Ch-Ching! Cash in My Crawlspace
This post has been included in the Carnival of Personal Finance #212, hosted by Darwin’s Finance.
For ages I kept many of my college and graduate school math, physics, and engineering textbooks boxed up in my crawlspace. After a decade of not opening a single one I decided it was time to unload them. On a whim, I put them up for sale on Amazon.com. As of today, all but three of about forty books have sold. Turning effectively useless paper into cash has been very gratifying. I’ve made about $1,000.
Every step of the process, from creating a seller account to interacting with buyers, was easy. The hardest part is taking the books to the post office, which I can do on my commute. Since this costs me about 20 minutes of time and about $4 for the envelope and postage, I never price a book below $15 (+$3.99 shipping) even if another merchant is offering the title for considerably less. It just isn’t worth my time to earn less than that. (Amazon.com takes a cut of a few dollars too. For books it is $2.34 + 15%.)
Amazon.com mediates all financial transactions and communication between buyer and seller so I did not feel as if I was taking any significant risks. I think the biggest risk is having someone request a refund long after a purchase. That never happened to me (or hasn’t yet). If it had I might have felt like I was being treated like a lending library.
What I found most intriguing about selling used textbooks on Amazon.com was participating as a seller in a market. I got to see and affect price and quality competition, things I had studied but not seen so vividly in action. Each used book listed on Amazon.com has a price, of course, but also a condition rating: new, like new, very good, good, acceptable, etc. Additionally, merchants are rated by purchasers on their performance (100% is the highest possible rating). Thus, one can think of the market for a particular book as three dimensional: price, book condition, and merchant rating.
In the market for a specific title, there is daily or even hourly jockeying for position with respect to these three dimensions. Some sellers strive for the cheapest price, undercutting the next seller by a penny, independent of the dimensions of quality or merchant rating. Some aim for gaps in the hierarchy where their book condition or merchant rating may justify a higher price.
For example, suppose for a particular title, another merchant with a 95% rating is offering the lowest price of $10 for a “good” quality copy and the next cheapest entry is at $20 for a “like new” copy by a 100% rated merchant. I might slip in and make a sale at $19 with my “like new” copy and my 100% rating. Buyers who are not that price sensitive may be willing to spend the extra $9 over the lowest price (i.e. $19 instead of $10) to buy my higher quality copy that comes with the better customer service implied by my slightly higher rating (100% vs. 95%). But there is no incentive to spend the extra dollar to buy the other “like new” copy from the other 100% rated merchant. As far as the purchaser can tell, that other high-quality merchant and I are selling the same thing (same quality) but mine is $1 cheaper.
The added benefit of selling on Amazon.com is that I am thoroughly comfortable with the used book market they’ve set up. I now buy used books on Amazon.com all the time, saving loads of money. I can only think of one good reason not to buy a used book, provided the quality is sufficiently high: used books do not qualify for free shipping, which Amazon.com offers for qualified purchases above $25. Therefore, sometimes I buy new if the price difference over used is within (or close to) the value of free shipping (if offered).
So, my advice: have no fear. Make and save money. Sell and buy used on Amazon.com.
What Health Reform Will We Get?
I’m getting a lot of questions from family and friends about health reform. This post repeats them and provides my thoughts.
Will health reform happen? I think the chances are good that congress will pass something that the Democrats and Obama will call health reform. That says nothing about the precise form it will take.
Will we get universal coverage? If we get any health reform I think it is likely that it will include an individual mandate so we will achieve something like universal coverage.
Will health spending be controlled? Those who ask this are really wondering if we will manage to change the rate of increase in health expenditures. I do not think we will achieve any significant long-term change in the rate of increase in health spending. I think we will achieve some one-time savings (shifts in the level of spending) but true cost control will require steps that are unpalatable to a majority of Americans and to key special interest groups. In particular providers need to get paid in a maner that does not encourage them to provide high-cost, low-benefit services. Maybe in a few years or a decade we’ll finally implement the necessary steps to reduce the rate of increase in health care costs.
