Month: March 2011

Is Japanese leadership broken?

From the NYT:

Never has postwar Japan needed strong, assertive leadership more — and never has its weak, rudderless system of governing been so clearly exposed or mattered so much…

Japan’s leaders need to draw on skills they are woefully untrained for: improvisation; clear, timely and reassuring public communication; and cooperation with multiple powerful bureaucracies.

Postwar Japan flourished under a system in which political leaders left much of its foreign policy to the United States and its handling of domestic affairs to powerful bureaucrats. Prominent companies operated with an extensive reach into personal lives; their executives were admired for their role as corporate citizens.

But over the past decade or so, the bureaucrats’ authority has been eviscerated, and corporations have lost both power and swagger as the economy has foundered. Yet no strong political class has emerged to take their place. Four prime ministers have come and gone in less than four years; most political analysts had already written off the fifth, Naoto Kan, even before the earthquake, tsunami and nuclear disaster.

I wouldn’t quite put it that way, but the points are well-taken and the article is interesting throughout.

Assorted links

Givewell on Giving to Japan

I agree with this advice from Givewell the most analytically tough of the charity ratings agencies.

* Those affected have requested very little, limited aid. Aid being offered far exceeds aid being requested.
* Charities are aggressively soliciting donations, often in ways we feel are misleading.
* Any donation you make will probably be used (a) by the charity you give it to, for activities in a different country; (b) for non-disaster-relief-and-recovery efforts in Japan.
* If you’re looking to pursue (a) and help people in need all over the world, we recommend giving to the best charity you can, rather than basing your giving on who is appealing to you most aggressively with images and language regarding Japan.
* If you prefer (b), a gift to the Japanese Red Cross seems reasonable.

Overall, though, a gift to Doctors Without Borders seems to us like the best way to effectively “respond to this disaster”. We feel they are a leader in transparency, honesty and integrity in relief organizations, and the fact that they’re not soliciting funds for Japan is a testament to this. Rewarding Doctors Without Borders is a move toward improving incentives and improving disaster relief in general.

Donate to Doctors Without Borders.

Facts about prices, potassium iodide edition

David Tufte reports:

Last Thursday morning, you could buy a packet of potassium iodide tablets for $10. Tuesday morning it would have cost you $540.

That is a 5,300% increase in the space of 5 days.

Annualized, that is 3 x 10126%.

Yes, that’s scientific notation.

Here’s the rate written out: 2, 915, 710, 944, 820, 310, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000%.

Is this the highest inflation rate ever?

Believe it or not, it is only the penultimate inflation rate.

It’s more digestible to convert this into a daily inflation rate, which would be 122%.

That rate is higher than that in Zimbabwe a few years ago, but it still falls short of Hungary in 1946.

p.s. Maybe QEII is at fault!

The culture that is Manhattan James Heckman gone wild edition

A mad-as-heck Manhattan mom says her daughter’s Ivy League dreams have been all but dashed — and she’s only 4 years old.

Nicole Imprescia is suing the $19,000-a-year York Avenue Preschool, saying her daughter, Lucia, was forced to spend too much time with lesser-minded 2- and 3-year-olds when she should have been focusing on test preparation to get into an elite elementary school.

The suit, filed in Manhattan Supreme Court, notes that “getting a child into the Ivy League starts in nursery school” and says the Upper East Side school promised Imprescia it would “prepare her daughter for the ERB, an exam required for admission into nearly all the elite private elementary schools.”

But “it became obvious [those] promises were a complete fraud,” the suit says. “Indeed, the school proved not to be a school at all but just one big playroom.”

The miffed mom yanked her daughter after just three weeks — but the school is refusing to refund the $19,000 she had to pay up front, said her lawyer, Mathew Paulose.

The article is here.  For the pointer I thank Michael Rosenwald.

Earthquakes and spending and deficits

Brad titles his post: “I Genuinely Do Not Understand Why There Is A Question Here…” and after quoting my post from yesterday writes:

If people thought that government debt was risky, its price would be falling as well. The fact that people are willing to pay more for government debt indicates that it is increasingly valuable–and so we should make more of it.

Ryan Avent comments as well.  A few points:

1. My post and question is about spending, but Brad has shifted the discussion to borrowing.  It’s easy enough to borrow more without increasing spending, if that is needed.  It’s still an open question whether spending should go up.

2. The countervailing forces which might favor lower government spending simply aren’t mentioned.  Those include lower wealth and higher tail risk.  If those can’t, at least possibly, imply lower government spending, what could?  The Japanese will need to spend on recovery, but must the U.S., normatively speaking, now feel compelled to spend more on its domestic programs?  A priori?  No way.

3. The earthquake and related events are a negative supply shock, so on Keynesian grounds they need not increase the case for activist fiscal policy.

