Grey Swan

There is a major underlying theme with the rapidly growing state and federal debt — unions. Over the past 30 years unions have won lucrative defined benefits contracts that placed affordable benefits in the present (e.g. 1978), but pushed off unafordable benefits to the future. Police officers could work for 20 years, and then retire with nearly full salary for those next 45 years. Similar schemes have been put in place for MANY other institutions that the tax payer funds (including, the big three auto makers). Of course, to believe that a policemen creates enough value in 20 years at a salary of ~$100K/year, to then live off of ~$90K/year for the next 45 years is ludicrous. Add to this the growing health benefits that many workers have and you have a recipe for disaster.

Unfortunately, the impact of transfering wealth from tax payers to overpaid union employees damages future growth as well as present consumption. Consider that NYC will have to cut its present police force so it can pay for its retired police force. Thus, crime rates will go up, and it will be tougher for businesses to do businesses, not just because of high taxes, but because of a more dangerous environment. The same concept is true with service cuts in the MTA and other vital industries.

The solution of course, is to ban public sector unions and to ban defined benefits. It is one thing if a private sector’s union forces them to go out of business. A better company will grow. However, the public sector can’t go out of business, so it’s costs can only grow. In the last 6 years entitlement spending in the country has increased about as fast as tax receipts, and this is in a period of dramatic growth. Now that most of this growth has proven illusionary, so should these benefits. My 401K went down by 30%, and so should the benefits of retired union workers. Just because union workers feel like they are very valuable, does not mean they are — this is proven by the fact that they must form a union to receive their excessive wages.

We need to ban public sector unions so that they stop strangling the tax payer. The government has little incentive to fight the unions because they use other people’s money to pay them. Union employees need to get paid less, and work harder. And those retired policemen need to get back to work like everyone else in this country.

I recently canvassed several interns who are working on preventative health measures in D.C. and asked if there was any new ideas being tossed about. They said “No”. This got me thinking – with all the talk about preventing future illness, why are so few ideas tossed about in public? In order to get this ball rolling, I have two such ideas.

 1) Free Sunblock at public beaches, pools, etc. If sunblock is indeed effective at blocking cancer, offering sunblock free might be a good idea. It would displace a large amount of private purchase, but it might also encourage people who forget or are otherwise uninterested to put some on. It could be held in despensers by snack stands where people could not freely refill there bottle, but could freely put it on. If the quantity of money saved from prevented cancer is in the ballpark of the cost of the program (minus the cost savings of people who would otherwise use sunblock), it would be a success.

2) Free earplugs at concerts, clubs, etc. Many studies demonstrate that young adults today have worse hearing than an average fifty year old had only a few decades ago. The accepted reason for this is excessively loud music. In particular, concerts and clubs are both very loud, and very practical venues for free earplug distribution. The idea is that bad hearing can be costly for a number of reasons – increased accidents (not hearing a car coming, etc), hearing aids later in life, etc. While earplugs are currently ‘uncool’ to wear to most outings, providing them free would increase the quantity of people wearing them, which would decrease their ‘uncoolness’. Consequently, a large number of people might protect their hearing, and the message of auditory protection would be heard. Most importantly, earplugs are very cheap to make and could be distributed at a low cost – making this idea much more viable than free sunblock.

 I hope to start a dialog about potential preventative health measures. Surely a detailed cost benefit study of these ideeas is needed, but having ideas to study is an important step.

N.B. I am not suggesting an all encompassing nanny state, but rather that when the public bears the costs but not the benefits of an individuals risky behavior (failing to apply suntan lotion and subsequently contract cancer), there should be room for policy improvement.

The Bush administration stresses the importance of abstinence only education. Ignoring religious issues with premarital sex, does this policy have a chance of preventing the spread of sexually transmitted diseases? Any economist would say – NO!

Consider you have a child who wants to ride a bike. You can tell him he should not ride a bike because it is dangerous, or you can warn him to wear a helmet in the hope that this will one day save his life. Well, unless you are a parent who can physically stop him from riding a bike, and you can only do this for so long, your best bet is to suggest the helmet. Why? Because deciding whether or not to ride a bike is a fairly large decision. An economist might coin the word dutility (Decision Utility – Pronounced like Utility but with a D), and say that deciding whether or not to go for a ride takes about 20 of these ‘dutils’ (Like the economic construct utility). The idea is that larger decisions require more dutils making them less responsive to any particular source of input *. As much as you lecture about the dangers of bike riding, it would probably be fairly difficult to overcome this 20 dutil decision with a simple diatribe. Deciding whether or not to wear a helmet is a much less costly. It’s not time-consuming to don one, it’s not particularly annoying to wear one, and most importantly, it does not interfere with the larger decision of whether or not to go for a ride. Let’s guess this takes about half a dutil. For such a low cost, the added safety seems pretty worthwhile. Much like a stream, it is easier to gently alter its course than cause it to run uphill.

