That was quick…

by on February 28, 2015 at 10:26 am in Economics, Political Science | Permalink

Greece called into question on Saturday a major debt repayment it must make to the European Central Bank this summer, after acknowledging it faces problems in meeting its obligations to international creditors.

There is more here, most of all showing the Greeks have not obtained much leverage from the talks.  They are in a deep liquidity squeeze, even post “agreement.”  The Bundestag overwhelmingly approved last week’s “deal,” whereas the Greeks don’t even want to vote on it.  So who won that round?  The on-paper ability to be flexible with a primary surplus — that isn’t real any more — just isn’t worth very much right now.

The decline in on-the-job training

by on February 28, 2015 at 1:34 am in Data Source, Economics | Permalink


That is from Timothy Taylor, who remains a model of excellence and lucidity.

Michael Pettis has an excellent short essay on this point, here is one (scary) excerpt:

A debt crisis must be resolved quickly because there is a self-reinforcing component within the process that can be extraordinarily harmful. High levels of sovereign debt create uncertainty about how the costs of resolving the debt will ultimately be assigned. This uncertainty causes growth to slow by adversely changing the behavior of a wide variety of stakeholders in the economy (as I will describe later). As the economy slows, contingent liabilities within the banking system rise, tax revenues decline and fiscal expenditures rise, all of which push up sovereign debt levels even further and increase both the cost of resolving the debt and the uncertainty about how the costs will be assigned. The consequence of this self-reinforcing deterioration in the sovereign balance sheet is, at first, a slow grinding away of the economy until the market reaches some point, after which the process accelerates and debt can spiral out of control.

Hat tip goes to the ever-excellent The Browser.

Price Ceilings

by on February 27, 2015 at 7:25 am in Economics, Education | Permalink

This week we released two new sections of our principles of economics class, price ceilings and trade. Most textbooks discuss how price ceilings create shortages and deadweight loss. Modern Principles delves much deeper to explain how price controls impede the operation of the price system creating economic discoordination and a misallocation of resources.

The introductory video is short but it covers a lot of economics.

Smile! The Dentists Lose a Monopoly

by on February 26, 2015 at 7:20 am in Economics, Law, Medicine | Permalink

Yesterday, the Supreme Court ruled (6:3) in North Carolina State Board of Dental Examiners v. FTC that the attempt of the state board of dental examiners to exclude nondentists from the practice of teeth whitening violated the Sherman antitrust act.

mouth1The opinion, written by Justice Kennedy, is especially lucid. Here, from Kennedy, are the key facts:

Starting in 2006, the Board issued at least 47 cease-and desist letters on its official letterhead to nondentist teeth whitening service providers and product manufacturers. Many of those letters directed the recipient to cease “all activity constituting the practice of dentistry”; warned that the unlicensed practice of dentistry is a crime; and strongly implied (or expressly stated) that teeth whitening constitutes “the practice of dentistry.” App. 13, 15. In early 2007, the Board persuaded the North Carolina Board of Cosmetic Art Examiners to warn cosmetologists against providing teeth whitening services. Later that year, the Board sent letters to mall operators, stating that kiosk teeth whiteners were violating the Dental Practice Act and advising that the malls consider expelling violators from their premises.

These actions had the intended result. Nondentists ceased offering teeth whitening services in North Carolina.

The FTC then brought suit, arguing that the action was anti-competitive. The case raises constitutional issues because the states are allowed to violate the federal antitrust acts, as will inevitably happen in the ordinary use of their powers. The question then became whether the NC State Dental Board was invested with enough state authority to overcome the antitrust provisions. On the one hand, the principles of federalism say leave the states alone. On the other (Kennedy quoting Justice Stevens in Hoover v. Ronwin):

“The risk that private regulation of market entry, prices, or output may be designed to confer monopoly profits on members of an industry at the expense of the consuming public has been the central concern of . . . our antitrust jurisprudence.”

In my view, the majority deftly navigated the tradeoff. The court said that North Carolina can, without question, decide that teeth whitening is the practice of dentistry but they have to do so more or less explicitly–they can’t simply put the fox in charge of the hen-house by deferring the decision to the dentists.

In other words, the court raised the cost of rent-seeking. If the dentists want to monopolize the practice of teeth whitening they will have to make that case to the legislature and not rely on the unilateral actions of a board composed almost entirely of dentists and created for entirely different purposes.

As Kennedy put it in language reminiscent of bootleggers and baptists:

Limits on state-action immunity are most essential when the State seeks to delegate its regulatory power to active market participants, for established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern. Dual allegiances are not always apparent to an actor. In consequence, active market participants cannot be allowed to regulate their own markets free from antitrust accountability.

Addendum: I, along with a number of other GMU scholars, was part of an Institute for Justice BRIEF OF AMICI CURIAE SCHOLARS OF PUBLIC CHOICE ECONOMICS IN SUPPORT OF RESPONDENT. Congratulations are due to the excellent team at IJ, as the brief seems to have been influential.

