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Incentives for Rating Agencies

Robert Waldmann

It would be easy to pass a law that issuers of securities aren’t allowed to pay ratings agencies. One problem is that if purchasers of securities paid for ratings, the ratings would have to be their secret at least for a while. One might add a provision that ratings be made public after x days for some x.

I don’t think this solves the incentive problem at all. Briefly, I think ratings agencies can decide if a class of financial instruments exists or not and, whoever pays them, have an incentive to make sure it exists by being generous to innovative financial products.

I do think an incentive scheme which would work is almost possible. I’d say no new regulations for old standard instruments like corporate bonds. For rating a not so traditional instrument ratings agencies can be paid only the salary of people who do nothing but rate that instrument plus 20% for overhead.

Now such rules haven’t worked very well for government contractors, but I think that’s the best that can be done.

Obviously this proposal is politically impossible. Aside from financiers and the ratings agencies disinterested observers who consider financial innovation to be socially useful will think it’s a terrible idea.

I respond “OK OK plus 30% for overhead.”

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Texas is Not in a Recession, but it’s Bottoming Out

Rick Perry famously declared that there was no recession in Texas, even though the only way they balanced the budget was through emergency funding.

Rick Perry and the Federal Reserve Bank of Dallas appear not to talk with each other:

Texas factory activity showed the first signs of bottoming out in September, according to the business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of current manufacturing activity, came in close to zero as the number of companies seeing increases and decreases was nearly equal….

Employment indicators suggest manufacturers are still trimming payrolls, but the key indexes are becoming less negative. The average work week index rose for the second consecutive month, and about 17 percent of manufacturers noted increases in work hours. The employment index also improved as

the share of firms reporting job cuts fell

, while those reporting new hires rose from last month. Wage pressures remained minimal, with 92 percent of producers noting no change in compensation.

Yep. Just what we expect to see in a “normal” economy.

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How malpractice drives health care costs

by Tom aka Rusty Rustbelt

How malpractice drives health care costs.

This is a bullet point narrative, representing a long time line, but illustrates what happens to drive health care costs:

  • Emergency physicians use x-rays to diagnose closed-head injuries and miss brain bleeds.
  • The hospital and physicians are threatened or sued for malpractice.
  • Word circulates about these cases (physicians, administrators, lawyers). 
  • CT scan technology is improving and is more available. 
  • In response, ED physicians use more CT scans on closed head injuries.
  • Benchmarking studies** indicate CT scans are best practices for closed head injuries. 
  • ED physicians use CT scans on more closed head injuries. Etc.  
  • This is how malpractice drives health care costs, even though there are relatively few suits on this specific issue.

** These sorts of studies will be integral to comparative effective programs, added to academic medicine research.
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Tom aka Rusty Rustbelt

PS. I am going to be on the road for about ten days next month talking to health care providers about reform, and hope to come home with some insider information (politicians and lawyers and etc. tend to show up at these meetings).

Rdan here: The only item I would add is that the addition of expensive equipment is easier than maintaining patient volume for the equipment (ROI). Such additions were originally seen as revenue enhancers, which turned out to be less than accurate for many practices, or sometimes resulted in efforts to simply push an increase in referrals that insurance paid for, which is seen as safe practice.

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Darwin Strauss and Popper

Robert Waldmann

Neoconservatives have expressed sympathy for “intelligent design theory,” that is, creationism. This is well documented by Ronald Bailey’s article in “Reason on line.” Bailey discusses why neoconservatives might claim they don’t believe in evolution by natural selection even though there is no scientific basis for that view.

update: link corrected thanks to VtCodger in comments.

Mainly, he suspects that it is a Strussian “noble lie,” roughly that they believe that fundamentalist religion is needed for the good of socieity, so they pretend to agree with it. He mentions, but is not very fascinated by, the idea that this is partisan hackery — that neoconservatives think the interests of the Republican party would be harmed if they didn’t bend their knees before the fundamentalists. Of course the problem is that once one decides to lie, it is very hard to decide exactly how noble to be about it.

He doesn’t mention the collosal arrogance of people who assume that biologists don’t know anything relevant about biology which they don’t know. I think this is always a risk in people coming from law or social sciences. They just have no clue how much evidence lies behind the claims of natural scientists and assume that they can bluff their way past biologists as they have successfully bluffed their way past say economomists.