4. Don’t forget that Mike Jensen answered Kenneth Arrow on risk in 1972.  Even if government spreads its pecuniary losses over many taxpayers, the relevant real risk is the covariance of the value of government output with private consumption.  Given that, an increase in risk still implies at least one force operating in favor of less government spending.

5.  It is an oddly non-Keynesian or perhaps even anti-Keynesian point.  In 1936 Keynes argued that the rate of interest did not allocate investment properly, or correctly signal the proper amount of investment, because interest rates also channeled liquidity preferences.  Today this is a claim which DeLong and Krugman are arguing against.

In other words, it’s an open question, as my original post implied.

Megan McArdle had some to-the-point words:

It’s hard to argue that we should become more willing to borrow because Japan had an earthquake that will cut into global GDP.

And:

And the bad signals aren’t just to the federal debt market–the flight to quality is ultimately going to push things like mortgage rates down too.  Would the people urging the government to take on as much debt as possible also urge our homeowners to once again leverage themselves as far as the banks will allow?

Update (12:25 pm) Reader abUWS has perhaps the best, most succinct metaphor I’ve ever seen for this argument:

“When the Titanic was sinking everyone eventually rushed to the stern of the ship. That didn’t mean that that part of the ship was actually safe.”

Addendum: Arnold Kling offers relevant comments.

Should you send aid to Japan?

Felix Salmon offers the case against donating money to Japan.  Read the whole thing, I don’t wish to quote it out of context.

For reasons which you can find outlined in my Discover Your Inner Economist, I am generally in sympathy with arguments like Felix’s, but not in this case.  I see a three special factors operating here:

1. The chance that your aid will be usefully deployed, and not lost to corruption, is much higher than average.

2. I believe this crisis will bring fundamental regime change to Japan (currently an underreported issue), rather than just altering the outcome of the next election.  America needs to signal its partnership with one of its most important allies.  You can help us do that.

3. Maybe you should give to a poorer country instead, but you probably won’t.  Odds are this will be an extra donation at the relevant margin.  Sorry to say, this disaster has no “close substitute.”

It may be out of date, but the starting point for any study of Japan is still Karel von Wolferen’s The Enigma of Japanese Power.   Definitely recommended.

Makena and the Orphan Drug Act

Makena is a drug used for premature birth therapy. It’s been available off-label for a long-time but KV pharmaceuticals ran a clinical trial and applied for FDA approval under the Orphan Drug Act (ODA). Under the ODA, KV is entitled to seven years of market exclusivity, this is even stronger than a patent because it gives KV the right to exclude from the market any drugs (not just similar drugs) that treat the same condition.

Now that KV has a monopoly—enforced against compounding pharmacies by threats from the FDA—the price will rise from about $10 to a listed price of $1,500. Naturally a lot of people are outraged.

In The Blessed Monopolies (pdf) I  explained how the ODA and similar rules such as pediatric exclusivity can be gamed by pharmaceutical firms for big profits. The early AIDS drug AZT managed to get market exclusivity under the ODA, for example, because it appeared when the patient population was below 200,000, thus meeting ODA requirements, even though everyone knew the patient population was expanding rapidly.

Once a drug is off-patent, however, there is very little incentive to study it further or to run the clinical trials necessary to get FDA approval. Although the drug has been used off-label for some time (another example of the importance of off-label prescribing) a decent clinical trial still has considerable value. The problem is that as with patents there is very little connection between the effort required to get exclusivity under the ODA and the potential profits (see my paper Patent Theory v. Patent Law).

Despite my skepticism of the ODA, however, I was convinced by Lichtenberg and Waldfogel’s Does Misery Love Company that the ODA as a whole has done some good. Lichtenberg and Waldfogel find that after the ODA was passed (but not before) mortality rates for people with orphan diseases decreased faster than mortality rates for those with more common diseases. The decrease in mortality was consistent with the introduction of more new drugs for orphan diseases.

The important point is that like patents the ODA should be evaluated as a rule and not on a case-by-case basis. I am all for patent reform and FDA/ODA reform but this is truly a case where we don’t want to throw the baby out with the bathwater.

Hat tip: Eddie W.

Addendum: See also Derek Lowe who, as usual, offers intelligent comments.

Some simple analytics of government debt

U.S. Treasury yields just plunged, as part of a flight to safety.  This is because of Japan and perhaps because of the situation in Bahrain also.

Quick quiz: does this mean our federal government should:

a) spend more money, because there are even fewer bond market vigilantes than before, or

b) spend less money, because there is a general signal that everyone should pull back on excess commitments and risky projects, governments included.

Sadly, we are allowed only one guess at this problem.

The extra credit question is a) vs. b) when the lower yields are instead caused by a global financial crisis.

Thoughts about labor markets

Today, the number of layoffs and discharges is very low — in fact, layoffs are at their lowest level since the Labor Department began collecting this data in 2000. Today’s problem instead is the very slow pace of job creation.