By the way, the dissenting opinion (Alito, Scalia, Thomas) appears to accept the logic of our brief to an even greater extent, so much so that they shrug their shoulders at the rent seeking as business as usual (I especially enjoyed the dig at the FTC as also being subject to regulatory capture). Thus, the dissenters focused entirely on the federalism question. I respect that approach but I think that as federalism stands today, the majority’s balancing approach is likely to lead to better policy.

Most days on MR we try to bring you something new, whether it be a report or an opinion of ours.  Even if it is not truly new, perhaps it is at least new relative to the discourse on most other web sites.  We are reluctant to recycle old posts, even though I am still thinking about whether a lot of food tastes better when you eat it with your fingers.

But maybe telling you something conventional can be new in a way too.  So here are a few totally conventional views which I hold, or still hold, but otherwise don’t bother reporting very often if at all:

1. Scott Walker and Jeb Bush are the most likely candidates to win the GOP nomination.

2. The GOP won’t try to repeal Obamacare, see #Syriza.

2b. Obamacare hasn’t made us healthier (yet?), but it has served as an inefficient form of wealth insurance for some lower-income groups.  On net, the negative health consequences of the disemployment effects of the law could easily counterbalance the direct positive health care access effects.  Imagine that, a health care reform that doesn’t even boost health.  Given their utility functions, many of the law’s backers should be happy with it, but they shouldn’t think I am impressed with their numerous “victory lap” blog posts.  Here is my 2009 post on what we should have done instead.  I still think that, noting that I remain happy with the cost control parts of what was done.

3. The Supreme Court will rule against the current version of Obamacare and send the matter back to Congress.  Confusion will result.

4. During the upward phase of the recovery, monetary policy just doesn’t matter that much.

5. We are still in the great stagnation, for the most part.  But with nominal gdp well, well above its pre-crash peak, it is not demand-based “secular stagnation.”  It just isn’t, I don’t know how else to put it.  And the liquidity trap is still irrelevant and has been since about 2009.

6. There is modest good news on the wage front, but so far it doesn’t amount to a fundamental shift in regime.  Following the monthly squiggles doesn’t tell us much.  And since wage trouble dates from 1999 and arguably earlier, I don’t attribute much of it to debt overhang from the recession.

7. Edward Snowden is both a hero and a traitor.

8. Syriza still has to try to make a Greek economy work with roughly the same means their predecessors had.  I don’t think they can do it, and I am sticking with my recent Grexit prediction, which by the way had an 18-month time horizon on it (see my earlier Twitter response to Felix Salmon).

9. No one knows what to do about ISIS or Putin.  The latter is a bigger danger than the former.  Confusion will result.

If you’re not excited, fine, that’s the point.  The predictable is a kind of news, too.  But hold on and come back, because tomorrow you might just hear more about remote-controlled, cyber cockroaches.

Ezekiel J. Emanuel writes:

The big problem is profitability. Unlike drugs for cholesterol or high blood pressure, or insulin for diabetes, which are taken every day for life, antibiotics tend to be given for a short time, a week or at most a few months. So profits have to be made on brief usage. Furthermore, any new antibiotics that might be developed to fight these drug-resistant bacteria are likely to be used very sparingly under highly controlled circumstances, to slow the development of resistant bacteria and extend their usefulness. This also limits the amount that can be sold.

Here’s a stunning graph from the New York Fed’s Liberty Street Blog:

What it shows is that default rates on student debt decrease with higher balances or, to put it the other way, the students with the highest default rates are the ones with the least debt.

I wouldn’t have predicted that but here are some possible explanations. First, dropouts have less debt and also less income. But while the debt rises proportionally with years of education the income rises in less than proportion. As I said in Launching, students who drop out after 2 years get less than half of the gains from completing a four-year degree (the sheepskin effect). Thus the 40% or so of students who dropout see their debt rise faster than their income so burdens are higher and default rates increases.

Although the debt to income ratio story is plausible it’s still surprising how many students default with low amounts of debt. Raymond, a commentator at the Liberty Street Blog, offers some additional hypotheses:

I work in financial aid at a large public community college. We pulled data on our defaulters and we found over 60% started with remedial coursework and borrowed their first and second terms. About 80% of the total data population suspended soon after the second term – thus the low amounts. Many were not students just out of high school, they were independent adults. Putting this altogether with the many years I’ve been in financial aid speaking with students I’ve come to a conclusion. 99% of the time when I have a student that has been suspended asking for loans and I mention private or alternative loans they immediately say they don’t have good credit. Bad credit seems to correlate with bad academics. Many seem concerned more with paying bills than paying education. Sometimes they are just out of jail and no one will hire them. Their probation requires they work or get a job which the later is nearly impossible. Other times we have people so deep in the hole in debt already that the student loans was a way to buy more time. The word is out if you have bad credit and are desperate for funds just go to a community college where tuition is low and borrow the maximum. We noticed in our data pull many students graduated from high school or received their GED up to 10 years ago or more! Want the defaults to go down – stop lending to students that have a significant number of remedial courses their 1st and 2nd terms at a college where tuition is already low.