Will premiums reduce? I think premiums for some individuals will come down. Low income individuals will receive subsidies. The non-group (non-employer) market will be reformed in a way to make insurance less expensive and more accessible. I do not expect that most Americans (those with employer coverage) will see a long-term change in the rate of increase in premiums.
Will there be a public plan? I expect there to be something that the Democrats and Obama can call a public plan. I do not expect it to be a plan that has sufficient power to drive down prices. That’s just too controversial.
Will employer-provided coverage be taxed? I expect it to be taxed, at least partially. Coverage expansion simply requires too much money to fully maintain the favorable tax treatment of employer-provided insurance.
What is the right way to reform the system?Hah! That’s a good question. It cannot be answered so simply. It depends on the goals. If controlling cost is the only goal then a single-payer, Medicare for all type plan is the right thing to do. If preserving choice and allowing people to keep the insurance they have then something that builds on the current employer-based system is the right thing to do. Since reform is not driven by what is “right” but by what is possible I don’t think it is terribly valuable to spend a lot of time thinking about what is “right.”
Where can I learn more? This is the best question. One source is my interview on OneMintthat links to some other articles. However, I think there are better sources of information on health reform than me. I’m not as plugged in to congress as other bloggers are. I don’t follow every nuance of every proposed bill and amendment. To learn more see Kaiser Health News and the Kaiser Health Reform Gateway. To stay up to date become a regular reader of Ezra Klein’s blog at the Washington Post and Jonathan Cohn’s blog at The New Republic.
If you have other questions about health reform (or anything), just ask. I’ll do my best to answer if I can.
Computer Upgrades on the Cheap
A few weeks ago I was considering ditching my relatively old desktop and laptop PCs. Both were running slowly. Instead I implemented a few inexpensive changes and both are now running faster, so fast in fact that I feel as if I have new machines. Here’s what I did.
Step 1: Added RAM. Both computers had less than 1GB of RAM, not enough to run bloated Windows XP and any other significant applications. Crucial.com, a generally trusted source for RAM, recommends 1-3GB of RAM for a “frequent user” running Windows XP Home edition. I boosted my laptop to 1.25GB and my desktop to 2.6GB of RAM and noticed tremendous improvement in performance. I paid about $35 per 1GB of additional RAM.
Step 2: Ditched Norton. I had been using Symantec’s Norton Internet Security for firewall and virus protection on both machines. Norton and one of its major competitors, McAfee, are well know resource hogs. Norton was contributing to the slowness of my machines. Moreover, Norton actually failed to protect my computer from a virus a few months ago and the technical support for which I was paying could not help me.
I replaced Norton with more efficient, free software. I did something different for my desktop and laptop. One does not need a software firewall if one has a hardware one, which I do on my home router. (Google your router make and model and check its specs to see if it has a hardware firewall.) Since my desktop is always running behind the router I only needed to install a virus protection program. Consumer Reports recommends the free version of Avira. That’s what I installed on my desktop and laptop for virus protection.
Since a laptop can and likely will be run over various wireless networks depending on location, it is recommended that one install a software firewall. There are many free firewalls for XP machines. ZoneAlarm is considered one of the best. I actually tried to install it on my laptop and something went awry. So I uninstalled it and went with a second choice: Agnitum Outpost (free version). This was the second most popular firewall downloaded from cnet.com, a trusted source for software downloads.
So far, I am satisfied with Avira and Outpost. Since both were free and installed in minutes I haven’t lost much in trying them. I can always uninstall one or the other and try something else. I’ll never pay anti-virus/firewall software again.
Step 3: Optimized Startup. By default, Windows runs a lot of junk one doesn’t need on startup. You won’t find everything in your “startup folder.” Many startup programs are “hidden” but can be found by running msconfig (see How to Fix XP Slow Startup at eHow.com). You can tell which startup programs are really necessary using bleepingcomputer.com’s startup program database. I found that out of the 15 or so startup programs, only two were necessary. I dramatically decreased startup time by preventing all the unnecessary programs from running.
