Liberty and the Golden Rule

In his radical book Fair Play (p. 16), Steven Landsburg puts forward this radical idea:

… we should care about other people’s liberty as well as our own. 

In On Liberty, Chapter IV, “Of the Limits to the Authority of Society over the Individual” (paragraph 12), John Stuart Mill puts forward the same idea, and explains just how radical it is:  

But the strongest of all the arguments against the interference of the public with purely personal conduct, is that when it does interfere, the odds are that it interferes wrongly, and in the wrong place. On questions of social morality, of duty to others, the opinion of the public, that is, of an overruling majority, though often wrong, is likely to be still oftener right; because on such questions they are only required to judge of their own interests; of the manner in which some mode of conduct, if allowed to be practised, would affect themselves. But the opinion of a similar majority, imposed as a law on the minority, on questions of self-regarding conduct, is quite as likely to be wrong as right; for in these cases public opinion means, at the best, some people’s opinion of what is good or bad for other people; while very often it does not even mean that; the public, with the most perfect indifference, passing over the pleasure or convenience of those whose conduct they censure, and considering only their own preference.

Part of the problem is in the limitations of the golden rule: “Do unto others as you would have them do unto you.” That is all well and good if they have the same preferences, but not if they want something different from what you would want in the same circumstances. Until further advances in technology, we are shut out of knowing directly what the world looks like from inside someone else’s mind, and have to guess based on how we would feel. But that sometimes steers us badly off target. Giving everyone personal liberty is a safeguard against our blind meddling.  

Of course, applying the golden rule at a meta-level would say “I want liberty, so I should give others liberty as well.” But there are many times when liberty is a higher law than applying the golden rule at the detailed level.

The National Security Case for Raising the Gasoline Tax Right Now

Here is a link to my 54th column on Quartz, “The national security case for raising the gasoline tax right now.”

In light of the title, I should point out that, from an efficiency standpoint (without regard to politics), there may no justification for phasing in a gasoline tax increase slowly. If a national security externality were like an environmental externality, that externality should ideally be reflected in the tax rate right now. But the national security externality is actually a pecuniary externality, so it would take some nontrivial reasoning to figure out whether or not there is any justification for phasing a gasoline tax in. It is an optimal taxation problem in which money in the hands of certain parties counts negatively. 

Danny Vinik's Interview with Miles Kimball for Business Insider: There’s an Electronic Currency that Could Save the Economy—and It’s Not Bitcoin

Link to the interview on Business Insider

Here, below the line of stars, is the full text of Danny Vinik’s interview with me for Business Insider. I linked to it when it first came out on November 21, 2013, and cleared with Danny the idea that I could copy it over in full here after some time had passed, given my role in making it possible. I think Business Insider holds the copyright. 

Danny Vinik and I talked for about 75 minutes. One thing I talked a lot about in the interview is that of all the possible ways to handle the demand-side problem, repealing the zero lower bound is the one that leaves us best able to subsequently pursue supply-side growth. Fiscal stimulus leaves us with an overhang of government debt that then has to be worked off by painfully higher taxes or lower spending. Going easy on banks and financial firms to prop up demand (as Larry Summers at least halfway recommends in his recent speech at the International Monetary Fund) risks another financial crisis. Higher inflation to steer away from the zero lower bound (as Paul Krugman favors) messes up the price system, misdirects both household decision-making and government policy, and makes the behavior of the economy less predictable. (On Paul Krugman, also see this column.)

Let me push a little further the case that electronic money can clear the decks on the demand side so that we can focus on the supply side with this example. Suppose you firmly believed that the demand side played no role in the real economy—that the behavior of the economy could be described well by a real business cycle model, regardless of what the Fed and other central banks do, and regardless of the zero lower bound. From that point of view, in which monetary policy only matters for inflation, electronic money would still be valuable as a way of persuading others that it was OK to have zero inflation rather than 2% inflation.

The United States has been marred in slow economic growth and a weak recovery for years now. Unemployment remains high. This is despite extraordinary efforts by the Federal Reserve to stimulate the economy. This drawn out period of low inflation and high unemployment has gotten more and more people talking about a “new normal” of mediocre growth.

