Entries Tagged 'Economics' ↓

At least as it’s measured by statistics.

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Here’s an argument I have heard multiple times from people on the left side of things: yes, this policy may shave half a percentage point or so from the growth rate, but do people want to be a few percent richer if they have to live in a more unequal society?

If this was true, then why is there nobody on the Left celebrating the last few years? They could even hail Obama as a great leftist: for the moderate price of a less than a percentage points of GDP growth (growth just below 2% instead of just above it), inequality is coming down. Seriously, has anybody actually stood up and said this economy is what we’ve been fighting for? Without too much searching, I think the answer is No.

In abstract, sacrificing just a few percentage points of GDP sounds easy. In practice, it’s actually pretty nasty.

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Do people want to be a few percent richer if they have to live in a more unequal society? Yes.

At least as it's measured by statistics. * Here's an argument I have heard multiple times from people on the left side of things: yes, this policy may shave half a percentage point or so from the growth rate, but do people want to be a few percent richer if they have to live in a ...

Ezra Klein has the liberal work argument for single-payer healthcare. If I may borrow a phrase from Megan McArdle, it falls for the immaculate negotiation argument. Here’s how I think Ezra imagines negociations would go:

Gov Official: Your drug is too expensive.
Pharma: It costs us a lot to develop, we need to charge 100 for it.
Gov Official: 50.
Pharma: No, we cannot sell it this cheap. How about 95?
Gov Official: Nope, it’s either 50 or nothing.
Pharma (grumbling): Ok, 50, but we’re not happy.

Here’s how I think they’ll go:

Gov Official: Your drug is too expensive.
Pharma: It costs us a lot to develop, we need to charge 100 for it.
Gov Official: 50.
Pharma: Let us think about it.

Pharma leaks a story about government death panels putting a value of life. Some congressman are asked about it my a news station friendly to the opposition party. A bipartisan effort is made to care for the needy.

Pharma: We thought about it and it’s still 100.
Gov Official: Ok.
Pharma: Next year, we’ll have a cost of living increase. It’ll be 110.
Gov Official: Let us think about it.
Pharma: Maybe this should a public discussion.
Gov Official: No need, 110 is very fair.

Your ability to negociate is exactly defined by your ability to walk away. In many of these cases, there is no way that the government will walk away. If anything, it’s the providers who routinely threaten to walk away from Medicare!

What do you think that doctors and patients would feel and do if there was a guideline for what fraction of a doctors Medicare cases could be prescribed brand-name medication or referred to specialists? The reason that the US government doesn’t do this now is because people don’t want it to do it. In other countries, the general population accepts this (in large measure because the richer, more educated, population who would protest is the one who ends up getting those brand-name medications and expensive procedures).

One of the most irritating things about the health care debate from the liberal side is that they propose often very sensible ideas, but then fail to actually argue that it should be done, saying they’ll press for them in 2016 if only you agree to spend a few billion dollars now.

Two weeks ago, as the FDA revoked the license for Avastin for breast cancer as evidence mounted that it is ineffective and it may even be detrimental. Medicare immediately announced it would continue covering it at full cost! What is stopping Medicare from taking advantage of this long-hanging fruit: stop paying for a very expensive treatment that probably makes people worse. It could do it now. There will be a backlash, sure; why won’t there be one in 2016?

Ezra Klein has the liberal work argument for single-payer healthcare. If I may borrow a phrase from Megan McArdle, it falls for the immaculate negotiation argument. Here's how I think Ezra imagines negociations would go: Gov Official: Your drug is too expensive. Pharma: It costs us a lot to develop, we need to charge 100 for ...

Scott Sumner wrote a very interesting post about what it means to have thought we were wealthier than we were/are. I’ll leave aside the philosophical differences in the definition of truth and focus on the economics here. The post was excellent because it made me think about many things, but ultimately, I think it hints, but fails to highlight an important point I had not yet thought about.

