Month: December 2010

The interventionist dynamic, health care installment #2,074

The Obama administration said on Tuesday that it would require health insurance companies to disclose and justify any increases of 10 percent or more in the premiums they charge next year.

State or federal officials will review the increases to determine if they are unreasonable, the administration said in proposing regulations to enforce the requirement.

The article is here.  How long ago was it that we were told the health care reform would a) control costs, b) take care of adverse selection, and c) make the insurance market workable again.  Yet somehow such a policy is necessary.

Remind me again, what will happen to the quality of coverage and reimbursement, all factors included, following price controls?

Assorted links

1. The rooftops and the rich, from Kevin Drum.

2. Speculative claims about the Haitian earthquake.

3. Bankruptcies in the U.S. vs. bankruptcies in Mass., since Romneycare.

4. Iran jails Jafar Panahi (The White Balloon, Circle) for six years and bans him from filmmaking for twenty.

5. Old and new: a photo essay of Mongolia.

6. Via Chris F. Masse, top ten CEO wealth creators, and destroyers, from 2010.

7. "inappropriate"

Mandatory Minimums and Drug Quality

A per unit tax tends to increase product quality as consumers and manufacturers substitute away from the taxed margin (quantity) towards the untaxed margin (quality) (see here for evidence on cigarettes, beer, and grapes and lobsters). The principle is quite general. Teenagers, for example, drink less often than adults but when they do drink they tend more often to get drunk. Similarly, Ronald Davies finds that mandatory minimums increased drug purity.

As of 1987, the US’s Anti-Drug Abuse Act (ADAA) has imposed mandatory minimum sentences for drug traffickers based on the quantity of the drug involved irrespective of purity. Using the STRIDE dataset and a differences-in-differences approach, I find that this led to increases in cocaine and heroin purity of 52 per cent and 27 per cent respectively.

Lesson two of economics is think on the margin. Lesson nineteen, which we don't always get to in Econ 101, is to remember that there are many margins.

Hat tip to Geary Behavioural Economics Blog.

Can vigilant creditors limit excess bank risk-taking?

I had promised to address that question.  Ideally, enforceable bond covenants should limit bank risk-taking, and ensure major bank solvency, but is that feasible?  I see a few problems with the idea:

1. It is very hard for a government or central bank to precommit to a "no bailout" policy.  This is partly because of powerful special interests, but most of all because political time horizons are short.  Most bailouts do patch things up in the short run, whether or not you like their longer-run consequences.  Bondholders know this, and they are less vigilant ex ante.

2. Bondholders don't and can't have much idea what is going on inside the trading book of a bank.  It doesn't matter how financially sophisticated the bondholders are; the point is that the trading book must remain fairly confidential and a lot of risk can be put in the trading book.

3. Some of the creditors — the short-term creditors — may be in on the deal.  They lend money to the banks, under the premise that risky strategies will be executed.  The short-term, collateralized creditors may not themselves be bearing much risk, given their superior "flight" capabilities and they also may be receiving a slight premium for such lending.

4. The net risk of a bank position is not determined solely by the bank's portfolio.  Say a bank lends money to homeowners and then those homeowners increase their leverage.  The bank is now in a riskier position, and de facto a more leveraged position, althoug it's measured leverage hasn't gone up a whit.

5. Experience with the ICE clearinghouse — one form of bank creditor — so far suggests that it serves bank interests, and indeed is largely controlled by the banks, rather than restraining them.

6. Let's say a no-bailout policy was credible, as indeed it was in the 19th century (there were no bailout facilities).  What does the equilibrium look like?  Is there less long-term lending to banks and more short-term lending?  Would that make banks more or less stable?  Few people think this is a positive development for countries.  Would banks be more subject to "capital flight" risk?

We also could expect greater mutualization of banks, as was the case before deposit insurance, and we could expect experimentation with corporate forms other than limited liability.  My view is this is what would be required to limit excess bank risk-taking.  Yet I believe that, for better or worse, it is politically impossible.  In a nutshell, big government needs big finance (or much higher taxes).

One reason that bailouts are so politically popular (not in rhetoric, but in their practice and in their effects) is that they make financial crises less common but, when they come, more severe because more leverage has built up.  That change in the structure of returns is usually a political winner, call it "Ticking Time Bomb."

Social Security prediction

Here is a related Paul Krugman post.  In my view, Obama may propose slowing the rate of benefit increase, but he won't propose an actual cut in Social Security benefits.  Use of the word "cuts" is thus likely to prove misleading.  I've already argued it is better to cut Medicare than Social Security (in-kind vs. cash), but it shouldn't come as a shock if reindexing benefits is part of a bipartisan budget deal.  It's an easier policy "to do" than fixing Medicare, though again I prefer the latter.

It's a common argument that we need not cut benefits now, simply to prevent benefit cuts in the future.  The reality is that the long-term budget (don't look at SS alone) is way out of whack, and reindexing now is one way to get larger spending cuts in the future than could be done on a one-time basis.  Unless you do reindexing of something, at some point in time, it is very very hard to institute large spending cuts on a dime.

Reindexing is one signal of a longer-term political time horizon.

Paragraphs about prosopagnosia

Face space also explains why the favorite trick of editorial cartoonists works so well.  By exaggerating features on a politician's face  — Bush's eyebrows, Obama's ears — cartoonists push it farther away from the center of face space, to places where it has less competition from other faces we have stored in our memory.  As a result, we recognize people from hand-drawn caricatures as quickly as from photographs — and sometimes even more quickly.