Economists have been looking for ways to give central banks more power to combat recessions and prevent these long, drawn out recoveries. Larry Summers laid out this major impending economic challenge in his recent speech at the IMF. Normally, when a recession hits, central banks cut interest rates to incentivize firms to invest and to spur economic growth. But when interest rates hit zero, those banks lose one of their most important tools to combat recessions. This is called the zero lower bound.

Hitting the zero-lower bound means that interest rates cannot reach their natural equilibrium where desired investment equals desired savings. Instead, even at zero, interest rates are too high, leading to too much saving and a lack of demand. Thus we get the slow recovery.

Until recently, we hadn’t hit that bound. But since the Great Recession, we’ve been stuck up against it and the Fed has been forced to use unconventional policy tools instead. What Summers warned of is that this may become the new normal. When the next recession hits, interest rates are likely to be barely above zero. The Fed will cut them and we’ll find ourselves up against the zero lower bound yet again and face yet another slow recovery.

So what’s the answer?

University of Michigan economist Miles Kimball has developed a theoretical solution to this problem in the form of an electronic currency that would allow the Fed to bring nominal rates below zero to combat recessions. He’s been presenting his plan to different economists and central bankers around the world. Kimball has also written repeatedly about it and was recently interviewed by Wonkblog’s Dylan Matthews.

“If you have a bad recession, then firms are afraid to invest,” he told Business Insider. “You have to give people a pretty good deal to make them willing to invest and that good deal means that the borrowers actually have to be paid to tend the money for the savers.”

But paper currency makes this impossible. 

“You have this tradition that as it is now is enshrined in law in various ways that the government is going to guarantee to all savers that they will get [at least] a zero interest,” Kimball said.

If the Fed lowered rates below zero in our current financial system, savers would simply withdraw their money from the bank and sit on it instead of letting it incur negative returns. The paper currency itself — because it’s something that can be physically withdrawn from the financial system — prevents rates from going negative.

This is where Kimball’s idea for an electronic currency comes in. However, unlike Bitcoin, which prides itself on its decentralization and anonymity, Kimball’s digital currency would be centralized and widely used. He would effectively set up two different types of currencies: dollars and e-dollars. Right now, your $100 bill is equal to the $100 in the bank. If you’re bank account has a 5% interest rate, you earn $5 of interest in a year and that $100 bill is still worth $100. But what would happen if that interest were -5%? Then you would lose $5 over the course of the year. Knowing this, you would rationally withdraw the $100 ahead of time and keep it out of the bank. This is where the separate currencies come in.

“You have to do something a little bit more to get the negative rate on the paper currency,” Kimball said. “You have to have the $100 bill be worth $95 a year later in order to have a -5% interest rate. The idea is to arrange things so let’s say $100 in the bank equals $100 in paper currency now, but in a year, $95 in the bank is equal to $100 in paper currency. You have an exchange rate between them.”

“After a year, I could take $95 out of the bank and get a $100 bill or if I wanted to put a $100 bill into the bank, they would credit my account with $95.”

Got that? After a year of a -5% interest rate, $100 dollars are equal to $95 e-dollars. This ensures that paper currency also faces a negative interest rate as well and eliminates the incentive for savers to hoard dollar bills if the Fed implements a negative rate. Presto! The zero lower bound is solved.

The benefits of this policy go even further though: We can say goodbye to inflation as well.

“Once you take away the zero lower bound, there isn’t a really strong reason to have 2% inflation at this point,” Kimball said. “The major central banks around the world have 2% inflation and Ben Bernanke explained very clearly why that is. It’s to steer away from the zero lower bound.”

He’s right. Back in March, Ryan Avent asked Bernanke why not have a zero percent inflation target. Bernanke answered, “[I]f you have zero inflation, you’re very close to the deflation zone and nominal interest rates will be so low that it would be very difficult to respond fully to recessions.”

But if nominal interest rates are allowed to go below zero, then the Fed has ample room to respond to recessions even if rates start out low. This is another major benefit from eliminating the zero lower bound.

What Kimball, whose blog is titled Confessions of a Supply Side Liberal, is most excited about is moving beyond the demand shortfall the economy currently faces to the supply side issues that hold back long-term growth.

