Month: March 2012

What the Goldman guy should have written

Philosophically speaking that is:

I signed on to this doctrine of fiduciary responsibility but initially I thought it would mean cooperating with other high status people rather than ripping them off.  I now feel uncomfortable about what I had agreed to do because I realize what it can mean.  I can’t reject the doctrine of fiduciary responsibility outright, because that would crash advanced capitalism, and furthermore it would leave me unemployable, even to run a charity for Africa vaccines.  Yet neither can I justify my GS-requested tasks on a rule-consequentialist basis, because a) I have read that rule consequentialism collapses into act consequentialism, and b) I still feel bad about ripping off high-status folks, even though I probably cannot demonstrate high welfare losses from those practices, at least not relative to the previous actions of the firm.  I will instead sidestep these difficult issues by claiming that morality and self-interest point in the same direction, that I am right on both issues, that my former firm is wrong on both issues, and that everyone should respect my denunciation of them, and perhaps I am still in a fog after all.

Had I read such a piece, I would have been impressed.  Here is my previous post on the economics of the situation.

On a related note, Energy Secretary Steven Chu “no longer” welcomes higher gas prices.

Pop Bonds

Pay on Performance Bonds incentivize private-sector creativity in the performance of public goals. One of the first Pop bonds (also called social improvement or social impact bonds, SIBs) was pioneered by the British government and the UK group Social Finance. The UK Pop bond is designed to reduce prisoner re-conviction rates. Social Finance raised about $8 million from investors to fund a variety of programs for released prisoners, helping them to find work, stay off alcohol and drugs, reintegrate with society and so forth. The programs are managed by a group of non-profits. The UK government has agreed to pay the investors a return but only if reconviction rates are 7.5% less than those of a control group. If reconviction rates fall below the target level, the investors will earn a good rate of return, 7.5-13%, depending on how far rates fall below the control, but they could also lose everything if rates do not fall. The Pop bond issued in 2010 and appears to be going well although no (potential) bond payments are scheduled until 2014.

A Pop bond puts little risk on governments, who pay nothing if the program does not work but who save money if the program does work. With less at risk government should be willing to experiment more and try new approaches to problems. By contracting out, the government also eliminates a public bureaucracy resistant to change. Most importantly, a Pop bond encourages creativity and innovation in social programs. Investors in a Pop bond have an incentive to monitor the groups implementing the programs and to ensure that they choose the very best, most cost-effective programs. The better the program works, the more the investors earn. If Pop bonds expand it may even pay investors to undertake their own experiments to see how best to maximize their returns.

For Pop bonds to work it is critical that outcomes be measured and marked to an appropriate, randomized, control group. If not carefully monitored, the private sector will also excel at innovative and creative gaming at the public expense (see the comments for some suggestions).

More Pop bonds are being planned in the UK and the idea is also catching on in the United States. The Department of Justice and the Department of Labor both have pilot programs in the works and Massachusetts has issued a request for proposals. By the way, Pop bonds are said to be a new idea but the U.S. bounty hunter and bail bond system which works very well is a clear precursor as is the system of privateering.

Pop bonds have the potential to produce public goods with private innovation; they are an idea worth watching.

Price discrimination for higher ed *classes*

Faced with deep funding cuts and strong student demand, Santa Monica College is pursuing a plan to offer a selection of higher-cost classes to students who need them, provoking protests from some who question the fairness of such a two-tiered education system.

Under the plan, approved by the governing board and believed to be the first of its kind in the nation, the two-year college would create a nonprofit foundation to offer such in-demand classes as English and math at a cost of about $200 per unit. Currently, fees are $36 per unit, set by the Legislature for California community college students. That fee will rise to $46 this summer.

The classes would be offered as soon as the upcoming summer and winter sessions; and, if successful, the program could expand to the entire academic year. The mechanics of the program are still being worked out, but generally the higher-cost classes would become available after state-funded classes fill up. The winter session may offer only the higher-cost classes, officials said.

That is some premium for reading and writing!  The naive might have thought that would have been guaranteed.  The story is here and for the pointer I thank Robert Tagorda.

Arbitrage markets in everything

Companies like EurimPharm work much as arbitrageurs do in the financial markets. Instead of trading stocks or bonds, the drug arbitrageurs buy prescription and over-the-counter pharmaceuticals from European countries where they cost less, such as Spain and Greece.

They repackage and resell them at a markup in more- expensive European markets, including Germany and the Netherlands.

The arbitrageurs’ profit comes from country-to-country price differences that can be hefty. A Europe-wide price survey in 2009 by a Spanish parallel trader showed price differentials that in a few cases topped 200 percent.

“There used to be a rule of thumb that said you can make money on a price difference of 20 to 25 percent,” he says. “Now you can do it with 10 percent.”

Here is more, there are several other economic points in the article, and for the pointer I thank Alex Bilimoria.

The bottom line

Bernanke has given serious thought to the Krugman-Rogoff argument. One obstacle is practical. Fed policy works, in part, by getting the market to do the Fed’s work (if the Fed is buying bonds, traders who want to be on the same side of the markets as the central bank will buy bonds too). But any policy adopted by less than a 7-to-3 majority by the Fed’s Open Market Committee would not be viewed by markets as a credible policy, likely to endure, and Bernanke is not guaranteed to get this margin today. “No central banker would do it,” Mankiw says of raising the inflation target; the political reaction would be too severe. (When Mankiw, a Harvard economist, wrote a column raising the possibility of a higher inflation target, Drew Faust, the university’s president, received letters urging her to fire him.)

