Economics

The Ebola risk premium

by on October 19, 2014 at 1:48 am in Current Affairs, Economics, Law, Medicine | Permalink

Underpaid or overpaid?:

They’re looking for the few, the proud — and the really desperate.

For a measly $19 an hour, a government contractor is offering applicants the opportunity to get up close and personal with potential Ebola patients at JFK Airport — including taking their temperatures.

Angel Staffing Inc. is hiring brave souls with basic EMT or paramedic training to assist Customs and Border Protection officers and the Centers for Disease Control and Prevention in identifying possible victims at Terminal 4, where amped-up Ebola screening started on Saturday.

EMTs will earn just $19 an hour, while paramedics will pocket $29. Everyone must be registered with the National Registry of Emergency Medical Technicians.

The medical staffing agency is also selecting screeners to work at Washington Dulles, Newark Liberty, Chicago O’Hare and Hartsfield-Jackson Atlanta international airports.

There is more here, via Matthew E. Kahn.  How much does the regular (non-Ebola) staff earn?

So argues a new paper (pdf) by Ekrame Boubtane, Dramane Coulibaly, and Christophe Rault, the abstract is here:

This paper examines the causality relationship between immigration, unemployment and economic growth of the host country. We employ the panel Granger causality testing approach of Konya (2006) that is based on SUR systems and Wald tests with country specific bootstrap critical values. This approach allows to test for Granger-causality on each individual panel member separately by taking into account the contemporaneous correlation across countries. Using annual data over the 1980-2005 period for 22 OECD countries, we find that, only in Portugal, unemployment negatively causes immigration, while in any country, immigration does not cause unemployment. On the other hand, our results show that, in four countries (France, Iceland, Norway and the United Kingdom), growth positively causes immigration, whereas in any country, immigration does not cause growth.

This result reflects two broader lessons.  First, at the margin the major benefits from migration are to the migrants.  Second, again at the margin, most policy changes matter less than you think they will.

Hat tip goes to Ben Southwood.

The economic value of misbehavior

by on October 17, 2014 at 3:52 am in Economics, Education | Permalink

There is a new paper by Papageorge, Ronda, and Zheng, with a very interesting thesis, namely that preparing rowdies for better schooling results may not help their long-term prospects in life:

Prevailing research argues that childhood misbehavior in the classroom is bad for schooling and, presumably, bad overall. In contrast, we argue that childhood misbehavior reflects underlying traits that are potentially valuable in the labor market. We follow work from psychology and treat measured classroom misbehavior as reflecting two underlying non-cognitive traits. Next, we estimate a model of life-cycle decisions, allowing the impact of each of the two traits to vary by economic outcome. We show the first evidence that one of the traits capturing childhood misbehavior, discussed in psychological literature as the externalizing trait (and linked, for example, to aggression), does indeed reduce educational attainment, but also increases earnings. This finding highlights a broader point: non-cognition is not well summarized as a single underlying trait that is either good or bad per se. Using the estimated model, we assess competing pedagogical policies. For males, we find that policies aimed at eliminating the externalizing trait increase schooling attainment, but also reduce earnings. In comparison, policies that decrease the schooling penalty of the externalizing trait increase both schooling and earnings.

For the pointer I thank the excellent Kevin Lewis.

As of 2004, only 16.7% of the cost of Korean higher education was picked up by government, as opposed to an OECD average of about 77% (see this paper).  That’s a relatively low level of subsidy.  And yet Korea has one of the highest degree-granting rates in the world, the status of the school you go to is all-important, tiers of quality are fairly rigid, admission is closely linked to exam performance, and doubts have been raised about how much people actually learn in those schools.  At least when it comes to surface phenomena, it appears Korean higher education has a lot to do with signaling.

In Germany they just made the universities completely free, and in the past they were quite cheap, which of course means subsidized.  Germany also sends a relatively high percentage of its population to vocational training, where presumably the students learn some concrete skills.  Could it be there is too much slacking in German universities (which I have interacted with twice, both as student and as professor) for attendance to serve as a very effective signal?

Can it be the case that a government subsidy, by limiting privately-perceived quality and returns, can lower private signaling costs?  Should advocates of the signaling model therefore be more favorably inclined toward subsidies?