Step 4: Defragmented Hard Drive. Defragmenting the hard drive is often recommended to speed performance. I performed this step but I think it had the smallest benefit. The steps above were responsible for most of the performance improvement.
As I wrote in a prior post, I also ditched Internet Explorer in favor of Firefox. That didn’t speed up my PCs but it did speed up my experience using them. One can find a variety of other speed-up advice online, like registry cleaning and removing unnecessary files. I didn’t perform these other steps. I’m more than satisfied with my computers’ performance now and expect to get a few more years of use out of the machines before having to replace them. That’s a lot of value for a small investment of time (under one hour) and money ($35 per 1GB of new RAM, the rest was free).
What Is Market Timing?
This post has been cited by The Carnival of Financial Planning, edition 95, hosted by Good Financial Cents.
Some say market timing is dangerous to financial health. “Timing the market is a fool’s game,” is how they’d put it. Some investors go so far as to establish investment plans with rules that forbid market timing. By and large, Bogleheads (mostly) frown on market timing. So what is market timing?
Market timing is about how one decides when to make changes in one’s investments. Obviously any change (purchasing new assets, rebalancing, selling, etc.) has to be done at some point in time. The question is: how do you decide what that point in time is? Upon what basis is the timing decision made? Using what information? The answers define market timing.
(Definition) If the basis for the timing of investment changes depends on conditions of the market (e.g. asset prices) then it is market timing. On the other hand, if the timing is due to indicators that are not functions of market conditions (like your age) then it is not market timing.
Let’s consider some examples.
(Example 1) The market crashed. Stocks are half the price they were six months ago. You sense they are “cheap,” that they can only go up. (Sound familiar?) You decide to pour your savings into stocks. Ruling: market timing.
(Example 2) You have an investment plan that says that you will shift from an 80/20 equity/bond mix to a 70/30 one when you reach age 30. So on your 30th birthday, that’s what you do. Ruling: not market timing.
(Example 3) You have an investment plan that says you will rebalance on January 1 each year to maintain your planned asset allocation. Hangover or not, you do so faithfully each year. Ruling: not market timing.
(Example 4) Your parents just gave you a five figure gift. You put it in your money market while you think about what to do. You notice emerging markets have done very well lately. You imagine that they’ll continue to do well. While you previously had no intention of tilting your portfolio toward emerging markets you dump the money into an emerging markets index. Ruling: market timing.
This last example, and to some extent the prior one, is tricky. One is always free to adjust one’s plan. Maybe you convince yourself that you really should tilt toward emerging markets. If that is really your new plan and you put it in writing and swear up and down you’ll stick with it then you might convince me that Example 4 is not market timing. But then you cannot justify the timing of the move based on asset prices. You have to justify it on the soundness of your plan. You should be indifferent as to the specific purchase date. There’s room for psychological gamesmanship here. One has to be brutally honest with oneself if one wishes to avoid market timing.
As for Example 3, isn’t rebalancing in some sense a function of the market? If, for example, stocks did poorly relative to bonds then one would need to shift assets from bonds to stocks. That is a move based on market performance, isn’t it? Yes, it is. Still, it is not market timing because the timing of the adjustment is not based on the market. It is based on the calendar. Planned, periodic rebalancing is not market timing.
Notice nowhere have I said that market timing is always definitively bad. Many may believe that, but I’m not going to take a stand here. My objective is just to define the term. Now that we’ve done so, each of us is free to decide how we feel about market timing and whether it is ever justified.
Now some bonus questions: (1) How did you decide your stock/bond mix? (2) Wasn’t it based on future expected average returns? (3) If so, is that market timing? (4) If not, upon what was your asset allocation based? My answers are: (1) careful investment planning (about which I will blog soon), (2) yes, (3) no, (4) N/A. Extra credit question: If my answer to (2) “yes” how can my answer to (3) be “no”?
