There Is No Fun in Measuring GDP « Modeled Behavior

There Is No Fun in Measuring GDP « Modeled Behavior:
GDP is simply not welfare, even for market based goods. ...

Suppose I have an economy with two sectors that each use half of the workforce. One sector produces fish and the other produces beaded jewelry. (An economists mind always goes to desert islands when constructing these examples.) Both fish and necklaces cost $1 and the economy produce 1000 of each per year. The two sectors are equal in size and equal in their contribution to GDP.

Does that mean that they each make people equally well off? Do necklaces add as much to quality of life as food? Probably not. More likely the supply and demand graphs for each sector look like this.

GDP is the same

Welfare or the total benefit to society each market is quite different.

A steeper demand curve or a shallower supply curve can produce huge welfare gains at relatively small GDP gains. Indeed, some of the goods like running down a hill or reading new material posted to the web have a supply curve so shallow that they are provided at nearly zero cost. This is why they show up with such a disparity between GDP and welfare. This isn’t limited to free goods, however, my classic example is water. How much better is your life because of clean water vs. how much of your income do you devote to water cleansing.

The right and the wrong way to do incentive pay.

The right way to think about "incentive pay" is that pay should give the long run incentives that attract good employees and the incentives to get them to stay with you long run.  Incentive pay does not usually work well for motivating workers on a day-to-day basis except in certain kinds of easily measurable work like piece-work manufacturing or some kinds of sales that have few externalities for the firm.  Even in these cases, it is not clear whether the incentive pay really motivates employees on a day to day basis or whether it works by screening the pool of workers to make a biased selection for people who want to work hard. 
The following study shows that incentive pay does not work for motivating good work.  However, high pay can bring good teachers to the profession and keep good teachers from quitting and working elsewhere.  This kind of long run incentive pay has never been studied to my knowledge and the optimal incentives would be different.  It would probably be best to pay teachers a salary that is adjusted according to their best year of results in the past four years.  That way if a teacher gets a bad class or has a rough year or two, they can make up for it another year.  This is better than paying teachers according to their yearly results because there would be much less variation and teachers are currently a risk-averse lot.  They are used to high job stability and it would be best to continue to give them fairly stable pay.  It might also be good to have a small component of their pay vary according to how their school is doing so that they have some team spirit in making their school function well.  We want teachers to work together well and we want them to encourage effective management. 

Matthew Yglesias:

Linda Pearlstein summarizes a pretty good new controlled study from Vanderbilt University that tested the idea that offering teachers bonuses of up to $15,000 could improve student outcomes. The results—nope...

The right way to think about teacher compensation, I think, is this. You could have a system in which all teachers are paid the same amount. But we don’t have that system. Instead we have a system where veteran teachers are paid much more than novice teachers, and teachers with master’s degrees are paid more than teachers without master’s degrees. We could switch this to a system where teachers whose kids do much worse than average on value-added measures get fired, and teachers whose kids to much better than average get paid more than average teachers. The idea here wouldn’t so much be to create an “incentive” as simply to ensure that the best teachers aren’t tempted to leave the profession while the worst teachers are encouraged to do so. If you want to do something through a bonus/incentive mechanism, what would make sense is to offer teachers extra money to take on challenging assignments in high poverty schools.

The point is that an absolutely flat salary structure makes no sense. Instead, we prefer to rely on proxies for quality. Currently, we use length of service and possession of a master’s degree as our proxies. But the evidence suggests that these are bad proxies and that value-added metrics, despite their flaws, are better.

Another, unrelated issue with incentive pay is that regression to the mean would tend to make negative incentives look more effective than positive incentives.  After a punishment for exceptionally bad performance, it will usually look like there is improvement due to random regression to the mean and after a reward for unusually good performance, there will usually be worse performance due to random chance.  A controlled experiment like the above can eliminate this problem, but it is something that we need to be careful about.

A Symbiotic Relationship – The AMA And The Health Lobby

Wonk Room:

...the tobacco industry leaned on the AMA [American Medical Association] to substantiate its dubious health claims. Beginning in 1933, JAMA [the Journal of the AMA] published tobacco advertisements, stating that it had done so only “after careful consideration of the extent to which cigarettes were used by physicians in practice.” The tobacco industry became the AMA’s largest advertiser, and its implicit endorsement of tobacco products allowed companies like Camel to proclaim slogans such as, “More doctors smoke Camels than any other cigarette.”
Of course, during this period of heavy of tobacco and industry influence, the AMA defeated the health care reform proposals of both President Franklin Roosevelt and Harry Truman using the specter of “creeping socialism” that would bring “debased standards of medical care.”
Currently, the Pharmaceutical Research and Manufacturers of America (PhRMA), the nation’s largest pharmaceutical lobbying group, is pursuing a multimillion dollar campaign against many aspects of health reform. A public insurance plan might pay less for branded drugs, or would opt for generics in many cases, so drug companies want to maintain the status quo. But if this is the concern, why is AMA stepping up to the plate for the drug lobby?
AMA derives at least a fifth of its budget from drug companies through an arrangement known as “licensure.” The program consists of AMA selling drug companies its “Masterfile” of doctor profiles, spanning everything from detailed biographic information to an individual doctor’s prescription-writing history. The program is extremely controversial since drug companies in turn use the information to aggressively market their products to doctors. Controversial drugs Vioxx and Avandia, which have subsequently been found to pose significant risks to patients, have been marketed to doctors, in some cases, using information obtained from the AMA.
After an uproar in 2007, the AMA, through a policy of self-regulation, claimed to have stopped selling doctor prescription-writing information. But that pledge must be viewed with skepticism given the AMA’s track record.
During a Senate investigation of abuses of the licensure practice in 1990, the Boston Globe reported that AMA and PhRMA lobbyists came to Capitol Hill to promise Sen. Ted Kennedy (D-MA) that the program was not part of any effort to convince doctors to prescribe PhRMA drugs. This promise to self-regulate was never kept. In 2001 the New York Times reported that the AMA generated $20 million dollars a year from licensure sales to drug companies in a complex scheme to market drugs like Baycol to doctors. In 2006, that number climbed to $40 million, and in 2007 it was reported to be $45 million.