In the second part of his article, Bailey argues that there is no scientific case against evolution by natural selection. Naturally it would come first, one normally doesn’t question someone’s honesty until one has exausted other options (although the NeoCons he quotes are pretty up front about how they start with the conclusion and work back to the evidence). I think the editorial decision makes sense as most Reason on Line readers don’t really need to be convinced that modern biology is not all a big mistake.

I think Bailey’s arguments for Darwin are weaker than his earlier analysis—not because he doesn’t make a convincing case, but because he buries the lede. Basically he has a theoretical disagreement with a mathematician, then speculates about the origin of life, then asks if one can be both a Christian and a Darwinist (hint yes) and only then discusses some of the evidendence for evolution by natural selection.

But Berlinski stoutly declares in Commentary that he is no creationist. He claims merely to be engaged in critiquing the failures of Darwinism. Berlinski is particularly savage about what he regards as Darwinism’s tautological character. “Time and again, biologists do explain the survival of an organism by reference to its fitness and the fitness of an organism by reference to its survival, the friction between the two concepts kindling nothing more than the observation that some creatures have been around for a very long time.”

In Berlinski’s view, evolutionary theory simply says that the ones that survive are the ones that survive. But that is not quite right. But that is not quite right. Darwinian natural selection sifts for useful variations among mutations, thus natural selection generates increased fitness, not just preserving the fittest. This process generates new species, species B being the descendant of earlier species A. This claim is clearly more than a tautology.

Wrong Bailey, the way to argue that something isn’t a tautology is to point out a testable implication. Instead Bailey claims the stated theory is not quite right because it didn’t include the word “species” even this explanation is incorrect (see below*) but the main thing is that the theory of evolution by natural selection has testable implications because organisms have detectable features which don’t make any detectable difference.

The evidence for the theory became vastly vastly enormously gigantically even more immense than it was already when biologists began sequencing DNA. They found patterns explained by the idea some sequences don’t matter and drift faster than others which do. Based on those sequences they can redraw the family tree of living things and lo and behold it almost exactly matches the tree drawn based on other features and based on fossils. Oh and one can check that the sequences that don’t seem to matter don’t matter and, so far, they don’t. Before sequencing the evidence was weaker but already overwhelming based on traights which didn’t seem important.

There might be another explanation for these facts, but no one has ever pretended to have one. Instead critics of biology like Berlinski and Kristol just ignore the evidence entirely. Bailey mentions it long after speculating at length about the origin of life (OK and I began indignantly typing before I read that far).

Berlinksi’s claim is, I think, false as a matter of fact. Biologists do not claim that the survival of this or that species is evidence in favor of evolutionary biology. The evidence all concerns trivial things which are considered evidence of evolutionary history exactly because they have tiny or zero effect on fitness.

The quote of Berlinski (all I have read of his writings) does not disprove the hypothesis that he thinks that modern evolutionary biology is completely summed up by the phrase “the survival of the fitest.” That is, indeed, a tautology. It is indeed part of the subtitle of “The Origin of Species.” But I mean, to be fair to Darwin, one should at least read the full subtitle. Oh and maybe glance at the book. And to be fair to evolutionary biology, one would have to note that much evidence has been collected since then (not to mention the theory has developed).

I have Popper in the title, because Popper did the same damn thing in “The Open Society and Its Enemies.” Popper at least asserted that something wasn’t there — predictions which have since been confirmed, explanations of puzzling facts, you know non tautological science — which absolutely wasn’t there. Popper, I think, assumed that he was brilliant enough to know what is written in a book after reading part (not all) of its subtitle.

* I think a biologist tried to explain this to Bailey and he didn’t get it. The non tautological point is that the descendents of species A might belonge to species B and C two different species present at the same time. Now the claim that two different organisms belong to different species is *not* mere terminology — it has an operational definition — orgnaisms from two different species can not produce fertile offspring descended from both of them.

If evolution were always new species A replacing now extinct species B, then all we would know is that we choose to use different words for organisms of type A and B. Without a time machine, we can’t test if they are two different species.

Now “survival of the fitest” does not logically imply that one species can, over time, split into two. This is a radical idea. It is also, in principle, experimentally testable, although the experiment will take a long time.

