Assorted links

by on March 26, 2013 at 1:50 pm in Uncategorized | Permalink

1. Advice and economics from Emily Oster, installment #1.

2. The beginning of the end of the age of deposit insurance.

3. Further evidence for the causal nature of the marriage premium.

4. Should it be legal for patent holders to pay companies to delay their release of generic drugs?

5. Can digital music catch on in Africa?

Millian March 26, 2013 at 2:16 pm

3. Misleading description on your part, don’t you think? There isn’t a causal premium described in the paper. There’s a selection-based premium (for men) and a causal penalty (for women).

Norman Pfyster March 26, 2013 at 2:38 pm

The article shows a mixed cause to the premium for men: 50% selection, 50% causal.

Finch March 26, 2013 at 3:00 pm

The penalty for women also stems from their choosing to specialize in home production and child rearing, which counts as a big fat zero in earnings, if I’m understanding the paper correctly. That’s the natural way to compute things, but it’s a little deceptive. It’s not like the work is valueless, it’s just that it doesn’t go into computation of GDP and you aren’t taxed on it (yet…). But as a society or as a family, you are wealthier because of it.

So, according to this paper, marriage makes men achieve more and women redirect their labor into something difficult to measure. Also they find differences between being married and cohabitating, which might be surprising for Sweden.

JWatts March 26, 2013 at 3:36 pm

Also they find differences between being married and cohabitating, which might be surprising for Sweden.

That’s interesting. Is the difference substantial? I couldn’t easily find the answer to that in the paper.

Finch March 26, 2013 at 3:47 pm

It’s really hard to tell – the paper is very poorly written. The appropriate section starts on the bottom of page 28. My interpretation was that married people make different decisions about duration of the relationship and the number of children, and those decisions affect the premium.

Brian Moore March 26, 2013 at 2:26 pm

From #2: “depositors are creditors, and that when you deposit money with a bank, you’re lending that money to an entity which might not pay you back.”

This may be true, but almost no one acts like it is, and the expectations shock if that gap in understanding were bridged would be… not so happy.

Mark Thorson March 26, 2013 at 3:00 pm

After reading that article, I thought gold should be near its 52-week high. Then I checked. It’s much closer to its 52-week bottom. That tells me Cyprus hasn’t changed the rest of the world very much. It’s a sideshow, and not much more than that.

Roy March 26, 2013 at 3:21 pm

What I have never understood about gold is that accounts denominated in gold are just as confiscatable as other accounts. Except when held in hand, which entails considerable liquidity problems, gold doesn’t protect you from the grasping state.

Steven Kopits March 26, 2013 at 3:24 pm

I think we’ll see the Dijsselbloem Doctrine until it blows up somewhere, probably Spain or Italy. And then the Europeans will learn why deposit insurance was created in the first place.

And after that, policy will turn to monetizing debt and solving the problem with some serious inflation.

JWatts March 26, 2013 at 3:38 pm

My understanding that the ‘Dijsselbloem Principle’ protects insured depositors.

From the article: ‘Instead, it the EU will go down a list: the bank’s executives come first, then its shareholders, then its bondholders, and finally its uninsured depositors. All of them will take losses before the national or European authorities step in with bailout money.’

Barkley Rosser March 26, 2013 at 4:14 pm

I completely agree, JWatts, and also with Alan Gunn below. They got creamed with the proposal to make insured depositers pay. It was unanimously rejected by the Cyrprus parliament, and that disappeared. Indeed, the list given by Djisselbloem clearly does not include hitting insured depositors. That is off the table now. Yes, that it was considered at all raises doubt about the sanctity of such insurance, but I think that claiming this is the beginning of the end for deposit insurance is not justified. I forecast we shall not see such a proposal again anywhere in the foreseeable future, certainly not in the eurozone. It is dead, period.

Steven Kopits March 27, 2013 at 8:26 am

There are two considerations regarding uninsured deposits worth keeping in mind:

1. If uninsured depositors run on a bank, do we know that insured depositors won’t? Might not insured depositors also assume that the bank will fail and therefore hurry to get their money out? Personally, I am not convinced that depositors differentiate between the seizure of insured versus uninsured deposits with respect to a bank run.

2. Exactly whose deposits are uninsured? Let’s take Baltimore, a city of 2 million that I know pretty well. How many people there have liquid deposits of more than $100,000 that they couldn’t split up between a few banks, ie, how many have, say, more than $500,000 in cash? Maybe a few hundred to a few thousand people.