A Two-Sided Inflation Argument
In a post on today’s NY Times Economix blog, Casey Mulligan argues many sides of the inflation prediction debate (The Next Inflation: When, Why and So What?). After reviewing the arguments as to why government spending is not typically inflationary and why an increase in the monetary base can be, Mulligan suggests why the Fed may permit inflation: it will help boost housing prices and reduce the number of underwater mortgages. Mulligan writes that “inflation will likely be a deliberate choice to reduce the housing market’s drag on the wider economy.”
This is a new variant on the “don’t worry about inflation” argument. It may be valid, though that is of course debatable. But I don’t like it. It basically says that the Fed could control inflation but may choose not to. Moreover, the inflation that the Fed allows could be beneficial. I don’t like it because it is a no lose perspective. If we get no inflation Mulligan can say, “See, I said inflation could be controlled.” If we get inflation Mulligan can say, “The Fed has chosen this course to help with home prices.”
There’s no testable hypothesis in this point of view. It doesn’t really answer the questions when, why, and how much, unless you like the answers: “sometime later,” “because the Fed prefers it that way,” and “a little or a lot.”
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Two-Sided Markets, Part II: Health Insurance
This post is cross-posted on The Finance Buff.
This is the second of a two-post series on two-sided markets. The first post introduced basic concepts that I will apply to the discussion of health insurance markets below. I am aware of only a handful of studies that make explicit use of two-sided market theory in analysis of health insurance markets. There are many other studies that make ad hoc reference to elements of its two-sided nature.
Two very similar papers by Bardey and Rochet (this and that), consider health insurance plans as platforms serving two groups: policyholders and health care providers. For this to be a genuine two-sided market framework we must be able to identify either (1) inter-group network externalities or (2) a sensitivity of transaction volume to how total price is split between the groups. These were the two essentially equivalent ways of defining a two-sided market discussed in my prior post.
That the first definition (inter-group network externalities) applies is not hard to see. In general, health insurance policyholders prefer greater access to more providers. Thus, the greater the number of providers contracting with the insurance plan the more valuable that plan will be to policyholders. That’s a positive inter-group network externality. Likewise, providers prefer greater patient volume. Thus, all other things equal, more policyholders make contracting providers better off, another positive inter-group network externality.
It is not immediately clear how to see that the second definition of a two-sided market (transaction volume sensitive to price allocation) also applies. What are the prices? What are the transactions? Policyholders pay a price: the premium. Do providers pay a price to contract with the insurer? They do. The price is the per-service discount they’re willing to provide the insurer for the expected patient volume.
In the Bardey-Rochet model, a transaction is a unit of provider service. A sick individual consumes one unit of service and a well individual consumes none. The transaction price is the sum of premium and provider discount. Transaction volume is sensitive to the tradeoff between premium and discount. At the extreme of a zero premium, the discount would need to be so high that no providers would participate and transactions would go to zero. (This is similar in spirit to the pricing tradeoff faced by Dude in my prior post.) Very briefly (because it is not the focus of this post), Bardey and Rochet go on to use a two-sided market set-up to show that adverse selection can lead to higher, not lower, insurer profits due to the negotiating leverage the additional health care utilization provides with respect to provider discounts. Such a conclusion cannot be drawn with a one-sided view of the market as it is an inter-group phenomenon.
The other paper I am aware of that explicitly uses two-sided market concepts in discussing the health insurance market is by Howell. Here a completely different type of two-sidedness is introduced. Insurance policyholders consist of two groups. One group consists of those who are healthy and not receiving any health care services, and the other includes those who are sick and are receiving health services (there are no preventative services in this model).
The only way this set-up can be viewed as a two-sided market is if one can identify the transaction between the sick and healthy and if one can show that the transaction volume is sensitive to relative prices or that there are inter-group network externalities. So, where’s the transaction between the healthy and the sick policyholders? Howell’s argument is that one can interpret the health insurer’s role as balancing the interests of the healthy and the sick. In effect, the collective risk sharing arrangement establishes implicit contracts between the groups whereby the healthy provide financial resources and the sick spend them. A healthy individual is willing to enter such an implicit contract because there is a non-zero probability he will fall ill.