“If you care at all about the future of this country, one of the things you need to realize is we need to solve the demand side so we can get back to the supply side issues that are really the tricky thing for the long run,” he said. “The way to solve the demand side issues that is the most consistent with not messing up our supply side is monetary policy and making it so we can have negative interest rates.”

At the moment, e-dollars are still only a theoretical concept, but Kimball is hopeful that they could be put into action in the near future. He believes that if a government bought in, it could be using an electronic currency in three years and reap the benefits of it soon after. 

“This is going to happen some day,” he concluded. “Let me tell you why. There are a lot of countries in the world and some country is going to do this and it’s going to be a whole lot easier for other countries to do it once some country has stepped out.”

“Why, indeed, do we have public schools at all? There are advantages to having an educated public, and there are at least arguments to the effect that the private sector will undersupply education. But that’s an argument for government subsidies or vouchers; it’s not an argument for the government to actually run the schools. The reason the government wants to run schools is so that it can control what is taught. I hope that makes people uncomfortable.”

Jonathan Gruber in the Hot Seat

I want to hear what everyone really thinks. So I hate it when people get punished for being frank about their views. Jonathan Gruber is in that situation now. If you haven’t seen it, it is well worth the 55 seconds to watch this video of Jonathan’s comments. Then to see an example of the trouble this has brought him, take a look at what Peggy Noonan wrote in her November 21, 2014 opinion piece in the Wall Street Journal (to jump over the paywall, google the title “The Nihilist in the White House”): 

ObamaCare … has been done in now by the mindless, highhanded bragging of a technocrat who helped build it, and who amused himself the past few years explaining that the law’s passage was secured only by lies, and the lies were effective because the American people are stupid. Jonah Goldberg of National Review had a great point the other day: They build a thing so impenetrable, so deliberately impossible for any normal person to understand, and then they denigrate them behind their backs for not understanding.

One is most likely to be punished for being frank about one’s views if (a) one has not been frank about them all along and (b) if one’s views–or attitudes communicated along with those views–have unappealing aspects to them. So, with due allowance for the constraints one is under, one should (a) seek to be as frank as possible early on and (b) strive for views and attitudes that are as enlightened as possible to begin with.  

The other lesson from Jonathan Gruber’s experience is that, more and more, one must be ready for everything one says to be totally public. For that, I think it is good preparation to have had a blog at some point during one’s career (ideally starting early enough that any mistakes or infelicities can be put down to the inexperience of youth), since blogging seriously involves saying many, many things, all of which are intended to be fully public.  

Note: On the subject of telling the truth, you might be interested in these two posts:

Robin Hanson: Dark Pain, Dark Joy →

I recommend Robin Hanson’s post that I link above. There are many things we hide from others, and some that we hide from ourselves. Robin Hanson explores our hidden pains and hidden joys, and why we might hide them. 

There can be legitimate reasons for hiding things from others, though much less often than many people think. (I learned a lot from reading Sissela Bok’s books Lying and Secrets soon after they came out.) But it is too bad to hide something from oneself. As I wrote in my post “Truth or Consequences”: 

In my personal life, in order to keep myself from avoiding the truth, I often say to myself: “Whatever you decide is true, you don’t necessarily have to do anything about it,” lest fear of what I should do given certain findings tempt me to not find out the truth.

Let yourself see the truth, even if it means promising yourself you might not do anything about. As long as there is some chance the truth will set you free, it is worth facing it.

My Math Column with Noah in Spanish: "La Diferencia Fundamental Entre Los Niños Que Se Distinguen en Matemáticas y Los Que No"

blog.supplysideliberal.com tumblr_inline_nfolziwz6u1r57lmx.png

Yesterday, I was pleasantly surprised to stumble across the translation “La diferencia fundamental entre los niños que se distinguen en matemáticas y los que no” on Quartz of my column with Noah Smith “There’s One Key Difference Between Kids Who Excel at Math and Those Who Don’t.” (You can see a German translation of one of my columns, “Die „Hunger Games“ sind nicht unsere Zukunft – Sie sind schon Realität,” here and Japanese translations of quite a number of my posts linked here.)