I personally think the experiment is under way and it is already clear that one species can split into 2 much more quickly than evolutionary biologists imagined. The experiment is raising fruit flies in laboratories. They are used to study genetics. Normal non mutant flies are called “wild type” but their ancestors haven’t been wild for about a century now. They have been bread in labs from each other.

Interestingly when an actual wild male captured in the wild is mated with a lab bread “wild type” female, something happens called “hybrid disgenisis” which means the offspring are messed up. It is known that this is caused by a transposon (basically a very very benign virus) which keeps itself inactive in the genome of wild fruit flies by making a repressor protein. None of that protein gets into spermatazoa so if the transposon is in one of the male’s chromasomes it makes copies of itself and spreads them around inside the chromasomes of the fertilized egg.

Evidently the transposon spread through the wild population after the ancestors of the lab flies were captured.

Some of the offspring survive this process. But already there is a barrier between wild and lab fruit flies after about one century. One can imagine that another hundred years or so, wild males will not be able to produce fertile offspring with lab bread females (just a few more such latent virus like things would do it).

Now to get two whole species it has to be blocked the other way too and the lab population is very isolated (also from other insects) and divided among labs so I mean maybe experimental speciation won’t occur in my grandchildren’s lifetime. But it’s really close.

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Radley Balko: Optimist, not Libertarian?

Manufacturing evidence is apparently legal for prosecutors who then prosecute the case. This, at least, is the argument a couple of crooked prosecutors are making.

Radley Balko is more optimistic than I am about prosecutors:

If the Supreme Court…would essentially overturn Buckley and give prosecutors complete immunity, even when they conspire to convict an innocent person from the earliest stages of an investigation. The vast majority of prosecutors would never engage in such reprehensible conduct, of course. But it’s curious why professional district attorney organizations and government agencies want to protect the lowly few who would.

I hope he’s correct, but, if I believe Robert E. Lucas, Jr., prosecutors are Rational Actors, and therefore get rewarded by what is measured: convictions, conviction ratio, high-profile conviction, convictions for capital crimes, etc.

I didn’t notice a metric for “losing when the client is innocent” on the list. So let us hope I’m wrong and most prosecutors are less than rational. It is, in any event, interesting to see a so-called “libertarian” website arguing that some people do not work in their own self-interest.

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Last week on a floating buffet

by cactus

I spent last week on a floating buffet. I had never been on a cruise before, and I was pleasantly surprised. The service was amazing, though I’m not sure having someone make the beds twice a day isn’t overkill. The food, in general, was quite good. Even the buffet had great fare, though at the buffet one had to be selective because there’s a lot of crappy food there too.

While I enjoyed the cruise, the ex-GF and I agreed it isn’t really our thing. We’re more the type to walk around and explore a city, using a hotel as a home base to store stuff. Having your hotel move to different locations is very nice, but you don’t tend to stay in the same place for very long.

A few observations/random thoughts:

1. Even if the crew did not have uniforms on, it was fairly easy to differentiate them from the passengers. My guess is that the average crewmember weighs about a forty percent of what the average passenger weighs, even leaving out the retirees on the ship.
2. Each crewmember had a tag with his/her name and country of origin.
3. No more than a handful of the crew (of thousands) come from the U.S.
4. From what I could tell, almost all of the cleaning staff was from southeast Asia. I can only think of one exception.
5. The wait-staff was mostly divided among southeast Asians and eastern Europeans. The latter tended to be younger (early to mid-twenties) and less professional. (A number of the southeast Asians told us they had degrees in hotel management and the like.) However, the maitre d’s and hostesses and the like tended to be eastern Europeans. The blonder the hair, the more front and center the station.
6. I don’t think I ran into any African staff. That isn’t to say there wasn’t staff of African ancestry – just not from countries on the African continent.
7. If one doesn’t drink and doesn’t feel a need to buy jewelry in the duty free shops, a cruise is actually less expensive than other forms of vacation.
8. The ex-GF played at least a couple of hours of poker every day – they didn’t have a dealer, but did have a table that dealt electronic cards automatically. The ex-GF came out barely ahead, but we ran some numbers and based on the house rake, the boat was taking in about a grand a day. Not too shabby.
9. The boat passed pretty close to Cuba. Remind me again – why does the U.S. government restrict its citizens from visiting the island? And do the folks who are the biggest promoters of that policy get to visit the place themselves, perhaps being exempt from the ban due to family reasons? What little faith the average Cuban might have in the regime would disappear if they could see the amount of waste these floating buffets can afford to generate on a daily basis.
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by cactus

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How to target the poor?

rdan

Several other conferences are happening elsewhere in the world, but with less fanfare than in Pittsburgh, both in media coverage and police activity. We do forget the ‘smaller’ issues of distibution of goods, so here is a reminder.