That is Carl Zimmer, from the January/February 2011 issue of Discover, not yet on-line.  Here is a short piece on how to draw caricatures.

Scott Sumner as a normative philosopher of language

Recently Scott Sumner visited us and I pondered the following.

Let's say that at the peak of a financial crisis, the central bank announces a firm intention to target a path or a level of nominal GDP, as Scott suggests.  If everyone is scrambling for liquidity, and panic is present or recent, and M2 is falling, I wonder if the central bank's announcement will be much heeded.  The announcement simply isn't very focal, relative to the panic.  A similar announcement, however, is more likely to work in calmer times, as the recent QEII announcement has boosted equity markets about seventeen percent.  But for the pronoucement to focus people on the more positive path, perhaps their expectations have to be somewhat close to that path, or open to that path, to begin with.

(Aside: there is always a way to commit to a higher NGDP path through currency inflation, a'la Zimbabwe.  But can the central bank get everyone to expect that the broader monetary aggregates will expand?)

The question is when literal talk, from the central bank, will be interpreted literally.

Much of the time, but not always.  Keep in mind that few informed people take the President literally.  Hardly anyone takes Congress literally.  Some people take the Fed literally but not always.  Literal speech, interpreted literally, is hardly the political default.  (One possible implication is that often a Fed cannot do much better than the political system it is embedded in, due to how people understand speech.)  Most people don't take their spouses literally either, or their children.

I view Scott as claiming that the world would be better off if the central bank would talk more literally.  If the central bank talks more literally, they will be (can be?) understood more literally as well.  Scott is a theorist of literality

In general I am sympathetic to this view and not only for the Fed.  I believe people should speak more literally in a wide variety of circumstances.

Since Treasury hardly ever speaks literally, I believe the Fed can speak literally, and be understood literally, only when it is fairly independent of Treasury.  That was not the case in the worst parts of 2008.

Central bankers usually speak with ambiguity.  Doing so conserves their influence, as has been presented in a number of important papers.  It is thus hard for the Fed to switch to a mode of pure literal speech.  Part of the difficulty is institutional, part lies with the audience (aren't you suspicious when a vague person sudden switches to direct, literal speech?), and part of the problem is political, since the Fed is not always independent.  Part of the problem lies in the Fed itself.  The Fed's mental model is often that speaking in a literal manner spends political capital and they are reluctant to do this, even when they ought to.  There is thus a public choice reason why the Fed serves up a suboptimal amount of literal speech.

Scott's views remind me of a concern of Robin Hanson's.  "Why can't those writers just come out and say what they mean?" Robin asked me once about the classic great books.  It was a plea for a more literal discourse.  Yet more literality is not always possible and not always more effective.

At the talk, Scott was superb in responding to questions and criticisms.  I enjoyed how much he gave the questions direct, literal answers.

Addendum: Mark Thoma has a good post on nominal gdp targeting.  Scott replies, Bill Woolsey too; I view Woolsey's reply as illustrating the difficulties with presenting literal speech.  Here is a DeLong reply.

Temporary employment

This year, 26.2 percent of all jobs added by private sector employers were temporary positions. In the comparable period after the recession of the early 1990s, only 10.9 percent of the private sector jobs added were temporary, and after the downturn earlier this decade, just 7.1 percent were temporary.

Here is more.  And this:

Temporary employees still make up a small fraction of total employees, but that segment has been rising steeply over the past year. “It hints at a structural change,” said Allen L. Sinai, chief global economist at the consulting firm Decision Economics. Temp workers “are becoming an ever more important part of what is going on,” he said.

My favorite new music releases of 2010

For classical releases I thought this was a stunning year, but a mediocre year in a lot of other categories.  I do however have a few (non-classical) favorites:

Timbuktu Tarab, by Khaira Arby; from Mali, intense.

Sikilela, by Amabutho; from South Africa.

In both cases I have trouble distinguishing the album name from the performer name and that is often a good sign of quality for world music.

My Beautiful Dark Twisted Fantasy, by Kanye West.

If you're looking for a fun song to download, beyond the stuff you probably already know, try Gyptian's "Nah Let Go," a joyous reggae song.

Most of this year's Spin picks and the like I found fairly boring.

Where did game theory come from?

The best book to read on that topic is Robert Leonard's new and noteworthy Von Neumann, Morgenstern, and the Creation of Game Theory.  Excerpt:

Von Neumann's seminal game paper was part of a rich contemporaneous discussion of the mathematics of chess and parlour games in the first three decades of the century, involving diverse contributors, from Lasker to Zermelo to Konig, Kalmár, and Borel.  It was a multifaceted literature, embracing Lasker's philosophical probing of the place of struggle in business and war, Zermelo and the Hungarians' set-theoretic analyses of chess; and Borel's own attempt to create a novel form of social inquiry, blending probability and psychology.

Here is the book's home page, the non-cached copy is not available at the moment.  Here are working papers by Robert Leonard, on the history of game theory.

Literary reputations

Somewhat on the way down:







Overall, in other searches also, I see a golden age for "high fiction" in the 1950-1970 period.

Holding steady:

Jane Austen


Joseph Conrad

Norman Mailer

Up, but down since 2000

Ayn Rand

On the way up:



Other than very recent authors, these are harder to find than you might think.

Falling off a cliff:

Robertson Davies

Typing in "Arnold Bennett" is like shooting fish in a barrel.