Now, how many businesses in Baltimore have more than $100,000 in cash? Well, pretty much all the strip and shopping mall stores, the churches, the schools, the police, the fire department, municipal services, auto dealers, the phone company, the electric company, most law offices, most doctors offices, most dentists offices, most landlords, most convenience stores, most gas stations, most auto dealers, the newspaper, and thousands of other small businesses. So if you swept the cash balances in banks over $100,000, the ratio of businesses to individuals affected would be on the order to 90:1 to 99.9:1. In other words, seizing uninsured deposits would be the functional equivalent of a cash sweep of the business sector. You think that would go well?

So I think we should aggressively disabuse overselves of the notion that seizing uninsured deposits is cost-free to the economy or that it mostly affects “those rich people”. Mostly, it’s the working capital and retained earnings of your business community.

JWatts March 27, 2013 at 10:27 am

FDIC insurance is $250,000 .

I think you have a good point about runs on banks, but it should be trivial for the government to get in front of any run and point out that the first $250K is protected. While the risk is still there, it’s far less than the risk that would result from confiscating assets below that limit to avoid confiscating higher amounts of assets above the limit.

The first proposed Cyprus model 9.9% above 100K euros and 6% below 100K would have been a bad precedent. It effectively makes the governmental guarantee and/or insurance far less valuable and effective.

Steven Kopits March 27, 2013 at 11:10 am

OK, so let’s take the $250k as the limit. (It’s Euro 100k in Cyprus, right?)

At $250k, the number of individual accounts in Baltimore not covered by deposit insurance must verge on zero, certainly not much above 100 or so for the city as a whole.

That means any “bail in” in Baltimore would consist almost 100% of business accounts from medium to large institutions: churches, schools, hospitals, universities, municipal services, police, fire, larger doctor and legal offices; larger stores like Giant Food, Best Buy, Eddies; convenience and fast food chains like McDonalds and Seven-Eleven; TV and radio stations; the Baltimore Sun; larger landlords like apartment houses and shopping malls; construction companies; hotels and motels; the airport; bus and taxi companies; the phone company; the electric company; and any other employer with more than, say, 20 employees. You get my drift.

A higher limit on insured deposits means either i) there’s effectively no one to bail in, so you might as well treat all deposits as insured; or ii) effectively you are draining working capital and retained earning from business, government and public services almost exclusively.

Steven Kopits March 27, 2013 at 11:21 am

“[I]t should be trivial for the government to get in front of any run and point out that the first $250K is protected…”

Really? So if you were in Italy, and you saw that 30% of uninsured depositors were trying to run on the bank, then you would sit back and relax? You wouldn’t think, “Gee, I wonder if this bank is still viable with 30% fewer deposits. Or maybe they’ll pay us, but when? In Cyprus, the banks were closed for weeks, and then capital controls were instituted. Maybe I should get my money out just in case.”

Don’t think that could happen?

What percentage of insured depositors do you have to spook until there’s a full scale run on the bank? 1%? 2%? Having lived through a run, let me tell you how it happens. Emails and text messages start to filter through from relatives, often insiders at the bank, suggesting that their relatives should consider taking their money out. This spreads virally, through emails, text messages and office gossip, and you can go from stability to a bank run in literally two hours. That’s how fast a bank can implode.

So, we need to keep in mind that the assertion that depositors will distinguish between insured and uninsured deposits is only that: an assertion. It hasn’t been tested in practice, so we don’t know if it’s true. It could very well be wrong.

Barkley Rosser March 27, 2013 at 1:17 pm

Steven,

There are numerous problems with your argument, starting with the trivial one that Baltimore has well under one million people in it, not 2 million.

You ask why would not insured depositors not withdraw if uninsured ones starting running on a bank? Because they are insured, that is why, and it is to protect the solidity of that insurance that the plan in Cyprus was revised after the initial one hitting insured depositors was unanimously rejected by the parliament.

It may be that if in the US we were to do something like what they did in Cyprus, a bunch of businesses would get hit and very few individuals. But, so what? We are not going to do anything like that in the US. We do not and will not have a banking sector where deposits amount to 8-fold what the GDP is, with a big mass of these from foreigners, with many of them engaging in illegal transactions. Let us keep real.