How can I be poorer than I thought? How can a society be poorer than it thinks? A few thought experiments

1. Researcher A thinks he found a cure for prostate cancer and takes out a patent. When the FDA reviews the evidence, it turns out that the data was mis-interpreted and it is no better than placebo. A is no longer rich. Also, society is much poorer because it does not have a cure for cancer.

2. Young Athlete B thinks that he can make the professional leagues. He knows he won’t be the MVP, but he’ll get drafted. It turns out he does not get picked by any team. B is poorer than he thought. Society, however, is pretty much the same: all of the extra income that B lost is not going to someone else. However, it is still possible that there was mal-investment: B spent his teenage years training instead of getting an education. If many young people do that, then it is possible that society ends up poorer than it otherwise would be. However, society is no poorer when compared to the moment just before the draft: it had M would-be-atheletes and expected to end with N < M draftees, and this is exactly what happened.

3. Rich Non-Profit Institution C has a large old art collection, which it values at $1B. Due to the crisis, it sells off its collection to focus on its mission. At auction, the collection only raises 0.5B. C is much poorer, but society is just the same. This type of being poorer does not aggregate. After all, there was someone else who thought they would have to pay $1B for the collection and is actually richer. The use value of the artworks did not change. There is no mal-investment either. This is an instance of a pure aggregation fallacy.

4. Baker D has 1000 cookies to sell for $1/each at a sale. However, only half as many people show up and he only makes $500. D is poorer than he thought. Society is no poorer before the sale starts. Of course, even a large society can think it would be able to export some good and then it turns out that people do not want to buy it.

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A common conception of the crisis is that There were too many houses built in the US as people thought they could get rich on real estate. It turns out that house prices will not rise forever, so people are actually poorer than they thought.

This makes no sense: if there are too many houses in the US, then the US is richer than it thought, not poorer. People who own the houses might be poorer as owners, but even they are richer as potential buyers (after all, most people sell their house when they want to buy a new house). This wealth loss does not aggregate as what one person will have lost is exactly offset by another having to pay less. There was no misperception of the use value of the houses. If there are “too many” of them, that’s a good thing!

There might be a small effect, where Americans thought they could export their houses to incoming immigrants.¹ As immigration dries up (and, in the case of Mexico, it might have gone into reverse), there are fewer people willing to come work in exchange for houses on US soil. Is this the narrative of the recession: Americans built a lot of houses for Mexicans immigrants, but then the government did not let the Mexicans come and buy them. Not really very convincing (it could be true, though—look at the states which had the biggest busts).

I can hear the objection: if having too many houses is so great, how come Detroit isn’t booming? Well, in the case of Detroit (and other similar cities), the empty houses are a symptom, not a cause. The city of Detroit is losing population despite having cheap housing; not because of it. Do you think the city would be better off if it bulldozed enough houses to get prices all the way up to, say, Cleveland prices? During the New Deal, people actually did things like this, culling millions of pigs during a crisis, but most economists now think that it totally misguided. Additionally, the Detroit example does not apply: there are issues with the sort of population that is attracted to very low rents and abysmal public services. They are often those without a job or prospects of ever getting one. But, again, this problem does not aggregate: if every city had lower rents, these people would not move to all of them (there are only so many of them).

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There is still a whole lot of naïvety in the above argument.

After all, just because there are more houses and people are richer, there might still be major rigidities in the economy that make it so that simmultaneously (1) there are a lot of empty houses and (2) there are fewer households being formed. As it turns out, this is exactly what is happening. This is a mix of behavioural factors (households, like companies, don’t want to mark to market when prices are going down, although they were often happy to do so on the upswing), and contractual rigidities. But these rigidities are not about wealth, at least not real wealth. And here, I stop disagreeing with Scott Sumners and direct you to him for the argument on NGDP.

¹ Why not consider selling a house to an immigrant a form of export?

Scott Sumner wrote a very interesting post about what it means to have thought we were wealthier than we were/are. I'll leave aside the philosophical differences in the definition of truth and focus on the economics here. The post was excellent because it made me think about many things, but ultimately, I think it ...