I am grateful for all of the interesting things that have happened to me and all of the things I have learned since I have started blogging–something that might not have happened without Noah’s urging. And I am grateful for all of you who have taken the time to read some of the things I have written.

If you have time to read one more thing, you might like the column I wrote for Thanksgiving last year: “Human Grace: Gratitude is Not Simple Sentiment; It is the Motivation that Can Save the World.” In the same spirit, you might like Rebecca Hale’s Humanist Thanksgiving prayer. 

Q&A: Is There Anything to Supply-Side Economics?

Question: Hi Dr. Kimball - So i’m a Larry Kudlow fan- been so since 2005. Do I stand alone here? its easier to find a trend of more critics against Kudlow along with Supply Side Economics. I google SSE and the 1st page is flooded with why it doesn’t work. your thoughts much appreciated.

Answer:  I used to watch “The McLaughlin Group” all the time, and liked Larry Kudlow a lot there.

On your question about supply-side economics, It depends on what people mean by “supply-side economics.” At current rates, in my view neither incentive effects nor Keynesian multipliers are large enough for cutting taxes to raise revenue. But leaving that very specific tax issue aside, the supply-side is of crucial importance, much more important for long-run welfare than the demand side. That is a point I make at length in “The Deep Magic of Money and the Deeper Magic of the Supply Side.”

Several of my sub-blogs particularly address the supply side in many of their posts:

To me, that what I say in those posts is supply-side economics.

Jon Hilsenrath, Brian Blackstone and Lingling Wei on Monetary Policy: Low Rates and QE "Didn’t Cause the Hyperinflation or Obvious Asset Bubbles that Some Lawmakers and Critics Feared"

The well known gap between the Wall Street Journal news pages and editorial pages is well illustrated today in this passage from the article “Central Banks in New Push to Prime Pump” by monetary policy reporters Jon Hilsenrath, Brian Blackstone and Lingling Wei:

The Fed pursued low-rate, QE experimentation for half a decade. It pushed U.S. short-term rates to near zero in December 2008 and promised to keep them there for long periods. Convinced that wasn’t enough, it then launched several rounds of bond purchases that helped push its portfolio of securities, loans and other assets from less than $900 billion to more than $4 trillion.

The policies didn’t cause the hyperinflation or obvious asset bubbles that some lawmakers and critics feared. The fact that the U.S. economy is now doing better than Europe’s or Japan’s suggests the policies helped boost growth, although the degree of support is a matter of great disagreement among economists.

I fully agree with that assessment. I disagree with two other places in the article where they quote Eswar Prasad and Liaquat Ahamed without quoting any contrary views. Here are my contrary views. 

Eswar Prasad’s Views

Jon, Brian and Lingling write:  

Global economic weakness creates a dilemma for the U.S. If the Fed pulls away from easy money as other central banks ramp up money-pumping policies, it could drive up the value of the U.S. dollar, straining U.S. exports. It also could put downward pressure on U.S. inflation and on commodities prices, which are typically denominated in dollars.

Eswar Prasad, a Cornell University professor and former International Monetary Fund economist, said those developments would make it harder for the Fed to move ahead on rate increases.

This is not a dilemma for the US at all. What happens in the rest of the world matters a great deal for the US economy; the greatest dangers the US economy faces in the next few years are bad news about how other nations’ economies are faring. Given this stake we have in the world economy, when the rest of the world is struggling with low aggregate demand and the US central bank is thinking of raising interest rates to rein in aggregate demand, the thing one should hope would happen is that the countries that are struggling depreciate their currencies to boost their aggregate demand, while the US tolerates appreciation of the dollar to rein in its aggregate demand at that juncture rather than reining in aggregate demand by raising interest rates. In other words, when the world as a whole still needs more monetary stimulus, it is good thing for the Fed to stay relatively stimulative, while exchange rate movements are allowed to help steer that stimulus to other countries that need it most.   

Liaquat Ahamed’s Views: “Central banks have done about as much as they can”

Liaquat Ahamed articulately expresses an idea that sounds plausible, but is wrong. Here is the quotation from Jon, Brian and Lingling’s article:

“Central banks have done about as much as they can,” said Liaquat Ahamed, author of “Lords of Finance,” which documented the mistakes global central bankers made before and during the Great Depression.

