• Everyday economics and the cost of curing diseases

    Alcohol, Marijuana or Tobacco: Which is Most Harmful?

    Dec 31 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Entertainment, Government, Lifestyle, Regulation, Thinking Economically • 644 Views

    In 2010, Great Britain’s Independent Scientific Committee on Drugs met to rank 20 substances. Using 16 criteria, they sought to separate myth from reality for lawmakers. However, their conclusions were so controversial that previously, when the senior drug advisor to the British government had expressed a similar opinion, he was “sacked.”

    Drug Scores

    You can see, below, that on the harm scale, alcohol and tobacco got higher scores than some illegal drugs.

    Negative externalities of substance use

    Researchers noted that they did not include benefits like the jobs and revenue from alcohol manufacture when calculating a harm score. From: “Drug harms in the UK: a multicriteria decision analysis”

     

    In this chart, the 16 criteria on which the drugs’ scores were based are divided between harm to users and harm to others. The harm to others section is a perfect example of negative externalities.

    Negative externalities from substance use

    From: “Drug harms in the UK: a multicriteria decision analysis”

     

    From Great Britain, I wanted to leap to U.S. states that appear to be ignoring marijuana’s relatively low negative externalities.

    Suing Colorado

    Nebraska and Oklahoma are suing Colorado for having legalized marijuana. Although the reason is the pot spillover, the rationale is the U.S. Constitution. In 2012, the Supreme Court validated the 1970 Controlled Substances Act (CSA) through Congress’s power to regulate interstate commerce. Because the CSA prohibits marijuana possession, production and distribution, Colorado is conflicting with federal law. According to the U.S. Constitution, when states conflict with federal law, the federal law is supreme.

    Our Bottom Line: Negative Externalities

    And all of this returns us to the drug harmfulness scale. Whenever government miscalculates the cost of the negative externalities it is trying to mitigate, then we are wasting land, labor and capital.

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  • Everyday economics and the Fed's dual mandate

    One Song, Two Graphs and the Fed’s Dual Mandate

    Dec 30 • Businesses, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Financial Markets, Government, Households, Labor, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 597 Views

    It’s not easy to sing about the Fed’s dual mandate. For a smile, do listen to Merle Hazard (below) before we take a look.

    In 1977, when Congress reformed the original Federal Reserve Act (1913), it said the Fed was supposed to maximize employment and minimize inflation. Only two years later, the inflation rate jumped past 13 percent. Believing that lower rates would have created an unacceptably uncertain business environment, Fed Chair Paul Volcker decided to focus solely on price stability. Ostensibly ignoring half of the Fed’s dual mandate (though he was not necessarily), Volcker sent the prime rate up to a whopping 20.5 percent. It worked. But first unemployment temporarily climbed beyond nine percent.

    Since then, most central bankers have emphasized price stability. However, appointing Janet Yellen to run the Fed, President Obama said he sought more emphasis on a dual mandate with the balance tipped toward employment.

    Current Inflation and Unemployment Trends

    For now, by seeing (below) an inflation and unemployment trajectory, we can ask how the Fed should respond to its dual mandate.

    Inflation

    With a two percent inflation max, the current rate looks fine.

    Monetary Policy, inflation and the Fed's dual mandate

    Unemployment

    Similarly, seeing that unemployment is trending downward, it too is okay.

    Monetary Policy, unemployment and the Fed's dual mandate

     

    Our Bottom Line: Monetary Policy Dilemmas

    We have a dual mandate dilemma. Some believe that the monetary policies that create more employment increase inflation and that controlling inflation leads to joblessness. Others say choosing price stability means employment will follow. And still a third group points to our graphs for 2014 and says both are feasible.

    I guess that’s why Merle Hazard said, “It’s awfully hard to be a central banker.”

     

     

     

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  • everyday economics and the cost of curing diseases

    The Cost of Curing Different Diseases

    Dec 29 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Humor, Government, Health Care, Regulation, Thinking Economically • 594 Views

    In what if? Randall Munroe wonderfully suggests how to eliminate the common cold.

    A detour for a moment…Randall Munroe, was a NASA roboticist until, at age 22, he started xkcd. A combination of “romance, math, sarcasm and language,” xkcd is a webcomic that became the springboard for what if?

    Really about tradeoffs, Munroe’s common cold reasoning takes us to the healthcare debate that we will soon consider.

    But first…

    The Cost of Eliminating the Common Cold

    The proposal:

    When you have a cold, rhinoviruses invade and, after a week or two, you win the war by killing all of the viruses. With everyone’s viruses dead, there would be no more colds.

    How to let everyone’s virus die before someone else is infected? A quarantine.

    Isolated, each person would just wait until his or her cold ended. Alone, that person would not have infected anyone else. And, at the end of that cold, that strain of rhinovirus would have been forever obliterated. In real life, the theory has worked. Small island populations have conquered some strains of the common cold until a ship arrives with a new one.

    The downside:

    1. A global quarantine would temporarily halt all economic activity. If we assume that the world’s GDP is close to $80 trillion, then a “pause” for several weeks, could precipitate an economic collapse.

