Month: November 2004

Red in Tooth and Claw

Is it possible that near-universal affluence and the social safety net inevitably make for less moving fiction? This thought is suggested by  A Fine Balance, Rohinton Mistry’s heart-wrenching novel of India that invites comparison to the English novels of the 19th century–complete with a kind of workhouse in which our heroes are briefly incarcerated. Such is life in the developing world; fans of Sister Carrie should read "At 18, Min Finds a Path to Success in Migration Wave" at (requires subscription), about the odyssey of one young woman from rural China.

Mistry’s book is set around 1975, with periodic excursions into the deeper past, and gives us a portrait of a place (India during the suspension of civil liberties under Indira Gandhi) where affluence is rare and the social safety net almost non-existent. It’s a society where the dead hand of bad government blights almost everything: there is rent control, food rationing, and a bureaucracy so extensive that "facilitators" negotiate it for you for a fee. Corruption abounds, abetted by all the regulation.

In literary terms, it’s too bad modern Western novels aren’t much concerned with money nowadays (you can read more about this), but to the extent the phenomenon reflects reader prosperity it’s probably just as well. Read A Fine Balance and you’ll come away feeling that the characters in most Western novels-like the people in most Western societies-have no idea how good they have it.

Does it matter that the dollar is falling?

I have heard several accounts of why a low or falling dollar is bad:

1. U.S. citizens hold a relatively high percentage of dollar-denominated assets, so they are now poorer.

2. It looks bad when "the world’s strongest country" has a currency low in value.  Perhaps OPEC will start pricing oil in terms of Euros.

3. Markets dislike uncertainty per se.  People start wondering what a dollar is really worth and this causes them to hold off on other investments and purchases.  This hurts financial markets and the economy more generally.

4. The real problem concerns interest rate hikes.  The Fed won’t let the dollar fall too far, for some of the other reasons listed.  It will stop a dollar free-fall by raising interest rates, which is bad for the economy.

5. If the dollar is falling, people will expect it to fall more and unload dollar-denominated assets.  This one, however, is tricky.

If the dollar is expected to fall, we would expect nominal interest rates on dollar-denominated assets to rise (or the dollar must fall in value immediately).  A reasonable equilibrium will obtain and dollars will once again be an attractive asset to hold.

My take: #1 is correct, but not a major problem.  Imports are not a huge part of our economy, and often the exporter eats the currency loss, at least for a while.  I don’t put much stock in #2.  #3 and #4 are real.  #5 makes little sense to me, but I cannot rule out its role in today’s world.  How can it work?  Perhaps portfolio managers bear a special penalty from being thought stupid if they hold onto dollars while a falling dollar makes the headlines.  In this case a falling dollar would continually increase the real risk premia on dollar assets, even if traditional measures of risk do not much vary.

Keep in mind that the dollar did have a "soft landing" in the 1985-1989 period, so these are all possible costs, not necessary outcomes.

I cannot do links from this unusual Calcutta terminal, but read Brad DeLong’s recent posts on the dollar as well.

Brands on the Run

The latest Wired has a very nice article by James Surowiecki, The decline of brands.  Jim argues that better consumer information has reduced the value of reputation.  Why go with the brand that has a good reputation (Tide, Sony, IBM etc.) if you can find an actual evaluation of quality on the web?

Better information transmission reduces the value of brands that have an objective quality but branding is unlikely to decline for products with subjective quality.  I don’t expect Coca-Cola to disappear anytime soon.  Indeed, as information about objective quality increases we can expect brands to try to position themselves in a subjective "lifestyle space" rather than in a measurable "attribute space."  It’s hard to compete with Coca-Cola when consumers are buying more than the taste.

Better information transmission also raises the profitability of product evaluators.  Roger Ebert has used the web to become a profitable brand.  And of course you already know the top-of-the-line brand for economic analysis.

The River Ganga

All along the Ganga [Ganges], the major problem of waste disposal has defied the best efforts of the Ganga Action Plan set up in 1986 to solve it.  The diversion and treatment of raw sewage in the seven main cities was planned.  In Varanasi however, the 17th century sewers, the inadequate capacity of the sewage works, the increased waterflow during the monsoons and the erratic electricity supply (essential for pumping) have all remained problems.  In addition, although most Hindus are cremated, an estimated 45,000 uncremated or partially [sic] cremated bodies are put in the Ganga each year.  A breed of scavenger turtles which dispose of rotting flesh was introduced down river but the turtles disappeared.