I have been taking many of the Wall Street Journal monetary policy reporters to task before for this error:

(I recently updated my bibliographic post “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide” to add a “News and Trends” section for posts likes this.) 

Until central banks have employed negative interest rates, including negative paper currency interest rates (implemented by a time-varying paper currency deposit fee), they have not done all the monetary stimulus they can. 

Of course, it is possible to have too much monetary stimulus. So there are indeed situations in which a central bank has done “all it can” in the sense that more monetary stimulus would be a bad thing. And in the long run, standard models (which I essentially agree with) imply that a central bank can only affect inflation, not real economic activity. (See my post “The Deep Magic of Money and the Deeper Magic of the Supply Side.”) 

Applying these principles to current events, a central bank can reasonably be said to have “done all it can” to foster economic growth in only two situations:

  1. Additional monetary stimulus would create a genuine danger of a serious, undesirable increase in inflation (that is greater than the danger of too little monetary stimulus).
  2. The central bank has done all it can to raise equity requirements to a level that will make the financial system safe, but has failed in these macroprudential efforts, so that additional monetary stimulus would create a serious danger of a bubble that would endanger the financial system.  

One might argue that the first case applies to the Bank of England or to China’s central bank, but it does not yet apply even to the Fed, and is nowhere close to applying to the European Central Bank or the Bank of Japan.

No central bank has yet qualified for the second case. I have written two Quartz columns on monetary policy and financial stability:

And I address some of the key issues in my all-time most popular blog post so far: “Contra John Taylor.”

The Fed actually has a great deal of authority over equity requirements that it has not fully used yet. On equity requirements, see my recent post “The Wall Street Journal Editorial Board Comes Out for a Straight 15% Equity Requirement” and other posts in my Finance and Financial Stability sub-blog. Of just Quartz columns about equity requirements, see these two:

Liaquat Ahamed’s Views: Supply-Side Reform, not Monetary Stimulus

The account of Liaquat Ahamed’s views continues:

Japan, he said, is burdened by a highly inefficient domestic economy, and Europe by a fragmented and fragile banking system. Pumping cheap credit into these economies won’t directly fix those problems, he said. “They may be just copying the U.S. when they have different problems,” he said. “The world has relied too much on central banks.”

Supply-side reforms are crucial, but as I wrote in my slate article “Governments Can and Should Beat Bitcoin at Its Own Game” about empowering monetary policy by eliminating the zero lower bound:

… every time one set of problems is solved, it allows us to focus our attention more clearly on the remaining problems. It is time to step up to that next level.

People sometimes argue that good monetary policy will distract governments from pursuing supply-side reforms. But because optimal monetary policy keeps output close to its natural level, it would actually make supply-side issues much more salient, since only supply-side forces change the natural level of output. 

Fostering long-run economic growth is a many-sided issue. Writing this post inspired me to add a “Long-Run Economic Growth” sub-blog link to my sidebar. I had some difficulty categorizing posts. I didn’t want to duplicate what I had in my “Long-Run Fiscal Policy” and “Education” sub-blogs too much, but included some of my favorite posts in those categories. And I consciously included many posts about things that could contribute to economic growth correctly measured, even if they wouldn’t contribute to GDP as currently measured.   

Monetary Policy vs. Fiscal Policy vs. Credit Policy

Jon, Brian and Lingling continue, in what may also be a reflection of Liaquat Ahamed’s views: 

In the U.S., Fed officials have been frustrated that they were being relied on to spur growth while the Obama administration and Congress feuded over fiscal policies that slowed growth in the short-run without addressing projected long-run budget deficits.

My view is that monetary policy is exactly what we should be using to keep GDP at its natural level. And except for our unfortunate policy of imposing a zero lower bound on interest rates with the way we now handle paper currency, that would work well. On the issue of monetary vs. fiscal policy, these two posts are a good start:

Overall, in the absence of a zero lower bound, I don’t see traditional fiscal policy (beyond automatic stabilizers) as a good way to deal with fluctuations away from the natural level of output.   

