Month: May 2011

*Outsider Art*

This is a poem by Kay Ryan:

Most of it’s too dreary

or too cherry red.

If it’s a chair, it’s

covered with things

the savior said

or should have said —

dense admonishments

in nail polish

too small to be read.

If it’s a picture,

the frame is either

burnt matches glued together

or a regular frame painted over

to extend the picture. There never

seems to be a surface equal

to the needs of these people.

Their purpose wraps

around the backs of things

and under arms;

they gouge and hatch

and glue on charms

till likable materials —

apple crates and canning funnels —

lose their rural ease. We are not

pleased the way we thought

we would be pleased.

That poem is cited in the new and enjoyable book by David Orr, Beautiful & Pointless {A  Guide to Modern Poetry}.

Simple Interventions that Work

Sometimes simple interventions are the best. From research by Glewwe, Park and Zhao.

About 10% of primary school students in developing countries have poor vision, yet in virtually all of these countries very few children wear glasses….This paper presents results from the first year of a randomized trial in Western China that began in the summer of 2004. The trial involves over 19,000 students in 165 schools in two counties of Gansu province. The schools were randomly divided (at the township level) into 103 schools that received eyeglasses (for students in grades 4-6) and 62 schools that served as controls. The results from the first year indicate that, after one year, making eyeglasses available increased average test scores by 0.09 to 0.14 standard deviations (of the distribution of the test scores). For those students who accepted the glasses, average test scores increased by 0.12 to 0.22 standard deviations….

These are rather large effects; similar tests given to children in grades 5 and 6 in Gansu province show that an addition year of schooling leads to an increase of 0.4 to 0.5 standard deviations of the distribution of test scores, which implies that these impacts are equivalent to one fourth to one half of a year of schooling. Thus providing eyeglasses is a relatively low cost and easily implementable intervention that could improve the academic performance of a substantial proportion of primary (and secondary) school students in developing countries.

It’s interesting that many students/parents refused the glasses.

Hat tip to Stephen Dubner who has a good segment on this at Freakonomics Radio.

Tight labor markets

Demand for Australian commodities is running white-hot. So too are costs in the country’s remote mining towns, to the point where tiny huts or “dongas” can cost as much as a five-star hotel room and backpackers can earn $2,000 a week cleaning them….

“Here the work is very good. You can work 80 hours a week if you want. It’s good money,” said Pic Segolene, a 25-year-old French backpacker who came to Karratha to earn enough cash to fund the rest of her trip around Australia.

Segolene works about 10 hours a day, earning A$25 ($26) an hour to clean houses in this thin slice of suburbia that serves as an Indian Ocean port and a gateway to the endless and bountiful red deserts of Australia’s interior.

Her boyfriend, Eric Gehin, 31, makes A$31 an hour as a gardener.

…Karratha has an official population of 18,000, but up to 10,000 more cram into the town, about 1,300 km (780 miles) from the nearest major city, to work for the mining or gas industries.

Workers often have to stay in primitive accommodation known as “dongas,” pre-fabricated huts smaller than a shipping container, each with an overworked air conditioner to keep out desert temperatures that can soar to 40 degrees Celsius.

A “donga” can cost up to A$250 a night, about the same price as a room in a five-star hotel in Sydney, overlooking that city’s famous harbour, or in downtown Tokyo or London.

The full story is here.   There are jobs in North Dakota as well, which is reporting labor shortages.

The new argument against financial innovation

It is from the not yet but soon to be famous Alp Simsek, at Harvard, and smart people tell me it is important and already influential.  I will read the paper soon, here is the abstract:

While the traditional view of …financial innovation emphasizes the risk sharing role of new fi…nancial assets, belief disagreements about these assets naturally lead to speculation, which represents a powerful economic force in the opposite direction. This paper investigates the effect of fi…nancial innovation on risks in an economy when both the risk sharing and the speculation forces are present. I consider this question in a standard CARA-Normal framework. Financial assets provide hedging services but they are also subject to speculation because traders do not necessarily agree about their payoffs. I de…fine the average variance of traders’ net worths as a measure of …financial stability for this economy, and I decompose it into two components: the uninsurable variance, de…fined as the average variance that would obtain if there were no belief disagreements, and the speculative variance, de…fined as the residual variance that results from speculative trades based on belief disagreements. Financial innovation always decreases the uninsurable variance because new assets increase the possibilities for risk sharing. My main result shows that …financial innovation also always increases the speculative variance. This is true even if traders completely agree about the payoffs of new assets. The intuition behind this result is the hedge-more/bet-more effect: Traders use new assets to hedge their bets on existing assets, which in turn enables them to place larger bets and take on greater risks. This effect suggests that …financial innovation is more likely to be destabilizing in more complete …financial markets and when it concerns derivative assets.