Surprisingly, although the Ganga may be one of the world’s most polluted rivers…scientists had discovered the river’s exceptional property in the last century.  The cholera microbe did not survive 3 hrs in Ganga water whereas in distilled water it survived 24 hrs!

That is from the India Handbook, eighth edition, p.249, and here is a photo and some

Football and Old Growth Forests

My hometown of New York City, where a rigorous political process weeds out all but the nuttiest ideas, is considering building a $1.4 billion stadium to bring the Jets back across the river from New Jersey, where they share quarters with the Giants. New York city and state would ante up $300 million each even though NFL football teams only play eight home games a year. Are communities crazy to do this kind of thing?

Not necessarily, according to economists Jerry Carlino and Ed Coulson, whose highly readable recent paper on the subject tries to take account of the intangible value people derive from sports teams. "We found that once quality of life benefits are included in the calculus," they write, "the seemingly large public expenditure on new stadiums appears to be a good investment for cities and their residents." The authors liken having an NFL team to having an old-growth forest–it’s something people enjoy even if they never visit. This is to say nothing of the pleasure and unity they derive from rooting, discussing, etc.

That would account for why these stadium deals are politically popular; Pittsburgh area households, for instance, said in a survey they’d pay an extra $5.57 annually each to keep the NHL Penguins–which works out to a present value of $66 million at 8% over the presumed 30 year life of a stadium. Carlino and Coulson worked from their estimate of the effect NFL teams have on local rents (for some reason football seems to raise them) to determine that teams bestow an amenity value of $184 per person. In metro New York, this could be huge. Then again, the Jets are already *in* metro New York.

My take: I’m not qualified to comment on the researchers’ methodology, but broadly speaking I think they’re onto something. My sons and I get great pleasure following the Yankees, for instance, and would gladly pay some small annual tax to keep them. But my guess is that the intangible value of an NFL team would be inversely proportionate to the importance of a city. You can’t take the Packers out of Green Bay, but Los Angeles doesn’t seem to mind having no team at all. Then again, maybe it’s just the weather.

The Pregnant Mare’s Lesson

Here again is Avorn:

The former colony is the United States, the time is now; the drug is the family of hormone replacement products that include Prempro and Premarin (manufactured from pregnant mare’s urine, hence its name.)  For decades, estrogen replacement in postmenopausal women was widely believed to have "cardio-protective" properties; other papers in respected medical journals reported that the drugs could treat depression and incontinence, as well as prevent Alzheimer’s disease.  The first large, well-conducted, controlled clinical trial of this treatment in women was not published until 1998; it found that estrogen replacement actually increased the rate of heart attacks in the patients studied.  Another clinical trial published in 2002 presented further evidence that these products increased the risk of heart disease, stroke and cancer.  Further reports a year later found that rather than prevent Alzheimer’s disease, the drugs appeared to double the risk of becoming senile.  The studies resulted in a reduction, but not an end, to the long-term use of these products.

Some thoughts on health care

I had prepared a post on health care for the ongoing on-line debate, but the topic was changed to fiscal policy.  Here is what I had in mind:

Most plans for greater government involvement cite the large number of uninsured Americans, over 40 million at last count.  The number is taken out of context, as many of these individuals are otherwise covered, choose not to purchase insurance, or are recent immigrants; read more here.

I doubt if insurance will disappear as the dominant means of payment in the health care industry.  The risks are too high and the anxieties too great.  So we need to improve the workings of private health insurance. It remains a mystery, why private health insurance has performed badly in holding down costs.  Companies compete fiercely to shed costly patients but they do less to invest in reputations for reliability and trustworthiness.  Similarly, it is a puzzle why HMOs don’t do more to invest in good reputations; lately Kaiser has moved in this direction.

Nobody has a truly good health care plan at this point.  But we do know that competition for quality service has been the driving force behind the benefits of modernity.  We need to figure out how to bring this to bear on health insurance.  In the meantime we need to control Medicare; I suggest means-testing, here is another worthwhile proposal.

Bush’s plan encourages health savings accounts (HSA).  HSAs give you a tax-free account for medical expenses but requires purchase of a high-deductible health care plan (above $1000 for individuals and $2000 for families, in most cases). And when age 65 comes, you can use the money for Medicare premiums or simply pull it out and pay standard rates of taxation. The accounts are now rising in popularity, although they remain small in absolute terms.

The plan has some admirable economic elements.  It provides a tax-free vehicle for savings; most economists agree that capital income should not be taxed.  But it is less of a health care plan.  Most of the potential beneficiaries from HSAs already receive excellent levels of care.  In sum, I like the idea of market incentives, but do not believe that HSAs will do much to make us healthier. 