Matthew Yglesias » Incentives For Saving Versus Giveaways to Rich People

Matthew Yglesias » Incentives For Saving Versus Giveaways to Rich People: "Moving to a consumption tax base would have an additional benefit of making discretionary fiscal policy much more workable. The thing that politicians are most inclined to do in terms of fiscal policy is cut taxes. But tax cuts don’t actually work very well as stimulus. Except they would work well if the only thing being taxed was consumption. In that case, 100 percent of the fiscal impact of temporary tax cuts would take the form of a temporary boost in aggregate demand.

Where does the Laffer curve bend?

Ezra Klein:

With the Bush tax cuts due to expire soon and debates about raising top rates further to cut the budget deficit soon to follow, the Laffer curve is bound to come up again. The idea, popularized by economist Arthur Laffer and writer Jude Wanninski in the 1970s and '80s, is simple. Tax rates of zero percent produce no revenue, for obvious reasons. Rates of 100 percent should produce no revenue either, as no one would bother making the money that falls into that bracket knowing it would all be taken away. Thus, presumably, there is some rate in between the two that maximizes revenue. Go above it and revenue would fall because people would avoid taxes or stop working; go below it and revenue would fall because less money would be taxed.

The Tax Experts

Emmanuel Saez, ...73% which means a top federal income tax rate of 69% (when taking into account the extra tax rates created by Medicare payroll taxes, state income tax rates, and sales taxes)...
Joel Slemrod ..."I would venture that the answer is 60% or higher.... The idea that we're on the wrong side has almost no support among academics who have looked at this....
Read Saez, Slemrod, and Seth Giertz's latest paper (PDF) on the subject.
...

Bruce Bartlett ..."Anthony Atkinson, probably the leading public finance economist in England, estimates (PDF) that the top rate could go as high as 63% to 83% before it became counterproductive in terms of revenue...The European Central Bank...finds that only two European countries are on the wrong side of the Laffer Curve. All other countries could raise substantial additional revenue by raising tax rates."

Progressive Consumption Taxes

Matthew Yglesias:

"it would be better to finance the government through a progressive tax levied on consumption... You can understand the virtues of this idea in moralistic terms (John Rawls says he prefers it “since it imposes a levy according to how much a person takes out of the common store of goods and not according to how much he contributes”) or in economic ones as laid out by Karl Smith. But what does that mean in practice? Fortunately, Dylan Matthews did a post yesterday laying out some options.

The one that’s easiest to explain, and I tend to think best, is Robert Frank’s idea. This would work exactly like the current income tax, except instead of a crazy patchwork quilt of tax-subsidies for savings you’d just exempt all savings from taxation. That would leave you with a simpler, more efficient, but less progressive tax code that also doesn’t raise adequate revenue. You need to respond by adjusting the rate structure to restore adequacy and progressivity. The resulting scheme is more conducive to long-term economic growth than our current system, equally progressive, and also somewhat simpler. And, importantly, the added simplicity doesn’t come from heroic assumptions about congress wiping away all deductions and exemptions and never putting any new ones in. It’s just simpler because it does something our tax code already does—try to encourage saving—in a simpler way.

multiple transferrable vote

...Fair Vote, an excellent organization pushing a variety of worthy reforms to the American electoral system.

...the related topics of gerrymandering and polarization,  [could be ameliorated by] ...multiple member congressional districts withsingle transferrable vote.

What does that mean and what does it have to do with polarization?

Well, take New York City. Instead of carving the city up into 13 or 14 different districts with members elected by plurality, all of them won by Democrats, the whole city could vote proportionally for a slate of 13-14 members of congress, and several of them would wind up being Republicans with the exact number depending on political fortunes. This would reduce what I think bothers people about polarization in congress in at least two ways. One is that though on many issues the NYC Republicans and NYC Democrats would fiercely disagree, on a bunch of other issues that have substantial regional or urban/non-urban elements to them the NYC bloc would be collaborating along with other bipartisan congressional blocks against other bipartisan congressional blocks. The other is that the balance of power in congress wouldn’t be determined by a relatively small number of “swing districts.” In any given election, Democrats and Republicans alike would have plausible pickup opportunities all across the country—even in New York City—meaning that it would make sense for the GOP to always at least think about trying to answer the concerns of American cities.

Then on the flipside, if Nebraska elected its three-member congressional delegation in a proportional manner you wouldn’t have the scenario where 41 percent of Nebraskans vote for Barack Obama but 100 percent of them are represented in the House by conservative Republicans. All regions of the country would have a measure of bipartisan representation, and both parties would have substantial blocs of members to advocate for the interests of different kinds of places.