Here is a very good piece by The Mitrailleuse, though I do not agree with all of it.  Here is the conclusion:

In summary, the libertarian discussion surrounding immigration shouldn’t be viewed as an all or nothing proposition and as Sanandaji has argued, it should take real world empirical patterns into account rather than assume away voting, the public sector, and social externalities. Libertarians should adopt the same skeptical economist’s view they apply to all other subjects when weighing questions about immigration to determine if we can actually affect the changes we would like to make.

It is perfectly acceptable for libertarians to disagree on such a complex subject and to hold opinions in favor of more marginal change. There are plenty of modest ways libertarians can criticize the existing immigration system without being in favor of open borders. These libertarians shouldn’t be vilified for their humility and prudence. There is no academic consensus on the subject and the issue is too complex and contextual for there to be a clear-cut libertarian position. The burden of proof lies on advocates of open borders to engage these criticisms.

For the pointer I thank Andrea Castillo.

California’s Water Shortage

by on October 16, 2014 at 7:30 am in Economics, Law | Permalink

In the 1970s the US faced a serious shock to the supply of oil but the shortage of oil was caused by price controls. Today, California is facing a serious water drought but the shortage of water is caused by price controls, subsidies and the lack of water markets. In an excellent column, The Risks of Cheap Water, Eduardo Porter writes:

Water is far too cheap across most American cities and towns. But what’s worse is the way the United States quenches the thirst of farmers, who account for 80 percent of the nation’s water consumption and for whom water costs virtually nothing….

Farmers in California’s Imperial Irrigation District pay $20 per acre-foot, less than a tenth of what it can cost in San Diego….This kind of arrangement helps explain why about half the 60 million acres of irrigated land in the United States use flood irrigation, just flooding the fields with water, which is about as wasteful a method as there is.

Tyler and I discuss water subsidies in Modern Principles:

Farmers use the subsidized water to transform desert into prime agricultural
land. But turning a California desert into cropland makes about as much sense
as building greenhouses in Alaska! America already has plenty of land on which
cotton can be grown cheaply. Spending billions of dollars to dam rivers and
transport water hundreds of miles to grow a crop that can be grown more cheaply
in Georgia is a waste of resources, a deadweight loss. The water used to grow California cotton, for example, has much higher value producing silicon chips in
San Jose or as drinking water in Los Angeles than it does as irrigation water.

The waste of subsidized water is compounded by over 100 years of rent-seeking and a resulting legal morass that makes trading water extremely difficult (see Aquanomics for a good analysis). A water trading system is slowly taking form in the American West but the political transaction costs are immense. Australia, however, faced similar difficulties but has managed to develop a good water trading system and Chile has long had a robust market in water. Subsidies to farmers are politically sustainable when everyone has as much water as they want but when faced with continued shortages and an ever-intrusive water Stasi consumers and industry may eventually demand a more rational, less wasteful system based on incentives, markets and prices.

Victor Mallet writes:

Amid gloom over global economic growth and uncertain prospects for emerging markets, India is beginning to stand out as uniquely well-placed to gather the windfall benefits of an international slowdown.

Unlike Brazil, Russia or South Africa, India reaps immediate advantages for its terms of trade and its domestic budget from the fall in commodity prices triggered by renewed concerns about the world economy.

And unlike China, India will not suffer much from any decline in global demand for manufactured goods because its export sector is relatively small.

Commodities – mostly oil – account for more than half of India’s imports but only 9 per cent of its exports, mainly food. The current account deficit falls by about $1bn a year for every $1 decline in the price of a barrel of oil, and the reduced cost of fuel subsidies is also easing the burden on the budget.

Another benefit of weaker commodity prices is falling inflation, long the bane of the Indian economy.

I have supported the various QEs from the beginning, while seeing them as limited in their efficacy.  At the time, and still, I feared deflationary pressures more than high inflation.  Still, recently the question has arisen whether those QEs boosted the risk of high inflation.  Ashok Rao looks at options data to pull out the best answer I have seen so far:

…did the risk of high inflation increase after the Fed engaged in QE2? (Note this establishes a correlation, not causation)…

And you see two very interesting trends: the probability of high inflation (that above 6%, which is the largest traded strike) sharply increased over the latter half of 2010 and early 2011, the time period over which the effects of QE2 were priced in. This is a general trend across all maturities. While the 3, 5, and 10 year option follow a similar path afterwards, the 1-year cap is much more volatile (largely because immediate sentiments are more acute). Still, you see the probability of high inflation pic up through 2012, as QE3 is expanded.