And as for what was done in Cyprus, the worst losers were the uninsured depositors at the Laika Bank, second largest in Cyprus, which has essentially been allowed to fail, although through the mechanism of splitting it into “good” and “bad” banks, with the insured depositors in the first one, which is not failed. Uninsured depositors in other banks are taking a haircut, but then many creditors in the Eurozone have been made to take haircuts on a variety of the debt deals in the zone, particularly involving Greece. What is such a big deal about those in Cyprus doing so, particularly at the cost of maintainig the promise of deposit insurance for those who are covered?

Steven Kopits March 27, 2013 at 4:55 pm

Barkley -

I was speaking of Baltimore metro area, which today is around 2.6 million. This includes Baltimore Country. Baltimore City proper is around 700k. When residents of Baltimore speak of Baltimore usually that includes the surrounding areas.

As for insured depositors in Cyprus, they have already experienced a lack of access to their funds for two weeks, and the prospect of further capital restrictions. If you’re right, capital restrictions should be unnecessary as soon as the good bank / bad bank split happens. Well, let’s see if those capital restrictions remain.

The EU Parliament has proposed bailing in uninsured depositors in Italy and Spain, among others. Even if we allow that Cyprus was hot money, will it all be hot money in Spain and Italy? Or would such a policy give businesses in those countries a massive hair cut? I was trying to make the point that I am not sure that these Olympian Euro zone finance ministers have any good idea whose deposits they are actually seizing and suggesting that, before they start blowing up the financial sector, it might be a good idea to develop at least some sense of where it will lead.

Nor am I opposed to depositors taking some of the pain (someone has to take it). But I have read Gorton–I presume you have as well–and am therefore aware of the risks associated with bank runs. Your looking at it through the lens of solvency; I am focusing on liquidity.

Rahul March 26, 2013 at 2:31 pm

#4. Should it be legal for patent holders to pay companies to delay their release of generic drugs?

Once a patent holder offers a settlement to one plaintiff how come copycat suits don’t line up? All for that same drug?

Sigivald March 26, 2013 at 3:29 pm

Easy – because it’s hard enough to make even a generic drug (especially in any marketable quantity), that the number of relevant actors is low.

I prefer the question rephrased as “Should it be legal for anyone to pay someone else to not sell a product?”

Where the answer is more obviously “Yes, if anyone really thinks that’ll work for them.”

Peter March 27, 2013 at 9:44 pm

Sigivald – I can’t tell if you’re being sarcastic or not. Obviously it can be profitable for a monopolist to pay a rival not to put a product on the market. Monopoly profits are quite often more than double duopoly profits.

This is just collusion.

rcyran March 26, 2013 at 4:05 pm

Under law, once a patent expires, the first company to file a generic version of a drug gets six months exclusivity. In other words there is the branded drug and one generic drug on the market.

The function of this law is to encourage generic companies to file challenges to patents and introduce generic versions of drugs (benefiting consumers) – during this six month period the generic usually sells at a 10% discount. So it’s very profitable to the generic company. After six months other companies enter the market, and the price plummets.

So it can make sense for the pharma company to pay a generic company a bribe to not sell during the six month exclusive period. There are also some other causes – some drugs are difficult to make so there’s a concentrated oligopoly etc.

MW March 26, 2013 at 6:23 pm

I thought the 180 day exclusiviity was only if the generic defended itself against an infringement case as in Para. IV proceedings.

londenio March 26, 2013 at 2:35 pm

#4 –> Solve for equilibrium?

IVV March 26, 2013 at 2:57 pm

And is there a causal penalty for marriage if the union produces no children?

Dan in Philly March 26, 2013 at 3:20 pm

Thinking that low earning spouses seem to be choosing home making over earning has a lot to do with it. It’s a self imposed penalty so as to allow.the high income earner to earn more. I’m interested to see if the statement that the net effect on household income is zero includes bourse worked. That is, one incomeearner will likely work fewer total hours than two.

Alan Gunn March 26, 2013 at 3:32 pm

Why is it the beginning of the end of the age of deposit insurance when they backed off the plan to take insured accounts?

