An interesting idea

From today's Guardian:

Stamp duty could be switched from home buyers to sellers to help young people get on the housing ladder, Peter Hain, a candidate for Labour's deputy leadership, proposed yesterday.

He told the Simon Mayo programme on Radio Five Live yesterday: "We should consider whether it would be more appropriate for the seller of a property to pay the stamp duty rather than the buyer. This would exempt first-time buyers from the charge. A move like this would be revenue-neutral, but would be an enormous boost to young people."

I'll reserve comment. Greg Mankiw has more, on a post documenting similar thinking in Illinois.

Thanks to Shane for the pointer.

Goolsbee's nonsense take on Buffett

A couple of weeks ago the NYT ran an interesting piece by Austan Goolsbee on Warren Buffet's plan for picking a successor. (gated NYT version, non-gated version at Economist's View). I tend to agree with Goolsbee's main point that Buffett's plan for picking a successor is a bad one (that is the plan as described in the article - there is some disagreement as to whether Goolsbee got his facts right to start with). What doesn't make sense is this:

A number of years ago, in a moment of professional weakness, I bought exactly one share of Warren Buffett’s Berkshire Hathaway....

For a brief moment, I thought his track record might disprove the economist’s mantra that no one can beat the market in the long term so it’s better to just invest in index funds like one that matches the S.& P. 500.

The mantra comes from the rather compelling evidence that actively managed mutual funds cost too much and don’t always act in the shareholders’ interests. They churn stocks, for example — raising fees while also generating capital gains taxes for the investors. Their high fees sharply cut into investment returns in the long run. ...

Berkshire Hathaway seemed like a mutual fund but without the bad incentives. Mr. Buffett doesn’t care about churning stocks to get bigger fees. He doesn’t do things at the expense of his shareholders. He is the Oracle of Omaha, for Pete’s sake. If anyone can beat the market, it’s him.

Well, I still own that share, but it hasn’t worked out as well as I had hoped. My share has underperformed the S.& P. 500... My colleagues have mocked me incessantly, but I have remained a closet romantic, hoping that Mr. Buffett would renew his secret formula and prove my colleagues wrong.

I have no choice but to be blunt: that's complete and utter nonsense. Furthermore, it seems that Goolsbee is not motivated by a desire to mislead the readers - he genuinely doesn't get it. The fact that his share did not outperform the market is no indication of whether or not Berkshire Hathaway's portfolio consistently does so.

For the sake of argument, let's say that Warren Buffett's portfolio consistently beats the market by 300% each year, and that he also has a certificate from God stating he will keep doing so in eternity. Should you expect to beat the market yourself by buying Berkshire Hathaway stock? The answer is a resounding no. The moment Buffett gets his holy certificate, the stock of Berkshire Hathaway will jump so that BH offers the exact same risk-weighed return to new investors as companies not similarly favoured by the Almighty.

Goolsbee's investment would have beat the market only if Warren Buffet had got unexpectedly better at generating investment returns sometime after the renowned University of Chicago economics professor and Obama's lead economic advisor purchased his BH share. If on the other hand Buffett unexpectedly went from generating (or being expected to generate) a 300% return on investment a year to 200%, BH's price would fall - and Goolsbee's own investment would not have proven to be such a good one.

To cut a long story short: You buy shares in a company if you believe other investors underestimate its potential. A company's profitability per se is neither here nor there.

Advertisement: An extensive post on the widely misunderstood efficient market hypothesis (as well as a couple of on-request posts and one on 'virtual' worlds) has been in the making for a while now, and should be appearing here soon.

For UK readers: Economic and Labour Market Review

Economic & Labour Market Review (ELMR) is a new monthly statistical journal from the Office of National Statistics:

The Review draws together expert research and analysis to build an up-to-date, comprehensive and unique statistical picture of the UK economy and labour market.