How to target the poor?

How can governments and aid agencies target the poorest? Some use detailed means tests, measuring assets and incomes. Others let the community decide for themselves. The first seems vulnerable to error and misrepresentation, the second to manipulation by elites.

One of the papers I’m most looking forward to at BREAD: a horse race between the means test and participatory methods.

When poverty is defined using per-capita expenditure and the common PPP$2 per day threshold, we find that community-based targeting performs worse in identifying the poor than proxy-means tests, particularly near the threshold. This worse performance does not appear to be due to elite capture.

Instead, communities appear to be systematically using a different concept of poverty: the results of community-based methods are more correlated with how individual community members rank each other and with villagers’ self-assessments of their own status. Consistent with this, community-based methods result in higher satisfaction with beneficiary lists and the targeting process.

Kharris clarifies the report in comments:

The “Target the Poor” study is based on experience in Indonesia, which helps to remind us (I hope) that not all policy solutions can be drawn from a US/Developed World context. Do we know that Indonesia has an income tax system that can stand up to the rigors of a reverse tax? Will the money arrive? No direct deposit for the target group. No bank account. Some may not live in a very monetized economy. A tax-based assistance program is better, I’d think, for the urban poor than the rural poor.

From the Into – “In developing countries, most potential recipients work in the informal sector and lack verifiable records of their earnings.” Tough to offer a reverse tax in such cases.

A separate note – the study has to do with delivery, not dialectic. The assumption is that society is a given, and that the decision to help the poor has been made. Now, how best to go about it?

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It’s Not Just the Foreign Conservatives

Once of the things that was clear at CGI this week is that the power companies that have looked into alternative energy sources have quickly realised they are not only good publicity but profitable (i.e., lower cost when used to scale). Florida Power & Light (discussed here) expanded an already major commitment, mostly in FL and CA. Jim Rogers of Duke Energy—a man who, since at least 2001 at Cinergy, has been going around saying things like “I cause 1% of the carbon put into the atmosphere. What are we going to do about that?” (It’s much more since Duke Energy acquired Cinergy) and therefore is described in the business press as eco-friendly. (See here or here, for example.)&mash;was all over the place, announcing commitments and partnerships. And those are just the CEOs who were most visible at CGI this week, even ignoring the ExxonMobil people. (I looked for BP, but didn’t see anyone. Probably next year.)

It should come as little surprise that the energy and power companies want to do something about Anthropogenic Global Warming: they went through the spike in oil prices a couple of years ago as well, and saw the customer reaction. If there was any doubt that it’s not just a good idea but good business as well, $150/barrel and home heating oil spikes that flood the complaint lines and see the orders decline only solidified the idea. (Not to mention that they employ many of the people who will be leading the R&D of those alternative sources, from OTEC to solar to the newer, safer generation of nuclear plants.)

And now, we have utility companies making a sane decision: don’t work with people who actively work against you. As Buphonia notes, Pacific Gas & Electric and PNM Resources of New Mexico have both decided to pull out of the U.S. Chamber of Commerce.

PG&E:

We find it dismaying that the Chamber neglects the indisputable fact that a decisive majority of experts have said the data on global warming are compelling and point to a threat that cannot be ignored. In our opinion, an intellectually honest argument over the best policy response to the challenges of climate change is one thing; disingenuous attempts to diminish or distort the reality of these challenges are quite another.

PNM Resources:

“At PNM Resources, we see climate change as the most pressing environmental and economic issue of our time. Given that view, and a natural limit on both company time and resources, we have decided that we can be most productive by working with organizations that share our view on the need for thoughtful, reasonable climate change legislation and want to push that agenda forward in Congress.

As a result, we have decided to let our membership in the U.S. Chamber lapse when it expires at the end of this year.”

Somebody tell Joe Conanson. For an Aussie Conservative perspective, see here.

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