The Weird Economics of Cellular Calling Plans

Yesterday’s New York Times has an amusing article about the complexities of cell phone pricing (ht: Carolyn):

HERE’S a consolation prize to the millions who recoil in bafflement from cellphone companies’ labyrinthine price plans, with their ever more intricate arrays of minutes, messages and megabytes: Economists don’t understand them, either.

“The whole pricing thing is weird,” said Barry Nalebuff, an economics professor at the Yale School of Management. “You pay $60 to make your first phone call. Your next 1,000 minutes are free. Then the minute after that costs 35 cents.”

I frequently use cell phone pricing to illustrate key ideas in my microeconomics class. For example, why is it often impossible to get a signal for my beloved iPhone? Because the marginal cost of downloading data is zero, and AT&T’s bandwidth is often overwhelmed. And why do cell phones usually charge a monthly fee rather than just a per-call or per-minute fee? Because they can get more revenue by offering a low (or zero) per-minute price coupled to a high monthly fee.

Still, as the article suggests, the complexity of cell phone pricing can sometimes seems inexplicable. Which reminds me of one of my favorite TV ads, starring Catherine Zeta Jones and a group of economists who are determined to explain cell phone pricing to consumers:

For my interpretation of the ad, see this post.

Climate Change vs. Deficit Reduction?

Next February, President Obama will unveil his 2011 budget. Over the past few days, the news media have begun to speculate about  some of the steps that he might propose in order to tame our growing deficits.

Over at Politico, Mike Allen and Jim Vandehei suggest that one policy casualty ought to be the effort to combat climate change:

The big question for Obama – and the country – is whether the sudden concern about deficits will be more rhetoric than reality once his first State of the Union address concludes.

All presidents promise deficit reduction – and almost always fall short. There is good reason to be skeptical of this White House, too, on its commitment.

For starters, the White House has not dropped plans for an aggressive global warming bill early next year that will be loaded with new spending on green technology and jobs – that would be paid for with tax increases. Democratic lobbyist Steve Elmendorf says the White House focus on deficit reduction could easily kill the cap-and-trade effort. “I think this means cap-and-trade has to go to the backburner,” he said.

This line of argument makes no sense to me. And its mere existence reinforces my concern that the politics of climate change are completely dysfunctional from a budget perspective. As I have noted before, the government could combat climate change in a way that would also combat our out-of-control deficits:

A carbon tax, for example, could raise revenue and reduce carbon emissions at the same time.

Alternatively, the government could auction off allowances under a cap-and-trade system and then designate some or all of the resulting revenues for deficit reduction.

Unfortunately, that is not the way our Congressional leaders are approaching this challenge. The House, for example, passed a climate change bill that would create allowances worth almost $1 trillion over ten years. The net reduction in the deficit? A paltry $9 billion since Congress would give most of the allowances away to industries with good lobbyists and would spend almost all of the rest.

Senate leaders, meanwhile, are touting their climate change bill as “not worsening the deficit” — a ridiculously low standard in this new era of trillion-dollar deficits.

My recommendation to the President is quite different from that in the article. If the President is committed to both climate change legislation and reducing the deficit, he should tell Congress to levy a carbon tax or designate a large fraction of the carbon allowances for deficit reduction.

John Smith: “I Made $1 Million Reading”*

*Results not typical.

Over at Managerial Econ, Luke Froeb highlights a new FTC initiative to crack down on testimonial advertising. Its target? Ads that highlight extreme results (“I lost 100 pounds eating Wonder chocolate”), without revealing what typical results look like. The FTC won’t forbid firms from highlighting extreme results, but if they do, they will also have to report typical results:

Under the revised Guides, advertisements that feature a consumer and convey his or her experience with a product or service as typical when that is not the case will be required to clearly disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides – which allowed advertisers to describe unusual results in a testimonial as long as they included a disclaimer such as “results not typical” – the revised Guides no longer contain this safe harbor.