Hope for Hart Schaffner Marx

Find you can’t get much done at home? Now we know why. Researchers at Stanford University…

carried out a number of studies in which they exposed individuals to objects common to the domain of business, such as boardroom tables and briefcases, while another group saw neutral objects such as kites and toothbrushes. They then gave all of the participants tasks designed to measure the degree to which they were in a cooperative or competitive frame of mind.

In every case, participants who were "primed" by seeing the business objects subsequently demonstrated that they were thinking or acting more competitively. The effect was the strongest when they had to respond in situations that were deliberately ambiguous.

"Competitively" meant that when quizzed they finished the word "wa_" with an r, and finished the word c__p___tive as "competitive" rather than "cooperative." But apparently the business objects exercised their influence subliminally:

Participants denied that being exposed to business-related objects had influenced their behavior in any way.

That’s not all. In a variant on a well-known experiment,

Participants were given $10 and asked to decide how much they were willing to share with a partner. The catch was that the partner could refuse any offer perceived to be too low, in which case neither participant would receive anything. While subjects exposed to neutral pictures generally split the money 50-50, only 33 percent of those who looked at business-related objects did, showing that they had become less cooperatively oriented. Results were similar when participants were exposed in the experiment room to actual business-related objects, such as a briefcase and an executive pen, as opposed to a backpack and a wooden pencil.

You can read a fuller account here. To me the implications are clear: no more nerf ball and blue jeans at the office. And for those of us who work at home, this is the month to climb out of our pajamas and unload all that Danish modern.

Heavy Going for Airlines

America’s airlines are beset by higher fuel prices, cut-throat competition and costly labor agreements. The industry’s total profits, since its inception, are probably around zero. Now this:

Through the 1990s, the average weight of Americans increased by 10 pounds, according to the Centers for Disease Control and Prevention. The extra weight caused airlines to spend $275 million to burn 350 million more gallons of fuel in 2000 just to carry the additional weight of Americans, the federal agency estimated in a recent issue of the American Journal of Preventive Medicine (fee req’d).

The extra fuel burned also had an environmental impact, as an estimated 3.8 million extra tons of carbon dioxide were released into the air, according to the study.

The full story is here.

My take: The most persuasive explanation for the fattening of America in the past 25 years (two-thirds of adults are now overweight) is technology, including advances not just in computing but also food preparation. What we’re seeing now is what Edward Tenner would call a classic revenge effect, in which technological solutions create new problems–usually, problems requiring constant vigilance. Ed explores this at length in his marvelous book Why Things Bite Back.

Medicare considers obesity an illness, but the costs and benefits haven’t adequately been explored. If obesity has this effect on airline fuel consumption, just think about driving! Look for OPEC to roll out a line of snack foods or soft drinks. My vote for best brand name: "Tank Up."

The Social Security Inversion

Everyone seems to agree that in reforming social security we should not cut benefits to the already or soon-to-be retired.  The political reasons for this are obvious but economically and morally the idea is as bankrupt as the program itself.  It’s the current (and past) retirees who have gotten the best deal from social security – many of them did better than they could have done in any other investment.

Ida May Fuller was the first social security recipient.  She paid in a total of $24.75, retired in 1939, lived to be 100 years old in 1975, and in the process collected $22,888.92 in benefits.  Ida May is an extreme example but it is true that for current and past retirees benefit increases, a growing economy and longer life expectancy made social security a real deal.  It’s today’s workers and children for whom social security is a raw deal.  Even if the system does not go bankrupt, current workers will receive a very poor return on their "investment."

In refusing to cut benefits to current and soon-to-be retirees the costs of any reform are forced onto those people for whom the system is already a poor return.  It would be fairer to spread the costs to all recipients especially to those who have benefited from social security the most. 

Congestion fees are working in central London

Ben Muse links to a summary of current knowledge.  Here is one bit:

The aim of the congestion charge was honest and explicit: to reduce traffic congestion by reducing traffic volume by 10 to 15 per cent. To achieve this, drivers are required to pay £5 per day if they enter central London between 7am and 6.30pm, Monday to Friday. In the event the reduction in traffic has been greater than anticipated. Overall traffic entering the zone is down 18 per cent during charging hours, with a reduction in car traffic of 30 per cent and a similar reduction in congestion. There has been little displacement of traffic into areas round the zone or additional congestion on the ring road. Motorists themselves have benefited; for those who still drive in the zone, journeys are quicker and more reliable…