But this doesn’t exactly pin down the transaction in a way that permits enumeration. My own interpretation is that the transaction is the health insurance policy itself, interpreted as a contract between the current (presumed) healthy state and the potential future unhealthy state.
From this perspective it is not hard to see transaction sensitivity to allocation of total price between groups. If the sick pay relatively more (e.g. higher copayments relative to premium) then relatively more healthy will participate leading to a higher number of transactions (sold policies). If the healthy pay more (e.g. higher premiums relative to copayments) then relatively fewer healthy will participate, lowering the transaction volume. Alternatively, the inter-group network externalities are also easy to see. A larger group of healthy participants leads to a lower premium for all policyholders (favorable selection) while a greater number of sick raises it (adverse selection).
Howell goes on to (rhetorically, not mathematically) embed this two-sided market model in the one involving policyholders and providers discussed previously. Another two-sided market can be found in the relation between sponsors who provide insurance subsidies (e.g. employers or the public) and policyholders. Howell calls this monstrously complex tangle of competing interests a “four-sided” market.
It is beyond the scope of this post to lay out all the price sensitivities and inter-group network externalities for the four-sided model. It is worth noting, however, that such a model is something like what actually exists. That is, health insurers mediate an enormous number of competing interests many of which are opaque to one-sided analysis.
An Interview with Russell Roberts
This post originally appeared on The Finance Buff.
I’ve never met Russell Roberts, a George Mason University economics professor also affiliated with the Mercatus Center and Stanford University’s Hoover Institution. I know him only through EconTalk, a podcast available from the Library of Economics and Liberty. On each episode of the program, a review of which I recently posted, Roberts discusses a topic in economics with a different guest.
Roberts is also a novelist. His latest, The Price of Everything: A Parable of Possibility and Prosperity (Princeton University Press, 2008), is a story of how prosperity is created and sustained, and the unseen order and harmony that shape our daily lives. He is also the author of The Invisible Heart: An Economic Romance (MIT Press, 2001), a novel discussing an array of public policy issues including corporate responsibility, consumer safety, and welfare. His first novel The Choice: A Fable of Free Trade and Protection (Prentice Hall, 3rd ed., 2006) was named one of the top ten books of the year by Business Week and one of the best books of the year by the Financial Times.
As if that were not enough, Roberts co-blogs at Cafe Hayek, is a frequent commentator on National Public Radio programs, and has authored numerous academic publications, and written for The New York Times and the Wall Street Journal.
As a huge EconTalk fan, I was delighted when Roberts agreed to an interview. Out of respect for his time, I promised him only five questions. But I could easily have asked more. (Actually, I cheated and asked compound questions.) I think we cover a wide range of interesting topics.
The Incidental Economist (TIE): EconTalk began a little over three years ago. What is the story of its origin? What were your expectations and goals for it at the time? How have they changed? Where is it heading?
Russell Roberts (RR): Radio Economics, an economics podcast, invited me to be a host for one of their episodes. People told me it was a waste of time. Reading is more efficient than listening, they said. No one wants to listen to anything for more than two or three minutes, they said. But thousands of people downloaded that episode. I thought, what if there were an auditorium, an arena, really, where thousands of people converged to listen to economics. Wouldn’t I want to show up to talk to that class? So I decided to try it. At first I thought it would be a few times a year. But then I realized that listeners want a weekly dose of economics. So EconTalk became weekly.
We’re on our way to a football stadium of listeners at EconTalk who show up every week, curious to learn something. Knowing they’re out there, I want to show up every week to share a conversation with them. My main goal is unchanged—to help people see how economics is a useful way to think about the world. But the program has changed. I try to talk less now than I did in the early days. At least I think I do.
Where is it heading? I don’t know. I hope to make it better and better. There is still plenty I can do. The recent book club is one example. I’d like to get listeners more actively involved in the process. And I try very hard to get guests with viewpoints that are different from mine. I think those are some of the best episodes.