Ray Lopez March 26, 2013 at 4:20 pm

@#4 – it should be legal to pay for companies to agree not to do something that’s their legal right–it happens all the time. For example, see this article: http://tinyurl.com/cq45ap5 Note that this is not the same as a licensee being refused the right to challenge the validity of a patent owned by a licensor, which was struck down in 1969 by the Sup. Ct. http://en.wikipedia.org/wiki/Lear,_Inc._v._Adkins

RPLong March 26, 2013 at 4:27 pm

#1

Terriblly disappointing.

Urso March 26, 2013 at 4:48 pm

The answers seem dashed off. One of the questions is “is x worth the money I’m paying?” and her response is “well, if it wasn’t worth the money, you wouldn’t pay for it, so the answer must be yes!”

Jared N March 26, 2013 at 4:32 pm

#4. Should it be legal for the government to pay farmers not to grow corn?

derek March 26, 2013 at 4:46 pm

#3:
“Finally, we find that the net effect of marriage on family earnings is zero because the male marriage premium is offset
by the female marriage penalty. Our results show that specialization results from the legal
arrangement of marriage, not from the living arrangement of the household.”

These two sentences combined make up an enormously strong argument against committed co-habitators marrying.

Finch March 26, 2013 at 5:27 pm

Huh? Isn’t it exactly the opposite?

Add the legal arrangement and the couple feels comfortable specializing. You _want_ the specialization. This is sort of obvious: if the relationship is not stable you aren’t really sharing risks and you must remain more individually robust to them.

derek March 27, 2013 at 2:24 pm

Huh, exactly. I read it incorrectly.

Alan March 26, 2013 at 6:54 pm

Once again, a MR discussion on the economics of marriage narrows down to economic justifications for men not wanting to get married. I suspect that the commenters here would ignore the economic justifications for not getting married if they had any real-world chance of getting married.

8 March 26, 2013 at 9:04 pm

Focusing on economic justifications for men not wanting to get married is getting at the crux of the problem because economic penalties to men have arisen in the past 50 years. The flip side is that women face reduced penalties for divorce.

Cliff March 26, 2013 at 9:37 pm

What comment thread are you reading?

mulp March 26, 2013 at 7:05 pm

“2. The beginning of the end of the age of deposit insurance.”

The beginning of the current age in the US was circa 1970.

I remember the claims that no one putting money in money market funds would expect that their deposits were insured, and consequently. no one would ever use money market funds like bank checking and savings accounts, and in a financial crisis, money market funds could readily impose controls on transactions without any harm to the economy. The insured deposit accounts at the reserve member banks would always be used for any funds that are required on demand.

There would never be runs on money market funds because the money market funds would never been seen as demand deposits, and thus transaction controls would occur only for isolated funds that were known have been high risk that failed as isolated events.

So, I paid attention as the 80s marked the end of insured deposits for the majority of demand deposits, with banks effectively punishing anyone who thought a bank was a place to keep your cash and savings. The banks of my youth who sought every dime of savings you had became institutions trying to get you to use every dime you had to service debt with the bank.

Dismalist March 26, 2013 at 8:07 pm

#3, the marriage premium and penalty: I followed the past and present links with interest, and learned something, but all the while had a queezy stomach. Now I know why: Marriage is a potentially rewarding but risky endeavor for both parties. [Division of the spoils is a red herring.] In the west it is by and large voluntary and the participants have some idea of the risks and rewards involved, though not a perfect idea. Humans deal with this kind of risk, shall I say idiosyncratic risk, badly, as there is hardly a chance for learning ex ante. As has been pointed out repeatedly by posters, the policy implications of this research, or even the personal implications, are zero.

biiiiiiicyliiiiist March 26, 2013 at 8:30 pm

Why Is Tyler always pushing Emily Oster?
Is she his daughter or something?

Ronald Brak March 26, 2013 at 11:38 pm

5. I think digital music has already caught on in Africa. The question is, will paying for it catch on? I guess it slowly will, as a status thing, but it’s not something I’m very concerned about. After all, I can already listen to the Badger Badger Badger song on weebls-stuff for free and I don’t see why anyone would want more than that.

widmerpool March 27, 2013 at 4:36 am

Of course it has caught on, the article itself says that pirate CDs are everywhere. Unless they have some kind of analog CD in Africa.

Donald Pretari March 27, 2013 at 2:49 pm

Some Laws/Govt Arrangements are necessary in order to get people to buy into the system at all. Deposit Insurance is one such example, although it might not be necessary everywhere.

Comments on this entry are closed.

Previous post:

Next post: