scarce tradesmen, ensuring that resources go to the most critical areas first.

… And no supremo can order Kiwi tradesmen working in Australia to come home.

While Invisible Hand is not all-powerful, I’d back it over Supremo any day.

Crampton, who blogs at Offsetting Behavior, replies to a few of his critics there.