The FTC’s goal is to protect consumers from misleading ads, a worthy goal.  But Luke (who was the FTC’s top economist for several years) believes that the new rule may have some side-effects. In particular, he wonders whether this policy will also make life more difficult for firms with legitimate products, since they would have to invest in studies to document the experience of typical consumers before they could highlight the experience of individual successes.

Defending the Fed’s Independence, Part II

Back in July, I expressed concern that Congress might undermine a key pillar of U.S. economic policy: the independence of the Federal Reserve.

Why is that so important? Because independent central banks do a better job of controlling inflation. Inflation may not be an immediate threat to the U.S. economy, but as that day approaches, the Federal Reserve needs to be able to pull back on monetary stimulus without political interference.

Of course, the remarkable scale of Fed actions over the past 18 months requires close review. Both practically and politically, Congress needs to exercise careful oversight over a now-multi-trillion arm of the Federal government.

The political challenge is finding a way to provide such oversight, while defending the Fed’ independence. In today’s Wall Street Journal, Anil Kashyap and Rick Mishkin suggest one way to strike that balance:

  • Oppose the House bill (sponsored by Rep. Ron Paul) that would give the Government Accountability Office (an arm of Congress) broad auditing powers over Fed actions, including monetary policy.
  • Endorse a pending amendment (sponsored by Rep. Mel Watt) that would give the GAO specific authority to audit the various lending programs created under the 13(3) provision regarding “unusual and exigent circumstances.” As Anil and Rick describe it:

This audit would involve oversight of the operational integrity of these facilities’ accounting, internal controls, and protection against losses. It would also disclose the borrowers from these facilities one year after the facilities are closed. The audit would produce new, important information that is not otherwise available and would play to the strengths of the GAO. And the amendment would exempt the Fed’s normal monetary policy actions from the audit.

Talking about Health Care (and Trillions)

Last night I did my first ever interview on local television, appearing on the Federal News Report on News Channel 8 in Virginia.

Going in, I had my usual talking points in mind on the various health bills pending in Congress, how much they cost, how they are paid for, whether the pay fors will actually work, etc.

But I wasn’t prepared for the best question Beverly Kirk asked me, even though I really should be. That question was very simple: How on earth do you make figures like a trillion dollars tangible to a normal human being? I didn’t have a particularly good answer and would welcome suggestions.

Last week, I was talking with a Senate candidate who asked a very similar question about the size of the deficit, which reached $1.4 trillion in 2009. I had a better answer for that one, noting that the imbalance between federal revenues and spending last year was equivalent to a family earning $40,000 per year but spending more than $65,000.

Unemployment from 3.6% to 48.5%

The New York Times has a fascinating graph showing how the unemployment rate has grown for every measured demographic group during the recession (ht: Ray).

Nationwide, unemployment has averaged 8.6% over the past twelve months, but that average conceals enormous variation.

At one extreme, unemployment has averaged just 3.6% for white women age 25 to 44 who have a college degree.

At the other extreme, unemployment has averaged 48.5% for black men age 15 to 24 who don’t have a high school degree.

(The NYT uses a twelve-month average in order to smooth out statistical noise in the estimates of unemployment for narrower demographic groupings. By way of comparison, note that the national unemployment rate was 10.2% in October, much higher than the twelve-month average of 8.6%.)

Another Argument for Legalizing Same-Sex Marriages

The voters of Maine disappointed me last week, voting to overturn a state law that allowed same-sex marriages.

Many public policy issues involve difficult tradeoffs. Health care, for example, is a hard issue. So is climate change. But same-sex marriage? That’s always struck me as a lay-up. It would benefit those who want to get married, while harming, as best as I can tell, no one. (In econo-speak, that’s called a Pareto improvement, and the first rule of economics is to take every Pareto improvement that life offers you.)

One sometimes hears the argument that allowing same-sex unions would weaken the institution of marriage. But I’ve never seen a plausible explanation of how that could happen. At best, the argument seems like a non-sequitur. And at worst, it may be exactly backwards.