What if you could text a number and get anything you want?

That’s the ambitious goal of a new startup called Magic, a text-messaging-based concierge service that promises to pull strings, place orders, and schedule deliveries all so you don’t have to.

Magic doesn’t have a dedicated app. It instead exists as a phone number nestled inside your contact list, acting as your go-to “guy” for anything (legal) you may need.

It’s only available in the US for now, and you can sign up by texting 408-217-1721.

I wonder if they will end up using the MR search function.  The story is here, via the excellent Samir Varma and Brent Depperschmidt.

Here is evidence for the Roberts Higgs thesis and, if I recall correctly, some recent remarks by Thomas Piketty on revolution and tax progressivity (does anyone know the link?).  Juliana Londoño Vélez writes:

Abstract    I argue that progressive income taxation in the twentieth century is a product of the exigency of war and not of democracy. I obtain long-run series of the top marginal personal income tax rate for a large sample of OECD countries, and use data on wars of mass mobilization and democracy from the Correlates of War data set and Scheve & Stasavage (2012) to test this hypothesis. My results suggest that wars of mass mobilization (i.e. wars in which more than 2% of the population served in the military) cause substantial increases in tax progressivity. These effects are persistent and do not vanish upon the conclusion of war.

The full paper is here (pdf), taken from the generally interesting Berkeley Economic History Lab list, as cited by Barry Eichengreen.  As Barry notes, see also the revised and much improved version of Lemin Wu’s paper on the Malthusian trap (pdf).

I have not read their new paper, but here it is (pdf), along with the abstract:

This paper takes a retrospective look at the U.S. government’s effort to rescue and restructure General Motors and Chrysler in the midst of the 2009 economic and financial crisis. The paper describes how two of the largest industrial companies in the world came to seek a bailout from the U.S. government, the analysis used to evaluate their request, and the steps taken by the government to rescue them. The paper also summarizes the performance of the U.S. auto industry since the bailout and draws some general lessons from the episode.
This is in any case a topic worthy of study.

Right now the compass seems to be pointing in the direction of health care.  That probably won’t change anytime soon:

In 1980, 1.4 million jobs in health care paid a middle class wage: $40,000 to $80,000 a year in today’s money. Now, the figure is 4.5 million.

The pay of registered nurses — now the third-largest middle-income occupation and one that continues to be overwhelmingly female — has risen strongly along with the increasing demands of the job. The median salary of $61,000 a year in 2012 was 55 percent greater, adjusted for inflation, than three decades earlier.

And it was about $9,000 more than the shriveled wages of, say, a phone company repairman, who would have been more likely to head a middle-class family in the 1980s. Back then, more than a quarter of middle-income jobs were in manufacturing, a sector long dominated by men. Today, it is just 13 percent.

The full story is here, by Searcey, Porter, and Gebeloff.

That is the newly published volume 16 of The Collected Works of F.A. Hayek, edited by Sandra J. Peart.  Of course this is splendid from beginning to end, including Peart’s introduction, the letters, Hayek’s commentary, and assorted documents, and the book even contains three very nice poems written by Harriet Taylor.

Is Hayek here blaming Taylor for moving Mill in a collectivist direction?  Is that the Straussian reading of this book and the reason why Hayek did it?

If there were a phrase for “one step above and beyond self-recommending,” this volume would get it.

Ironically, given all the concerns about robots destroying jobs, Mr Tsuda said one of the main constraints on the market’s growth was a shortage of human engineers.

“To use robots — not just to make them — you need quite a level of engineering,” he said. “If anything, for us and the market as a whole, growth is held back by the number of engineers who can do that.”

From Robin Harding at the FT, there is more here.

Algorithm Aversion

by on February 22, 2015 at 7:40 am in Economics, Science | Permalink

People don’t like deferring to what I earlier called an opaque intelligence. In a paper titled Algorithm Aversion the authors write:

Research shows that evidence-based algorithms more accurately predict the future than do human forecasters. Yet, when forecasters are deciding whether to use a human forecaster or a statistical algorithm, they often choose the human forecaster. This phenomenon, which we call algorithm aversion, is costly, and it is important to understand its causes. We show that people are especially averse to algorithmic forecasters after seeing them perform, even when they see them outperform a human forecaster. This is because people more quickly lose confidence in algorithmic than human forecasters after seeing them make the same mistake. In five studies, participants either saw an algorithm make forecasts, a human make forecasts, both, or neither. They then decided whether to tie their incentives to the future predictions of the algorithm or the human. Participants who saw the algorithm perform were less confident in it, and less likely to choose it over an inferior human forecaster. This was true even among those who saw the algorithm outperform the human.

People who defer to the algorithm will outperform those who don’t, at least in the short run. In the long run, however, will reason atrophy when we defer, just as our map-reading skills have atrophied with GPS? Or will more of our limited resource of reason come to be better allocated according to comparative advantage?