    2. Location and food are problems. A quarantine means each of us has to be alone. Munroe calculates that there is enough room on the earth if each person is 77 meters from the next individual. But, being evenly dispersed around the globe means some people are at the North Pole, others are at the equator and a lucky group gets placed in some temperate zone where it is 70 degrees and sunny every day. With people spread out like that, it would be tough to allocate food.

    Munroe’s conclusion:

    Without even returning to the tradeoffs, he points out that the quarantine won’t work because people with impaired immune systems will leave the quarantine with live viruses and infect everyone all over again.

    Okay, so quarantining the world is unlikely. But, whether looking at a quarantine or a pill, always healthcare treatment decisions requires tradeoffs.

    The Cost of Treating Hepatitis C

    Harvoni is a new Hepatitis C cure that costs $94,500 per patient. Three months of pills and the devastating disease is gone. Multiply $94,500 by the 3.2 million who need treatment and you get an astronomical number. Thinking economically, we know the opportunity cost of spending on one disease is using the money elsewhere.

    Some say the solution is to lower the price.  But, according to a Tufts study, it costs $2.5 billion to develop a drug. Would firms do less research if they can’t cover their costs?

    Another answer is to wait until the liver is impaired or the person is very ill before resorting to an expensive cure. To that we can reply that the tradeoff is years of treatment that could exceed the $94,500.

    Looking at the price of new drugs during October 2014, you can see where our national debate on healthcare spending will go:

    Opportunity cost of expensive healthcare drugs

     

    Our Bottom Line: Tradeoffs

    How much our country does to keep people healthy depends on the tradeoffs we are willing to make.

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  • Everyday econ omics and the metric switch

    Why the Metric Switch is so Tough

    Dec 28 • Economic Debates, Economic Growth, Economic History, International Trade and Finance, Macroeconomic Measurement, Regulation • 563 Views

    This very funny two minute WestJet video on metric time displays why it is tough to make the switch.

    Where are we going? To the need for universal weights and measures.

    Trying to Switch

    In 1980, Interstate 19’s 63 miles became 101 kilometers. Now, Interstate 19 is the only U.S. road that remains with metric markers. And soon there will be none because Interstate 19 is returning to the mile.

    Metric System conversion Arizona highways

    A sign along Arizona’s Interstate 19 from The Washington Times.

     

    The metric initiative began when Congress, Gerald Ford and Jimmy Carter believed we needed to make the switch. Following the federal mandate, states started to implement the metric system. Progress evaporated in 1998, though, when Congress eliminated a deadline.

    One official perfectly summed up why the whole effort flopped. Referring to the cost and confusion of changing 400 signs on Interstate 19, he said, “That’s just for a single 63-mile stretch of highway—imagine that times 1,000 for the entire interstate highway system, times a bajillion for everything in the entire country. No wonder attempts to upend the unit status quo in the U.S. have failed.”

    Mars Mission Metric Mess-Up

    On the other hand, not switching has a cost.

    In 1999, a weather satellite approaching Mars vanished. The reason turned out to be a metric mix-up. One piece of software had calculated the vehicle’s thrusters in pounds. It then passed off the information to a second piece of software that assumed the data was in newtons, a metric unit. As a result, the Mars Climate Orbiter was torn apart because the wrong data told it to fly too close to the Martian surface.

    Similarly, looking back, we can see why we need standard weights and measures for trade. In 18th century France, there were 250,000 different units and some even had the same name. Assorted fabrics, grain, wood all had their own metric. Traveling from one village to another, you could have seen a 20% difference in the size of a pint.

    Leaping from an 18th century fragmented Europe to the eurozone, you can see why they sought to optimize trade through a shared currency, weights, measures and regulations.

    Our Bottom Line: Globalization

    If globally, we all used the same weights and measures, we could diminish the transaction costs, confusion, mistakes and perhaps boost U.S. exports. On the other hand, the burden of switching is mind-boggling.

     

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Slow Shopping to Fast Shipping

    Dec 27 • Businesses, Economic History, Economic Thinkers, Entertainment, Gender Issues, Government, Households, Innovation, Labor, Lifestyle, Macroeconomic Measurement, Money and Monetary Policy, Tech, Thinking Economically • 558 Views

    Our Posts Roundup

    Everyday economics and how music affects our shopping. Sunday 12.21.14 The music that affects how fast we shop…more

     

    Everyday economics and the cost of cheap parking. Monday 12.22.14 Why free parking is really expensive…more

     

    everyday economic of gas taxes Tuesday 12.23.14 Where to find the cheapest gas…more

     

    The everyday economics of increasing productivity. Wednesday 12.24.14 How UPS cuts delivery time…more

     

    Everyday economics and unpaid work Thursday 12.25.14 What Moms, Dads and Santa would earn…more

     

    A part of the money supply, currency wears out, is shredded and then recycled or destroyed. Friday 12.26.14 The money that the Fed discards…more

     

    Ideas Roundup

    • consumption expenditures
    • monopolistic competition
    • Pigovian taxes
    • negative externalities
    • variable pricing
    • GDP
    • economies of scale
    • productivity
    • unskilled labor
    • national income
    • wages and salaries
    • money supply

     

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