The takeaway message from this is hard to parse. This market doesn’t exist in the United States before 2008, and isn’t liquid till a bit after that, so it’s tough to compare this with normal times. While the sharp increase in the probability of high inflation would seem to corroborate the Hoover Institution letter, that wouldn’t mean much if it simply implied a return to normalcy. That’s just a question we’ll have to leave for a later day.

What about the probability of deflation? We’ll the interesting point is that for the three higher maturity options, the probability for high inflation and probability of deflation were increasing at the same time. This was a time of relatively anchored 5 year implied inflation, but the underlying dynamics were much more explosive, as can be seen in the above charts.

There are some very useful pictures in the post, and do note the variety of caveats which Ashok wisely (and characteristically) offers.  He notes also that for the United States deflationary risk was never seen as very likely, but the QEs lowered that risk even further.

Inequality and parenting style

by on October 15, 2014 at 1:50 pm in Data Source, Economics | Permalink

Greg Mankiw refers us to this graph (there is further explanation here), which of course can be interpreted in a variety of ways, with causation running either way or perhaps not at all:

inequality and parenting style

Tivo and Netflix ought to have been made other entertainment more popular and football less popular as a form of entertainment but instead more people are watching football than ever before. Gabriel Rossman asks why?

We can start with a few basic technological shifts, specifically the DVR and broadband internet. Both technologies have the effect that people are watching fewer commercials. From this we can infer that advertisers will have a pronounced preference for “DVR-proof” advertising.

….In practice getting people to watch spot advertising means programming that has to be watched live and in practice that in turn means sports. Thus it is entirely predictable that advertisers will pay a premium for sports. It is also predictable that the cable industry will pay a premium for sports because must-watch ephemera is a good insurance policy against cord-cutting. Moreover, as a straight-forward Ricardian rent type issue, we would predict that this increased demand would accrue to the owners of factor inputs: athletes, team owners, and (in the short-run) the owners of cable channels with contracts to carry sports content. Indeed this has basically all happened….

Here’s something else that is entirely predictable from these premises: we should have declining viewership for sports….If you’re the marginal viewer who ex ante finds sports and scripted equally compelling, it seems like as sports get more expensive and you keep having to watch ads, whereas scripted gets dirt cheap, ad-free, and generally more convenient, the marginal viewer would give up sports, watch last season’s episodes of Breaking Bad on Netflix, be blissfully unaware of major advertising campaigns, and pocket the $50 difference between a basic cable package and a $10 Netflix subscription.

…The weird thing is that this latter prediction didn’t happen. During exactly the same period over which sports got more expensive in absolute terms and there was declining direct cost and hassle for close substitutes, viewership for sports increased. From 2003 to 2013, sports viewership was up 27%. Or rather, baseball isn’t doing so great and basketball is holding its own, but holy moly, people love football. If you look at both the top events and top series on tv, it’s basically football, football, some other crap, and more football…. I just can’t understand how when one thing gets more expensive and something else that’s similar gets a lot cheaper and lower hassle, that you see people flocking to the thing that is absolutely more hassle and relatively more money.

It’s a good question. Demographics don’t appear to explain the change. Football skews young, male and black but none of these are undergoing rapid increase. (It’s the aged that are undergoing high growth rates but it’s baseball that appeals more to the old and that isn’t doing great). Fantasy football is big but is it cause or effect?

One possibility is that precisely because there are so few common events to coordinate on, the ones that do coordinate become more important. Why football and not baseball or basketball? Why not? It’s not hard to spin stories but it may also be that random advantages snowballed.

Other theories?

Terrence McCoy reports:

Schultz wants $150,000 for Ebola.com — a price he thinks is more than reasonable. “According to our site meter, we’re already doing 5,000 page views per day just by people typing in Ebola.com to see what’s there,” said Schultz, who monitors headlines the way brokers watch their portfolios, to gauge his domain’s worth. “We’re getting inquiries every day about the sale of it. I have a lot of experience in this sort of domain business, and my sense is that $150,000 is reasonable.”

The full story is here, and for the pointer I thank Michael Rosenwald.