However, credit policy, which lies somewhere between monetary and fiscal policy, can have a useful role to play in stabilization, simply because National Lines of Credit to consumers can have a faster effect on aggregate demand than interest rate changes (which typically take 6-12 months to have their effect). Here is what I wrote in my academic working paper “Getting the Biggest Bang for the Buck in Fiscal Policy” (pp. 3, 9): 

… for the sake of speed in reacting to threatened recessions, it could be quite valuable to have legislation setting out many of the details of national lines of credit but then authorizing the central bank to choose the timing and (up to some

limit) the magnitude of issuance. Even when the Fed funds rate or its equivalent is far from its zero lower bound at the beginning of a recession, the effects of monetary

policy take place with a significant lag (partly because of the time it takes to adjust investment plans), while there is reason to think that consumption could be stimulated quickly through the issuance of national lines of credit. …

… A big advantage of national lines of credit is that, once triggered, the details of spending are worked out through

the household decision-making process, which is relatively nimble compared to corporate and government decision-making processes.

Conclusion

The bottom line is that the conventional wisdom about monetary policy (on the left as well as on the right) is somewhat off target. To the extent that what people say seems reasonable, it is in important measure a self-fulfilling equilibrium: because the conventional wisdom is what it is, only certain policies are thinkable, and therefore what is said in the conventional wisdom makes sense. The concept of the Overton window is very helpful here. There is great value in working to expand the Overton window of policies that can be discussed among “very serious people” rather than just arguing about policies within the Overton window.

John Stuart Mill: How Laws Against Self-Harm Backfire

Deep in the human psyche is the hatred of being under someone else’s power. In On Liberty, Chapter IV, “Of the Limits to the Authority of Society over the Individual” paragraph 11, John Stuart Mill argues that laws against self-harm are often seen by those they affect through the lens of this hatred of domination. That can make such a law backfire in its intended aim of reducing a particular kind of self-harm:

Nor is there anything which tends more to discredit and frustrate the better means of influencing conduct, than a resort to the worse. If there be among those whom it is attempted to coerce into prudence or temperance, any of the material of which vigorous and independent characters are made, they will infallibly rebel against the yoke. No such person will ever feel that others have a right to control him in his concerns, such as they have to prevent him from injuring them in theirs; and it easily comes to be considered a mark of spirit and courage to fly in the face of such usurped authority, and do with ostentation the exact opposite of what it enjoins; as in the fashion of grossness which succeeded, in the time of Charles II, to the fanatical moral intolerance of the Puritans. With respect to what is said of the necessity of protecting society from the bad example set to others by the vicious or the self-indulgent; it is true that bad example may have a pernicious effect, especially the example of doing wrong to others with impunity to the wrong-doer. But we are now speaking of conduct which, while it does no wrong to others, is supposed to do great harm to the agent himself: and I do not see how those who believe this, can think otherwise than that the example, on the whole, must be more salutary than hurtful, since, if it displays the misconduct, it displays also the painful or degrading consequences which, if the conduct is justly censured, must be supposed to be in all or most cases attendant on it.

Of course, it is not only adults who are inspired to rebel against law that ban self-harm. As Susan Reimer writes in “Why the war on smoking backfires with teens,” a May 2000 Baltimore Sun article sparked by Malcolm Gladwell’s book The Tipping Point: 

Teens don’t smoke because they want to be seen as more grown-up or more like grown-ups. It is precisely because grown-ups are forbidding them to smoke that they take it up.

There is a social element to this spirit of rebellion:

Teen smokers are the “salesmen,” and Gladwell reports that they are usually defiant, sexually precocious, honest, impulsive, indifferent to the opinions of others, sensation-seeking – in other words, just the kinds of kids other teens are drawn to.

One of the most memorable stories from The Tipping Point was about an campaign to make not smoking a form of teenage rebellion against the manipulative adults in the tobacco companies. In Malcolm Gladwell’s telling, the campaign was abandoned due to pressure from tobacco companies when it was too effective at making teens think ill of tobacco companies–and through seeing tobacco companies as a possible target for rebellion, begin to think differently about smoking.  

In practice, one thing that can add to the chances that a law against self-harm will backfire is that those who champion such laws are often championed by people who make evident the general human pleasure at telling others what to do. That also helps energize a desire to rebel. 