Yet unemployment remains high.  File under “increasing polarization of labor market outcomes.”

Here is Steve Pearlstein channeling A. Michael Spence:

…what ails the U.S. economy is primarily a structural problem, not a cyclical one that can be effectively dealt with through the magic of short-term Keynesian stimulus.

Or let’s consider David Leonhardt’s very good piece on the labor market:

Lawrence Katz, a Harvard labor economist, calls the full [labor market] picture “genuinely puzzling.”

That is Larry Katz, who was chief economist at the Department of Labor under Clinton and who is arguably the most knowledgeable labor economist in the world.  Larry Katz, who is renowned for how many literatures he holds at his fingertips.  (Here are some papers by Larry Katz, including a good, short piece on unemployment in the great recession.)  Larry Katz, who wrote the most effective critique of the Lilien “sectoral shift” hypothesis.  Larry Katz, force of nature.

I am not asking you to agree with Spence or Katz, only to keep them in mind.  What is striking about the current generation of popular Keynesian models is how little effort they make to integrate cyclical and structural phenomena.  This is very much like some of the original Keynesian models of the 1930s, but it is an out of date approach and it will lead to excess optimism about the ability of fiscal stimulus to set things right.

Where does Japan put its nuclear reactors?

Chris Blattman reports on the work of Daniel Aldrich, quoting Aldrich:

Using a new dataset from Japan, this paper demonstrates that state agencies choose localities judged weakest in local civil society as host communities for controversial projects. In some cases, powerful politicians deliberately seek to have facilities such as nuclear power plants, dams, and airports placed in their home constituency. This paper then explores new territory: how demographic, political, and civil society factors impact the outcomes of siting attempts. It finds that the strength of local civil society impacts the probability that a proposed project will come to fruition; the greater the concentration of local civil society, the less likely state-planned projects will be completed.

Here is further reporting on the research from John Sides.

The Big Society just got smaller

Migrants from outside the European Economic Area will no longer be allowed to work in the UK as chefs in takeaway restaurants, the government has said.

…A similar ban will apply to workers such as hairdressers, beauty salon managers and estate agents from April.

The number of skilled migrants not from the European Economic Area is being capped annually at 21,700.

…The government wants to cut net migration from about 200,000 a year to tens of thousands by 2015.

Here is the story, hat tip goes to Random Variable.

Blood Money: Diyat

LA Times: Aziz Ahmed was supposed to die. In 2006 he used a meat cleaver to kill a friend he thought had been sleeping with his wife. He confessed and was sentenced to be hanged.

But last month Ahmed won his freedom; not because his confession was recanted or fresh evidence was presented, but because of a wad of cash. He paid the victim’s family $9,400 and walked out of prison a free man. The slain man’s relatives said they would use the money to buy the widow a cookware shop in this dusty farm town in Punjab, near the Indian border.

“We’re not bitter about this at all,” said Mohammed Nasir, brother of the victim, Ghulam Sarwar. “This money will take care of Ghulam’s wife and children.”

What outsiders might describe as “blood money” is a tenet of Islamic law sanctioned by Pakistani jurisprudence and used, by some estimates, in up to 60% of homicide cases here. The practice is called diyat, and it could be the means by which the United States and Pakistan extricate themselves from a dangerous diplomatic row that has strained relations between the two governments.

It is important to understand that diyat arose as a progressive measure designed to substitute restitution for retribution. Restitution systems have a number of virtues. One virtue of restitution is that it puts the victim’s family at the center of the process rather than ignoring their interests. Criminal law, in contrast, replaces the interests of victims with the interests of the state. Perhaps this is sometimes necessary (what to do about victims without families?) but restitution systems have been quite sophisticated at dealing with these problems. David Friedman, for example, explains the Icelandic system of wergeld and Bruce Benson discusses the medieval Ango-Saxon system. I am not aware of much work, however, on Islamic diyat. Randy Barnett makes the case for restitution as a substitute for criminal law today.

If restitution is to work well it’s crucial that restitution be set at the right levels. It’s not always clear that this is done. In Saudi Arabia maximum compensation prices are as follows (from Wikipedia, according to this document, take at your own risk)

  • 100,000 riyals if the victim is a Muslim man
  • 50,000 riyals if a Muslim woman
  • 50,000 riyals if a Christian or Jewish man
  • 25,000 riyals if a Christian or Jewish woman
  • 6,666 riyals if a Hindu man
  • 3,333 riyals if a Hindu woman.

More generally, however, Diyat will vary by the wages and prospects of the deceased. If that sounds wrong do note that US tort law compensates in a similar way, although as a supplement rather than substitute for criminal law.

The optimal scope and overlap of criminal and tort law is an under-researched topic.