In a dynamic setting, …financial innovation always reduces the average variance in the long run because traders learn from past asset payoffs. A question emerges as to how new assets should be introduced to minimize their short run impact on the speculative variance. I show that staggering (or delaying) the introduction of new assets is not effective because it reduces traders’ learning simultaneously with their speculation. A viable alternative is to set temporary position limits (or taxes) on new assets.

If there was a “Fantasy Economics League,” I would go long on this guy.  For the pointer I thank Tristan.

Can one change one’s mind on the health care mandate?

I never have, but some people have, see this post too.  I don’t care to guess at their motives (which are totally cynical), but let’s consider this as a question in pure logic.  It is harder to make a mandate work when a) health care costs are high, and b) income inequality is high.

a) The higher are health care costs, the more the mandate is forcing lower income consumers to buy an inefficiently high quantity of medical care.  (Forcing everyone to buy the same quality toothpicks is not a big deal, but forcing everyone to buy the same quality car, or house, is tougher to pull off.)  Of course subsidies offset this problem to some extent, but the poor person still may be worse off or only marginally better off, the subsidy is itself costly, the subsidy raises fairness questions, in a pluralistic health care system the subsidy may cause inefficient burden-shifting into the subsidized sector, and the subsidy involves higher implicit marginal tax rates as it is phased out for higher income classes.

b) The higher is income inequality, the more serious are the problems discussed in a).

Circa 2080, imagine a world with two classes, the very rich and the fairly poor.  The very rich pay thirty percent of their $1 million a year incomes on health care.  The fairly poor earn $100,000 a year.  How are we supposed to roughly equalize health care consumption?  Does it make sense to give the fairly poor 3/4 of their real income ($300,000 out of a total of $100,000 cash plus $300,000 health care benefits) in the form of health care benefits?  And could we enforce that with a mandate + subsidy?  Probably not.

Of course both health care costs and income inequality have been rising in this country.  It is a critical question — and one which remains unanswered — at which margins these problems kick in decisively.

Under “Medicaid for everybody plus private cash top-offs,” this same problem does not arise, but there is also less egalitarian redistribution.  I would favor that blend over a mandate.

Here is related commentary from Ezra Klein.  Here is related commentary from Andrew Sullivan.

*The Next Convergence*

The authors is Michael Spence (yes, the Michael Spence and he used to be “A. Michael Spence”) and the subtitle is The Future of Economic Growth in a Multispeed World.  The book’s home page is here.

I enjoyed reading this book.  It is an entirely sensible take on catch-up growth, a topic which is lacking a good popular treatment and yet deserves one.  I found each of the short chapters well-written and to the point.  Yet I came away from the work with a strange feeling: I don’t have a good sense of why Spence wrote the book.  It doesn’t flex his Nobel-quality analytic mental abilities (unlike this recent piece he wrote), nor is it a rank popularization.  It doesn’t promote a “big idea” that his name will be attached to, nor is Spence moving in the Stiglitz or Krugman directions, either politically or in terms of level of pitch.  I don’t understand what the book is supposed to be signaling.

I also was baffled when Spence agreed to take on a Deanship, at the peak of his economics research career.  Doesn’t one do well academically, in part, to say no to meetings, and to avoid becoming a Dean?  Apparently not in this case.

I have no good theory of A. Michael Spence, or for that matter of Michael Spence.

Since his seminal papers and book on signaling, there has been no more important idea in economics.

I see Michael Spence, and A. Michael Spence, as among the most interesting economists out there.  They remain ciphers to me, enjoyable ciphers but ciphers nonetheless.

The EU is to end passport-free travel?

European nations moved to reverse decades of unfettered travel across the continent when a majority of EU governments agreed the need to reinstate national passport controls amid fears of a flood of immigrants fleeing the upheaval in north Africa.

In a serious blow to one of the cornerstones of a united, integrated Europe, EU interior ministers embarked on a radical revision of the passport-free travel regime known as the Schengen system to allow the 26 participating governments to restore border controls.

Here is the story, which I take to be big news indeed.  Addendum: Some of the comments claim that the Guardian’s account is exaggerated.  Here is a more balanced story.