When a law is one against harming others, things are different. It doesn’t look as much like rebellion when someone else understandably says “ouch, that hurts.”

Coda: The exceptions I can think of to the principle that laws against harming others inspire less of a spirit of rebellion are when the ones being hurt have been put into a subhuman category, such as slaves were in the Confederacy, or as illegal immigrants are today by anti-immigration activists. The Confederates saw themselves as rebels defending their rights; and many anti-immigration activists today see themselves as rebels defending their rights.

I have said strong words about anti-immigration attitudes before. For example, see my column The Hunger Games is Hardly Our Future: It’s Already Here. I believe that 200 years from now, with the more increasing sensitivity to harm that time will bring, those who are for restrictive immigration now will look in historical hindsight much as those who were for slavery 200 years ago look to us now.

Robert Flood and Company on Bubbles | A Facebook Convo →

I am delighted when my Facebook page becomes the site for serious economic discussion. Here is a great example. 

Miscellaneous Notes about Facebook and Tumblr: A reminder to everyone: my Facebook page is totally public.

By the way, I put links to all of my blog posts on my Facebook page. So anyone who wants to follow my blog on Facebook can do that. At this point, I routinely accept friend requests from everyone who seems human (as opposed to a bot).

Carlo Ratti and Matthew Claudel: Top-Down vs. Bottom-Up →

The following quotation is from the Project Syndicate article “Life in the Uber City,” by Carlo Ratti and Matthew Claudel:

As every French fifth-grade student knows, the Internet was invented in Paris. It was called Minitel …

Both Minitel and the Internet were predicated on the creation of digital information networks. Their implementation strategies, however, differed enormously. Minitel was a top-down system; a major deployment effort launched by the French postal service and the national telecommunication operator. It functioned well, but its potential growth and innovation was necessarily limited by its rigid architecture and proprietary protocols.

The Internet, by contrast, evolved in a bottom-up way, managing to escape the telecommunication giants’ initial appeals for regulation. Ultimately, it became the chaotic but revolutionary world-changer that we know today (“a gift from God,” as Pope Francis recently put it).

A key requirement for robust long-run economic growth is to make sure that established players can’t block bottom-up solutions when bottom-up solutions are called for–which is often!

Clay Christensen, Jerome Grossman and Jason Hwang: How to Divide and Conquer Our Health Care Problems

As I discussed in my post “Clay Christensen, Jerome Grossman and Jason Hwang on the Three Basic Types of Business Models,” Clay Christensen and his coauthors in all his business strategy books use a model of three basic types of business models:

  • solution shops
  • value-added processing (VAP)
  • facilitated networks.

In The Innovator’s Prescription (location 375), Clay Christensen, Jerome Grossman and Jason Hwang point out how these different types of business models default to different types of payment structures. Adding some headings:

Solution Shops 

Payment almost always is made to solution shop businesses in the form of fee for service. We’ve observed that consulting firms such as Bain and Company occasionally agree to be paid in part based upon the results of the diagnosis and recommendations their teams have made. But that rarely sticks, because the outcome depends on many factors beyond the correctness of the diagnosis and recommendations, so guarantees about total costs and ultimate outcomes can rarely be made. …

Value Added Processing

VAP businesses typically charge their customers for the output of their processes, whereas solution shops must bill for the cost of their inputs. Most of them even guarantee the result. They can do this because the ability to deliver the outcome is embedded in repeatable and controllable processes and the equipment used in those processes. Hence, restaurants can print prices on their menus, and universities can sell credit hours at guaranteed prices. Manufacturers of most products publish their prices and guarantee the result for the period of warranty.

Since they operate in the realms of empirical and precision medicine, VAP businesses in the health-care industry can do the same thing. MinuteClinic posts the prices of every procedure it offers. Eye surgery centers advertise their prices; and Geisinger’s heart hospitals can specify in advance not just the price of an angioplasty procedure, but can guarantee the result. In a new and remarkable agreement with several European governments, Johnson & Johnson has guaranteed that its new drug Velcade will effectively treat a specific form of multiple myeloma that can be diagnosed with a particular biomarker—or it will refund to the health ministry the cost of the full course of therapy. J&J can do this because the treatment is undertaken after a definitive diagnosis has been made. …

Facilitated Networks

Facilitated network business models in health care can be structured to make money by keeping people well; whereas solution shop and VAP business models make money when people are sick. 