ELMR includes impartial commentary and analysis from its specialist ONS authors, illustrated with tables, charts and diagrams. It provides an independent, cohesive view of the state of the economy and the labour market, and gives an insight into how the statistics behind the analysis are produced and interpreted.

Concise, well written and available online free of charge, the Review provides an excellent overview of the latest UK statistics and is recommended to all readers interested in an up-to-date snapshot of the UK economy.

Is it the unhealthy that need health insurance the most?I on Krugman on Obama on health care

Via Economist's View, Paul Krugman (NYT, gated) discusses Barack Obama's health plan. I won't express an overall opinion (I couldn't read the whole piece, as I don't have access to the NYT online), but a particular sentence caught my eye:

[...] insurance companies won’t be allowed to deny people coverage or charge them higher premiums based on their medical history. Again, points for toughness.

First of all, do you really get toughness points for this one? I know precious little about the state of the health care debate raging in America, but from personal experience most voters love this sort of stuff. Here's the government standing up to big multinationals and sacrificing corporate profits to protect the sick. I bet you good money that if you ask a representative sample of voters who stands to lose out, the majority will fail to name the segment of the population with relatively good medical histories.

Secondly, I'm not so sure the proposal is such a good one. As is the case with any market in private goods government tampers with, designating relevant information off-limits generates inefficiency. Some healthy individuals, unable to enjoy a low 'good medical history' premium, will no longer find it worthwhile to insure. As per 'The Market for Lemons', the bad health risks stay in the market - and the average insurance premium goes up.

While these issues are certainly important in themselves, my main objection lies elsewhere.

Health insurance is a marvellous thing and I recommend it to everyone. However, it is not the unhealthy we should be subsidising: it's the poor.

The richer you are, the more insurance becomes a financial product like any other. At the extreme, no matter how risk averse Bill Gates is, it is not unlikely that health insurance has no place in his optimal investment portfolio. On the other hand, a poor person sharing Gates's risk profile would find it beneficial to invest a much larger proportion of her savings on health insurance. The reason is simple: potential health care costs represent a much greater risk to her 'heavy-on-health, light-on-other-assets' portfolio than they do to Gates's. Any government intervention on the health insurance market ought to have the poor as its main focus, not the unhealthy per se.

Beyond privacy, the only good argument I can think of for concealing medical information is the perverse incentive it generates for people to avoid medical examination that may reveal a high probability of future health problems. But there are better ways for public policy to tackle this.

Make insurance compulsory, allow medical histories to be seen by insurers to increase efficiency in the market, and have the government directly subsidise the poor that have adverse medical histories, for example by offering them insurance by the state on a public welfare rather than profit maximising basis.

To cut a long story short, it is important to realise that the poor and currently healthy need insurance as much as anyone - and it would be a mistake to make it more difficult for them to acquire it.

Why is annual leave entitlement so rigid?

This one is a tough nut to crack.

Most employees in permanent, full time jobs are offered a very specific deal on the number of days they can take off, and deviations are allowed only in extreme circumstances. Recently, mainly driven by a desire to accomodate working mothers, there has been some change: for example, part-time contracts (the four-days-a-week sort) have become more common than in the past.

But the basic pattern remains the same. Even at times workload is low (and thus the productivity of the marginal worker is low or zero), an employee who so wishes is not allowed to 'purchase' (for example by foregoing the corresponding part of his salary of multiple thereof) extra days off from his employer.

This is a puzzle to me, because I know for a fact that such an option is valuable to both employees and employers. Personally, I would forego up to £5,000 ($10,000) for the ability to purchase extra days from my employer at times my presence is not required. If I was an employer, I would also be happy to save on labour costs during times there is some excess capacity, or alternatively be able to hire the best talent at lower hourly rates simply by agreeing to fewer total days of work.

To put this in an economic framework: In many circumstances, it must be the case that the there is a sum of money X an employee can pay an employer for extra days off, with X being less than the worker's expected productivity during those days and less utility enhancing to the worker than those extra days. Yet I've never heard of such a transaction taking place, even implicitly. (That's not entirely true. During my National Service, extra days off were given to soldiers that were particularly productive. That was a special case, however, as monetary compensation was simply out of the question: a conscript's monthly salary was fixed at 8 euros.)