From a Jean Tirole press conference:

French economist Jean Tirole advocated Scandinavian-style labour market policies and government reform as a way of preserving France’s social model.

Hours after he won the economics Nobel Prize, Tirole said he felt “sad” the French economy was experiencing difficulties despite having “a lot of assets”.

“We haven’t succeeded in France to undertake the labour market reforms that are similar to those in Germany, Scandinavia and so on,” he said in telephone interview from the French city of Toulouse, where he teaches.

France is plagued by record unemployment and Tirole described the French job market as “catastrophic” earlier on Monday, arguing that the excessive protection for employees had frozen the country’s job market.

“We haven’t succeeded also in downsizing the state, which is an issue because we have a social model that I approve of – I’m very much in favour of this social model – but it won’t be sustainable if the state is too big,” he added.

Tirole remarked that northern European countries, as well as Canada and Australia, had proven you could keep a welfare social model with smaller government. In contrast, he said France’s “big state” threatened its social policies because there will not be “enough money to pay for it in the long run”.

There is more here, hat tip goes to Alex.  And I very much liked this Appelbaum interview with Tirole,here is one bit:

There’s no easy line in summarizing my contribution and the contribution of my colleagues. It is industry-specific. The way you regulate payment cards has nothing to do with the way that you regulate intellectual property or railroads. There are lots of idiosyncratic factors. That’s what makes it all so interesting. It’s very rich.

It requires some understanding of how an industry works. And then the reasoning is very much based on game theory. Usually we don’t have a perfectly competitive market, so we use game theory, which describes situations with a small number of actors. And information economics, those are the tools. But then you go into the industries and try to think about the possible rules. It’s not a one-line thing.

I liked David Henderson’s piece, and this one too, Tirole on France and Canada.

He has a new paper (pdf) on this topic, with Jorda and Schularick, based on data from seventeen advanced economies since 1870.  In an email he summarizes the main results as follows:

1. Mortgage lending was 1/3 of bank balance sheets about 100 years ago, but in the postwar era mortgage lending has now risen to 2/3, and rapidly so in recent decades.

2. Credit buildup is predictive of financial crisis events, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome.

3. Credit buildup in expansions is predictive of deeper recessions, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome as well.

Here is VoxEU coverage of the work.  On a related topic, here is a new paper by Rognlie, Shleifer, and Simsek (pdf), on the hangover theory of investment, part of which is applied to real estate.  It has some Austrian overtones but the main argument is combined with the zero lower bound idea as well.

Adam Posen on Japan

by on October 14, 2014 at 2:23 am in Economics | Permalink

Similarly, the returns on tackling the underutilisation of human capital in Japan dwarf the impact of everything else, including the problem of a declining workforce. If Japan were to get more of its university-educated women into the workforce, the demographic problem would go away for 20 years. If Abe accomplished this, the fatalistic whining about Japan’s supposedly intractable demographic crisis would cease to be an excuse or a constraint for its economic future. But the efforts made to date, while encouraging, are insufficient. About 420,000 women have rejoined the workforce over the past year or so. This is an impressive achievement. In absolute terms, though, this is a small fraction of what is possible for female labor force participation.

There are further points of interest here.

I found this piece by Alex Hutchinson very interesting, here is one excerpt on the issue of incentives:

One reason marathoners are running faster is that road racing is more lucrative. When the Sheikh of Dubai put up $1 million in prize money plus a $1 million world-record bonus in 2008, the Dubai Marathon instantly became one of the world’s fastest, despite its desert temps (average high in January, when the race is held, is 75°F). In fact, prize money for road races more than doubled since 1998, while track racing purses have gotten smaller (see below). As a result, runners are increasingly heading straight to the marathon. But big money can also draw the fastest runners away from the fastest courses, and the standard winner-takes-most prize structure favors cat-and-mouse tactics as runners race each other instead of the clock. When the Amsterdam Marathon switched to time-based prizing in 1999, four different runners immediately smashed the course record by 90 seconds. The sub-two-hour solution? A big pot of money that runners can win no matter where they race, and that is shared equally among all who break 2:00 in that event.

It is not obvious to me why a big first prize is not a good incentive, for instance why does it militate against speed to “race each other instead of the clock”?  Is it that the runners stay on too few courses, thus lowering the variance of performance outcomes?

In any case the hat tip goes to Vic Sarjoo.