Now let’s consider sex. Deciding whether or not to have sex for the first time is a much larger decision than whether or not to ride a bike. Let’s say that for the average American this decision is worth 500 dutils. Perhaps this number is much higher. Whether or not a person decides to have sex before marriage requires consideration of many factors, including sex drive, love, lust, peer pressure, potentially sexually transmitted diseases, religion, etc. So many factors are in play that any one of them is unlikely to have a significant impact. Thus sex education, while perhaps having a 5 dutil influence, is unlikely to change the behavior of a person. On the other hand, deciding whether or not to use protection is a much smaller decision- akin to wearing a bike helmet. Asking someone to use protection is not asking them to do a u-turn, just to bear a very so slight right. Maybe this happens to be a 3 dutil decision for the average person. Whatever the unquantifiable dutility, evidence shows that sex education is far more effective than abstinence only education.

* This need not be true. A person who is on edge about a decision can be easily swayed. We can start to think about marginal dutility as being more important that total dutility.

Daily news reports stress that the price of luxury good tends to increase faster than the rate of inflation. Increasingly, middle and upper middle class families are being priced out of the luxury good market altogether. Why? I believe that a combination of age old factors and new trends are the root cause. This includes the relative and zero-sum nature of status, societal stratification, rising wages, and the increasingly rapid and free flow of information. The combination of these factors leads to an unmitigated arms race for high status.

In a previous blog I explained that status is achieved relatively*. The result is that wealthy people demonstrate their greater buying power by purchasing more luxurious goods than their neighbors. This may be in the form of large items like a brand named car, or small ones like a new and exotic bottled water. The underlying problem is that these goods do not necessarily get significantly better as their price increases, they just get more exclusive.

When we couple this with the rapidly expanding wealth of our nations elites, we begin to see why luxury prices are spiraling out of control. A decade ago bottled water was considered a luxury good. This was not because it was so expensive, but because it was so ridiculous. Bottled water? Its free out of the tap! A person needed to have money to ‘throw away’ to buy such an item. Today, many people consider bottled water a necessity. What do the rich drink? They drink Voss. Voss costs about three times as much as Poland spring, but it is certainly not three times as good. Its just preferred because it’s exclusive. I currently think that a five dollar bottle of water is ridiculous, but maybe I won’t in a few years. Water illustrates my point so clearly because it so clearly remains the same. Its just water! The main contribution that higher wages have made to the rising cost of luxury goods is creating more demand (more money) for the same ‘number of items’ – status. Consequently, the cost of these goods increases. In the proceeding paragraph I explain how factors compounding the rising wage rate lead to an arms race over status.

Stratification plays an important role in placing similar people in competition with each other. If a poor person lives next to a billionaire, not only can they not compete status-wise (at least not materially), they also won’t. There is no point. In our current society however, people with similar incomes are more and more likely to live near each other. Placing direct social competitors in close proximity with one another increases the importance of status items. People have much greater need to prove themselves because they are surrounded by peers.

The last part of my theory is that the spread of news and information compounds the aforementioned issues. The media continuously displays the styles of the wealthy and the famous. This constant bombardment of information essentially increases the pool of competition for status items. Instead of simply competing in our local community, we now have to compete on a much larger scale. We don’t just want to have a nicer phone than our neighbor, we want a nicer phone than Steve Jobs (the iPhone). Since status is zero sum** but competition for items that grant status continues we have a positive feedback loop. What was good enough today to impress ones friends may be the laughing stock of tomorrow.

**Most people would rather make 100,000 dollars in a community where everyone else made 80,000, than 120,000 dollars in a society where everyone else made the same. The idea is (and this must have evolutionary roots) that being fitter than ones peers may be better than being fitter in general, at least as long as ones survival is not threatened.

Many European countries offer free education to those who want it. The idea is that education is good, and the more educated people get, the better. Since education is costly however, this is not necessarily true.

The main problem with education is that it is a partially zero-sum pursuit.

While classes in computer science and engineering may teach skills applicable in the job market, most classes don’t. Instead, they claim to ‘teach you how to think’. I am a little dubious. Not only have studies showed no increase in intelligence from college, having been through the experience myself I can say that the majority of time is spent learning specific facts that are quickly forgotten. My point is that while college may offer some true benefits to a person’s future productivity, the real purpose of schools is to credential a candidates drive and aptitude. For a certification, 160,000 dollars is a lot of money. Consequently, by simply educating more people two things are likely to happen:

1. Top students may have to get higher degrees than previously to distinguish themselves. Since college is mostly about people jostling for post-college job positions, if more people go to college it will be hard to distinguish the good job candidates from the bad ones. This might force the best to move up a notch in educational attainment to prove there worth. Since the reason for additional education is better credentials, this will be costly in money in time but not provide a sufficient (if any) productivity boost.
2. There will be more people who spend four years learning nothing at a great cost. Since college is mostly a case of zero-sum competition, additional people attending college costs money without increasing the true productivity of these students. This is a net loss.

If we think about it, the root problem with trying to educate everyone is that the students remain the same. Education does not make people smarter, and many jobs require aptitude rather than knowledge (you learn what you need to know on the job). Consequently, having more educated people does not necessarily lead to a better workforce. Education becomes an unproductive arms race.