Tuesday, January 06, 2009

Prime Obsession, and Robert Shiller

Two books that I recently read:

1) Prime Obsession, by National Review's John Derbyshire. Prime Obsession has a mix of chapters: about half address the biography and background of Bernhard Riemann, the eminent German mathematician, as well as many of his forebears, contemporaries, and successors. The other half of the chapters are a layman's explanation, starting with some elementary math, of the Riemann Hypothesis.

It's a brilliant book. Derbyshire has a wonderful knack of explaining complicated mathematical concepts from the ground up. He does this so well that even a non-mathematician has at least a glimmering of a thrill when, in an anecdote, the physicist Freeman Dyson is told of the statistical distribution for the non-trivial zeros of the Riemann zeta function, and his response is, "That's the form factor for the pair correlation of eigenvalues of random Hermitian matrices!" What this means (so far as I understand it) is that the distribution of prime numbers has a completely unexpected parallel to the energy levels observed in quantum mechanical experiments. (It's a bit dismaying, to be sure, when after a chapter written in language like that, the next chapter begins with the warning: "You might find the following few sections challenging." But Derbyshire is up to the task of making it all comprehensible.)

2) Robert Shiller's The New Financial Order: Risk in the 21st Century. Shiller is a clever and creative economic thinker, and he presents several bold ideas in this book (including standardized units of currency, income tax schedules based on inequality, and much more).

I was intrigued by his idea of insurance for "livelihoods." Shiller provides an example of a young man thinking of a career in biochemistry. The risk is that his highly specialized knowledge might be displaced or become unusable in the employment market, for some reason. So there's a lot of uncertainty that might cause talented individuals to forego a socially valuable career. Shiller's answer is a livelihood insurance policy that "would be designed to pay him a regular supplement to his income over the years in the event of a decline."

The problem with such insurance plans is two-fold:

a) Insurance companies wouldn't have enough information to price and sell such plans for many careers, particularly new careers as to which there is no historical or national data on income patterns;

b) Even where such insurance plans are possible, the very people who would most benefit would also be least likely to be able to afford a policy. Journalists and GM workers would love to have an insurance policy right now that paid them a lifetime income in the event of job loss. But for that very reason, if such policies were sold at all, they would be exorbitantly expensive for journalists and GM workers (for the same reason that it would be highly expensive for a death row inmate to buy life insurance).

Now if such insurance policies were publicly subsidized in some fashion, that would be a different matter. But then Shiller's argument devolves into a case for a government-sponsored minimum income, except one that varies by career. While Shiller does point out that because of moral hazard, livelihood insurance policies might have to pay only for aggregate drops in the average income for a certain profession, there would still be some moral hazard (I think) for people selecting whether to enter a career where the government's minimum income was higher.


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5:51 AM  

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