Salary and annual leave are both elements of the compensation workers receive. Why is the former so flexible and the latter so rigid?

A potential reason could be the existence of a sclerotic legal framework, but even this is not a particularly convincing explanation: tales of government incompetence aside, if the demand for reform was there it would have happened.

The only half-satisfying explanation I can come up with is path dependence. Back in the days of industry and the conveyor belt, a worker's productivity was essentially determined by attendance. 300 days in front of the conveyor belt meant two times more 'product' than 150 days. At the same time, pay was determined by employer-union negotiations: there were no 'high-performance' employees standing to gain by breaking ranks and going it alone.* Collective wage bargaining is, well, collective; and as a result everyone in the union simply accepted the wage and leave settlement that maximised the median member's utility.

Today, while there is no shortage of super market tills and call centres, more jobs have become 'flexible' and potential improvements in pareto efficiency have become possible. However, the institutions (management norms, employment law) surrounding performance pay and non-pecuniary benefits such as annual leave take time to adjust.

Commenting on the rise of performance related pay, Tyler Cowen writes: 'For me the puzzle is why the world held back so much on bonus pay for so long.'

I am wondering the same about annual leave. Is it long before I can purchase some much needed extra days off from my employer?

*More on the 'productivity spread' and the rise and fall of unions soon.

What women do to a President

The previous post got me thinking: Can daughters also explain the party of the President of the United States?

To find out, I got data on all US Presidents since 1945 from Wikipedia and fit them on a linear probability model. My dependent variable was the party of the President and the difference between daughters and sons the regressor.


The results? Having an extra daughter increases the probability of a President being a Democrat by 1.7%.

Now, my initial dataset is not free of problems. Reagan had the highest number of daughters of any Presidents (four), and thus messes up with the results significantly. But Reagan, of course, was a Democrat during his early years in politics. Correcting for this fact, 1.7% jumps to a more respectable 9%.

Good going so far, but of course there's more to it: my model does not account for intergenerational effects. Assuming that parents also have an effect on their children's voting behaviour, George W. Bush should clearly be excluded - his dad had no less than 4 sons. This leads us closer to the true value of the probability in the population - a by now very convincing 13%.

But this is not enough to establish causality - we also have to make sure our results are robust. To test for this, I add an additional observation to the dataset excluding W Bush and with Reagan labeled a Democrat. Enter President Jed Bartlet, Abu el Banat, father of 3 daughters, the fictional President of 'The West Wing' - the award-winning TV series. If our model's specification is correct, including President Bartlett should not affect our results, since he is not for real. Indeed, his inclusion returns us an estimate statistically equal to 13% - a clear sign that our model does a good job capturing the true effect of (real) daughters.

While more research is necessary to broaden the evidence base and explore other interesting hypotheses, the results here are very promising. So now you know: next time you come across a rising political star with daughters, chances are he's a Democrat.

Disclaimer: This post is meant as a joke, please do not take any of this seriously. I'm enjoying a lazy weekend.

What women can do to you, politics edition

Oswald and Powdthavee present very convincing evidence that they can turn you into a left-winger - and that's before they even grow old enough to utter a word. Using data from a rich longitudinal dataset, the British Household Panel Survey, they find that every extra daughter raises a parent's probability of voting Left by 2 percentage points.

The authors also have a go at explaining why:

[...] Because of wage discrimination and different female preferences over public goods (females derive greater utility from public goods like community safety), rational parents tilt to the left if they have daughters. A male voter who has a daughter becomes subconsciously sympathetic to the ‘female’ preference for the policies advocated by left-wing parties. This conceptual framework gives correct predictions; whether it is in fact the right explanation for the patterns in the data seems an important topic for continued research.