It is a testament to the possibility of progress in economic thinking that no one has (yet) proposed that auto makers get subsidies to not produce cars.

It is a testament to the possibility of progress in economic thinking that no one has (yet) proposed that auto makers get subsidies to not produce cars.

Heard someone from a very large wind power company. They have $7.5b in US assets. They employ 332 people. That’s 22m per employee.

Be green or create jobs, you must pick.

Heard someone from a very large wind power company. They have $7.5b in US assets. They employ 332 people. That's 22m per employee. Be green or create jobs, you must pick.

Megan McArdle talks of British austerity:

Even if you think that stimulus is a good idea for America, that wouldn’t mean that it was a good idea for the Brits. Britain has a much smaller, much more open economy than we do. That means that the country is more vulnerable to a run on its currency or its debt than we are. The ruling coalition would say that it also means that stimulus is less effective–stimulus dollars spent in Britain will “leak” more readily into other countries.

Actually, the main reason why the first sentence might be true is that Britain already had a high debt. In 2008, the US had a very low debt (when compared to the rest of the rich world), just over 40%. So, there was room to borrow and increase that to 80% (which Congress+Obama proceeded to do). Britain was already at close to 80%. There was simply no room to increase that to 120% without markets balking starting to ask for much higher yields.

The above is also why I’m skeptical on any proposals where the debt peaks in 2020 at around 80% and then starts going down. In 2020, we should expect that the economy will be close to the end of the cycle currently starting; when a recession will hit again. How is the US suppose to stimulate itself out of it?

Megan McArdle talks of British austerity: Even if you think that stimulus is a good idea for America, that wouldn't mean that it was a good idea for the Brits. Britain has a much smaller, much more open economy than we do. That means that the country is more vulnerable to a ...

1. Most people agree that we are not motivated by money alone. In fact, a favorite economics straw-man is to say that economists think that people only act out of interest for money (economists tend to assume that people act in their self-interest and, in many economic situations, that is the interest for money; but it is often something else).

2. However, there are areas where we think that only money is a motivator. For example, in science, it has become common for articles to carry a “conflict of interest” declaration where one is expected to state whether one has a financial interest in the outcome of the presented research.

3. Some publications use the phrasing “financial conflict of interest,” but others just write “conflict of interest.” However, even in this last case, it is only the financial conflict of interest that is meant. As if there were not other motivations to slightly cheat or embelish the results. The research community (and the public in general) fall into this naïvely cynical view of human motivation where only money is a motivation for non-exemplary behaviour.

4. I’d love to see at the end of a scientific paper: The senior author is up for tenure review at the end of this year and had, so far, not published in a high profile journal. Would such a statement lead you to weight the claims in the paper differently?

1. Most people agree that we are not motivated by money alone. In fact, a favorite economics straw-man is to say that economists think that people only act out of interest for money (economists tend to assume that people act in their self-interest and, in many economic situations, that is the interest for money; ...

1. Given how the profession failed to prevent the worst financial crisis ever, it is clearly not a science.

2. Physics failed to prevent the nuclear problems in Japan (and earlier in Chernobyl and Three Miles Island—a dismal history of failure). So, physics is not a science.

3. Geologists did not warn us about earthquakes and several of them thought that Japan was a pretty nice place to live even a few weeks ago! So, geology is not a science.

4. I used to have an old car that, at one point, had a lot of engine problems. Thermodynamics is obviously not a science either.

5. Sometimes, people I don’t like win elections. Political science is a fraud.

6. The postal office loses mail all the time, so even stamp collecting is not a science.

Amazingly, example 1 is often taken seriously.

1. Given how the profession failed to prevent the worst financial crisis ever, it is clearly not a science. 2. Physics failed to prevent the nuclear problems in Japan (and earlier in Chernobyl and Three Miles Island—a dismal history of failure). So, physics is not a science. 3. Geologists did not warn us about earthquakes and ...