As Theresa Vargas describes in today’s Washington Post, one group of people–the former spouses of homosexuals who tried to live as heterosexuals–believe that legalizing same-sex marriages would strengthen the institution of marriage: 

As the debate over legalizing same-sex marriage in the District grows louder and more polarized, there are people whose support for the proposal is personal but not often talked about. They are federal workers and professionals, men and women who share little except that their former spouses tried to live as heterosexuals but at some point realized they could not.

Many of these former spouses — from those who still feel raw resentment toward their exes to those who have reached a mutual understanding — see the legalization of same-sex marriage as a step toward protecting not only homosexuals but also heterosexuals. If homosexuality was more accepted, they say, they might have been spared doomed marriages followed by years of self-doubt.

In short, the Pareto improvement from allowing same-sex marriages may be even bigger than I thought.


Deja Vu All Over Again?

Earlier this week, the Treasury released its quarterly update about its borrowing requirements and its strategy for meeting them. I haven’t had time to review all the documents, but I did skim through the minutes of the meeting of the Treasury Borrowing Advisory Committee (TBAC), which was held on November 3.

This pair of paragraphs particularly caught my attention (my emphasis added):

The Committee then turned to a presentation by one of its members on the likely form of the Federal Reserve’s exit strategy and the implications for the Treasury’s borrowing program resulting from that strategy.

The presenting member began by noting the importance of the exit strategy for financial markets and fiscal authorities. It was noted that the near-zero interest rates driven by current Federal Reserve policy was pushing many financial entities such as pension funds, insurance companies, and endowments further out on the yield curve into longer-dated, riskier asset classes to earn incremental yield. Treasury securities have benefitted from the resultant increase in demand, but riskier assets have benefitted even more. According to the member, the greater decline in the indices for investment grade and high-yield corporate debt relative to 10-year Treasuries and current coupon mortgages display this reach for yield. A critical issue will be the impact on the riskier asset classes as market interest rates move away from zero.

Yes, our old friend the reach for yield. Back in pre-crisis days, the reach for yield would often be viewed as evidence that the monetary transmission mechanism was working well, with low short-term rates providing a real boost to the economy. Now, however, we are all-too-familiar with the downside of the reach for yield: unsustainable booms in longer-term assets.

Is this deja vu all over again? I don’t know. But those paragraphs certainly didn’t make me feel more comfortable about our recovery.

P.S. I should also note that the TBAC endorsed greater reliance on Treasury Inflation Protected Securities (TIPS), as well as moving from 20-year TIPS to 30-year TIPS. These recommendations paralleled some similar ones released back in September by the GAO.

Health Care Potpourri

1. The Medicare doctor fix has gotten cheaper. Yesterday the Congressional Budget Office (CBO) released a cost estimate for the House proposal to make a permanent “fix” to the rates that Medicare pays doctors (as you may recall, those rates are scheduled to be cut by more than 20% at the end of the year). The ten-year price tag? $210 billion. That’s down from the earlier $245 billion cost because of an arcane change in Medicare regulations (in addition, it’s now being scored separate from other parts of health reform).

2. The House Republican alternative to the House bill would cost much less, but cover many fewer people. According to another cost estimate released yesterday, CBO estimates that the Republican alternative would spend $61 billion over ten years on expanding coverage versus $1.055 trillion in the House bill. In return, their proposal would reduce the number of uninsured by 3 million in 2019 versus 36 million under the House bill.

3. Over at EconomistMom, Diane Lim Rogers has a nice piece about some of the tax increases that the House bill would use to pay for health care reform. Her concern? That they look a lot like the tax increases currently scheduled under the alternative minimum tax. Congress always steps in to prevent the AMT from biting more deeply. Why would things be different with a new AMT-like tax?

4. Confused by all the different cost measures being thrown around in the health debate? Over at e21 (the new think tank), I’ve tried to provide some clarity about the leading measures and how they stack up for the House bill and the Senate Finance bill: “How much do the health bills really cost?