TIE: You explore economics in several different ways: by podcast, blog, in the classroom, and through your novels. How do these media differ in their capacity to communicate economic concepts? What works well one way but not another?
RR: People are different. Some people like to read. Others don’t. Some have to read. Some have time to listen. Some have great visual imaginations, others are more analytical. Some want a short insight. Some are willing to sit down and listen for an hour or read a whole book. I try to use as many different kinds of media as I can. I’m working on a video right now and hope to do more of that.
TIE: You seem to have made a commitment to spread economic thinking. Why is it important for more people to understand economics concepts? What is at risk without greater understanding? Is progress in this regard being made? How do we know?
RR: I think economics helps you understand the wonder of the world. Understanding the fundamentals of economics (tradeoffs, spontaneous order, incentives, trade) helps you be a fuller human being. It also helps to keep you from being fooled by self-interest cloaked in altruism. That makes you wiser and in theory, a better voter. I wish I knew how to measure progress in economic literacy. One very crude measure, and it is enough for me, is when a listener of EconTalk writes me about something she saw in the news and recognizes it as a “bootlegger and Baptist” story. That is very gratifying.
TIE: Economists seem to have prominent voices and roles these days, even in areas outside economics. Matt Yglesias raised this most recently in a post titled “Prestige Cross-Pollination,” and Ezra Klein called it “a special privilege of economists” in a post titled “The Tyranny of the Economists.” Do you think there is a tendency for economists to overstep the bounds of their expertise? To the extent they do, is it dangerous?
RR: What scares me is hubris backed by the appearance of science. We economists make that leap all the time. It is dangerous but I don’t expect it to stop. I do hope people can learn to be skeptical.
TIE: You’ve interviewed a lot of economists on EconTalk. How has the experience changed you and your view of the profession, its role, and future? Are there any broad lessons you’ve learned that you can share?
RR: Hosting EconTalk has been one of the great intellectual rides of my life, as exhilarating as graduate school. As listeners know, I’ve become much more skeptical of certain kinds of empirical work and much less confident of economics as an empirical science generally. I see it more as a way of thinking, a language, a philosophy for approaching the world. I talk about these issues in this podcast with Robin Hanson. You can also hear it come through in this podcast with Ed Leamer.
Eye on Inflation
This post originally appeared on The Finance Buff.
Yes, another inflation post. If the economists keep blogging it, I’ll keep linking to their stuff. We’ll see in a few years who got it right. I’ll have the records!
- Andy Harless in A Long Way to Inflation is much more worried about deflation.
- Casey Mulligan in What Monetary Policy Cannot Do recalls Milton Friedman’s claim that monetary policy cannot have a sustained effect on interest rates or inflation and finds the claim credible in light of recent data.
- Henry Blodget in Why Krugman’s Not Worried About Inflation describes the “pissing match” among economists over inflation. He links to Arthur Laffer (Here Comes Hyperinflation), Paul Kasriel (worried about inflation), and of course Krugman (no inflation worries). Krugman himself cites Mark Thoma’s and David Altig’s reaction to Laffer. So this is a dense source of economic prognostication.
I predict more debate, followed by some “I told you so” gloating, and then we’ll all forget about it until the next blast of fiscal and monetary stimulus in ??? years.
The VA’s Health Coverage Expansion
This post originally appeared on The Finance Buff.
Kaiser Health News (KHN) reports today on expansions in health coverage for veterans through the Department of Veterans Affairs (VA). Back in 2003, low-priority veterans were not permitted to enroll for VA care. By updating its income eligibility cutoff, the VA will soon provide access to an estimated 266,000 additional veterans. According to KHN, this is part of an effort by the Obama administration to fulfill his “campaign promise to bring all veterans into the VA’s system.”
In the same post, KHN cites Associated Press (AP) reporting on VA patient safety issues. According to AP, an inspector general report to be released today finds that “fewer than half of VA facilities selected for surprise inspections last month had proper training and guidelines in place.”
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