1. Ayn Rand in her book Atlas Shrugged imagined that the productive classes (engineers, artisans, artists, and business men), the Atlas that carries the rest of the world, would move to a separate place of infinite freedom as the parasitic world collapses around them. This is not a bad metaphor of what much of the world was like between 1930-1989: from all over the world, the productive classes would move to the United States. It’s impossible to read a history of computers without noticing the huge number of Hungarian-born thinkers, the nuclear bomb was built with the help of many German-born jews (including Einstein, at least conceptually), &c. The US really had an imported elite.

2. Over the last few decades, the US became freer (huge gains for non-whites, women, and minorities, in general), but the rest of the world made even larger gains. The US barely makes the top 10 in the economic freedom index of the Heritage Foundation anymore (liberals that like to argue that the US should be more like Canada or Denmark should know that the Heritage Foundation agrees). Given the trend, it would not be surprising if the US continued to lose places in this ranking.

3. The reports of Americans themselves fleeing for freer jurisdictions are still anecdotal (there are queues to renounce American citizenship in Singapore and London). However, even if the talent traffic has not reversed, it slowed down. Atlas, when he shrugs, isn’t necessarily coming to the US anymore. He’s or moving to Toronto or Tallin or Sidney.

4. What I’m writing fits perfectly into the framework of The Great Stagnation: being freer that the USSR or Maoist China or the India of the License Raj (or even class-based Britain) was definitely low hanging fruit for the United States. That is now over. Still, I feel this as a rather more positive development than T. Cowen does: Atlas is now helping the really poor in the third world. A few weeks ago, the Atlantic had an article on the new global elite which cites a CEO stating that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade. I think this might have been meant as an indictment of this global elite (like the article as a whole), but (like the article as a whole) it rather endears me to it. Whereas Carnegie spent his fortune on perks for the already rich and in the richest country in the world, Gates spends his on helping the third world. (Ironically, I write these words sitting on the Carnegie Mellon campus, full of perks for the rich-to-be).

5. The expression catch up growth, while describing a real phenomenon, also reveals a complete lack of respect for the difficulty of solving many of the problems that hold poor countries back. These are often complex social and political problems and they require the entrepreneurial spirit, the tenacity, and the intelligence that would have gone into making kitchen gadgets a generation ago. It’s probably a win for the world.

1. Ayn Rand in her book Atlas Shrugged imagined that the productive classes (engineers, artisans, artists, and business men), the Atlas that carries the rest of the world, would move to a separate place of infinite freedom as the parasitic world collapses around them. This is not a bad metaphor of what much of ...

Yesterday, my twitter and RSS feeds were full of complaints about how the republicans were going to cut science funding. Save Science! A few weeks ago, it had been full of people screaming about Rand Paul’s plan to cut science funding.

As it happens, none of these were plans to cut science funding specifically. Some of the mainstream outlets did not even mention science funding in their descriptions. The proposals would cut all across the discrecionary budget, mostly excluding defense.

I imagine that environmentalist groups sent emails touting cuts to the EPA, pro-choice groups sent email about cuts to family planning, the affected unions cried out about job cuts in their ranks, energy people were upset about cuts to their pet projects, train lovers think Republican hate trains, &c

And all of this without touching the third rail of American politics: cuts to services to old people. Otherwise, the AARP would be crying that Republicans want the eldery to live on cat food. Of course, most of federal spending is on the eldery, so it is logically odd that no cuts were proposed there.

Everyone feels personally attacked (Republicans hate science, they hate trains, they hate wind energy, they hate old people), but something’s got to give. If you don’t think that your budget should be cut, whose budget should be (you can answer raise taxes to cut the middle classes’ budget)?

Yesterday, my twitter and RSS feeds were full of complaints about how the republicans were going to cut science funding. Save Science! A few weeks ago, it had been full of people screaming about Rand Paul's plan to cut science funding. As it happens, none of these were plans to cut science funding specifically. Some ...