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