In particular, facilitated networks often work on some kind of subscription or annual fee for payment. 

Clay, Jerome and Jason argue that there are two key steps to making health care less expensive:

  1. separating out the components of health care according to the most appropriate type of business model, and
  2. developing better ways of doing things within each category, building on that higher level of focus within each part of health care. 

Here is how they say it (with my headings):

The need to separate out components of health care according to appropriate business model:

Many who have written about the problems of health care decry the fact that the value of health-care services being offered by hospitals and doctors is not being measured. To them, we would explain that the reason isn’t that these providers don’t want to provide measurable value; they simply can’t, because under the same roof they have conflated fundamentally different business models whose metrics of output, value, and payment are incompatible with one another. …

Using the clear metrics within each category of health care to innovate further:

The reason why this basic segregation of business models must occur from the outset of disruption is that it will enable accurate measurements of value, costs, pricing, and profit for each type of business. A second wave of disruptive business models can then emerge within each of these three types. Powerful online tools can walk physicians through the process of interpreting symptoms and test results to formulate hypotheses, then help them define the additional data they need to converge upon definitive diagnoses. This will enable lower-cost primary care physicians to access the expertise of—and thereby disrupt—specialist practitioners of intuitive medicine. Likewise, ambulatory clinics will disrupt inpatient VAP hospitals. Retail providers like MinuteClinic, which employ nurse practitioners rather than physicians, need to disrupt physicians’ practices.

Avoiding the trap of thinking everything needs to be done in the solution shop business model: 

Hospitals and physicians’ practices have long defended themselves under the banner, “For the good of the patient.” Yet, for the good of the patient, do we really need to leave all care in the realm of intuitive medicine? Much technology has moved past this point, and health-care business models need to catch up. Two landmark reports from the Institute of Medicine—Crossing the Quality Chasm and To Err Is Human—shattered the myth that ever-escalating cost was the price Americans must pay to have the high-quality care that only full-service hospitals staffed by the best doctors can provide.

I find Clay, Jerome and Jason’s indictment of our current health care system as mixing together care appropriate to different business models trenchant. I wish this insight made it into more of the commentary about health care reform.  

You can see the rest of my posts tagged “Clay Christensen” here.

Jessica Lahey: Teaching Math to People Who Think They Hate It →

Ever since writing “There’s One Key Difference Between Kids Who Excel at Math and Those Who Don’t” with Noah Smith and “How to Turn Every Child into a ‘Math Person’ as a follow-up, I am on the lookout for ideas helpful for math education. Jessica Lahey’s article linked at the top gives a nice description of the Discovering the Art of Mathematics: Mathematical Inquiry in the Liberal Arts (DAoM) curriculum. 

Among math professors, Stephen Strogatz has one of the strongest presences on Twitter. In the classroom, he uses the Discovering the Art of Mathematics curriculum. Jessica’s article describes an exercise about folding paper so that a scalene (irregular) triangle can be cut out with one cut that is well worth reading about. Here are some other excerpts:

Strogatz has discovered a certain thrill in rectifying the crimes and misdemeanors of math education. Strogatz asks his students, more than half of them seniors, to provide a “mathematical biography.” Their stories reveal unpleasant experiences with math along the way. Rather than question the quality of the teaching they received, they blamed math itself—or worse, their own intelligence or lack of innate talent. Strogatz loves the challenge, “There’s something remarkable about working with a group of students who think they hate math or find it boring, and then turning them around, even just a little bit.” …

Twelve years of compulsory education in mathematics leaves us with a populace that is proud to announce they cannot balance their checkbook, when they would never share that they were illiterate. What we are doing—and the way we are doing it—results in an enormous sector of the population that hates mathematics. …

If we only teach conceptual approaches to math without developing skill at actually solving math problems, students will feel weak. … You need to have technique before you can create a composition of your own. But if all we do is teach technique, no one will want to play music at all.