That is from Roger Lowenstein’s profile of Ben Bernanke, interesting and excellent throughout.

Model this (the Goldman guy)

Everyone is talking about the Goldman guy who quit, he wrote this (reactions here):

I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival. It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons.

This strikes me as economically naive.  Is it at least possible that the culture at Goldman has changed (I am not myself committing to any assessment here of GS) because profit maximization dictates such a shift?  What are a few possible models?

1. Income from trading has risen in importance, relative to income from clients, and if you can do well trading you will make money, whether or not you are a jerk.

2. Greater competitiveness lowers levels of service quality for efficiency wage-like reasons.  GS can no longer play the role of high mark-up, precommit to high-quality, monopolist.

3. We have moved to the “used car” equilibrium.  You know they are screwing you over, or trying to, but leaving for the guy next door simply replicates the same basic incentives so you stay put and fight back best you can.

4. The current interest rate spread means they don’t have to try too hard.

Anything else?  Those are possible mechanisms, not factual claims about the world.  In any case, I am suspicious of his impulse to blame it all on a sudden shift in the moral propensities of the people he was working with.

Warn people about two things

One problem with disclosure regulation is that people grow accustomed to the warnings and caveats and their eyes glaze over.  They stop paying attention.

So let’s say you are the Über-regulator.  You get to warn people about two things.  Once.

Of course they may not listen to you at all, but let’s assume you have enough credibility from your political post to be given half an hour on network TV and subsequent extensive coverage and commentary on blogs and Twitter.  That said, especially useful warnings, such as “You’re not as smart as you think” are perhaps especially likely to be ignored.  “Honor They Superior!” is perhaps also a non-starter, though you may try it if you wish.

Which two things do you pick for your warning?

“Driving is dangerous”

“Fight nuclear proliferation.”

“Don’t let your kid near a bucket.”

“Politics isn’t about policy.”

“Beware the Ides of March!”

“Some people out there suck!”

The correct answer is not obvious.  And what does this imply about regulation more generally?

I thank Bryan Caplan for a useful conversation on this topic.

Black market Tide free banking

From Cory Doctorow:

The Daily‘s M.L. Nestel cites law enforcement reports from across America describing a crime-wave of Tide detergent thefts, including claims that bottles of easily resellable, name-brand washing soap can be bartered for meth and heroin in Gresham, OR.

He cites this article:

Tide has become a form of currency on the streets. The retail price is steadily high — roughly $10 to $20 a bottle — and it’s a staple in households across socioeconomic classes.

Tide can go for $5 to $10 a bottle on the black market, authorities say. Enterprising laundry soap peddlers even resell bottles to stores.

“There’s no serial numbers and it’s impossible to track,” said Detective Larry Patterson of the Somerset, Ky., Police Department, where authorities have seen a huge spike in Tide theft. “It’s the item to steal.”

Why Tide and not, say, Wisk or All? Police say it’s simply because the Procter & Gamble detergent is the most popular and, with its Day-Glo orange logo, most recognizable of brands.

For the pointer I thank Ken Feinstein and Pamela J. Stubbart.

The taco truck mystery

This one comes from Felix Salmon.  In my view Felix puts forward the two correct hypotheses:

…food trucks are much more likely to be run by first-generation immigrants, for a variety of reasons. Quite aside from any hard-working immigrant stereotype, that’s good news just because the food they sell is going to be that much more authentic. (Not that food trucks need to be particularly authentic to be delicious: just ask the Korean taco people.)

And:

My favorite theory is that it basically comes down to the amount of time that elapses between the taco being made and the taco being eaten. Fillings can stay warm and delicious for a while, but the tortilla really is at its very best within seconds of coming off the stove, rather than getting soggy at the bottom of a tortilla warmer brought to you by your server. I suspect that if you could walk into the kitchen of a decent taco restaurant and get the chef to make you one then and there, it too would taste better than the same taco ordered off the menu.

I would add one factor.  Taco trucks are mobile, and they often serve Latino construction workers, who are themselves mobile in terms of choosing various workplaces over the course of a year, and thus they require mobile sources of food.  This encourages the taco truck, but not the stationary restaurant, to invest in better and more authentic food.

Middle East facts of the day

…according to the United States Census Bureau, Iran now has a similar birth rate to New England — which is the least fertile region in the U.S.

The speed of the change is breathtaking. A woman in Oman today has 5.6 fewer babies than a woman in Oman 30 years ago. Morocco, Syria and Saudi Arabia have seen fertility-rate declines of nearly 60 percent, and in Iran it’s more than 70 percent. These are among the fastest declines in recorded history.

That is from David Brooks.  These societies will be old before they will be wealthy.  Which means perhaps they will never be wealthy.

What is up with the gdp-less recovery?

That is what people are calling it, although I would not use that term.  Jon Hilsenrath has the best overview I have seen, here is one excerpt:

Robert Gordon, a Northwestern University professor who tracks productivity closely, says he sees “clear signs everywhere” that a productivity slowdown is happening. Last year, productivity—measured as the output of workers for every hour they work—grew just 0.4% and has grown at a 0.9% annual rate over the past seven quarters. Productivity did spurt higher in 2009—during this stretch of fear-induced firing—but over a longer stretch it shows additional signs of slowing. Worker productivity has grown at an annual rate of 1.7% since 2004, down from 2.6% growth in the decade before that.

Mr. Gordon agrees with Ms. Romer’s overfiring story. But he says the longer-run threat to productivity shouldn’t be overlooked. “The productivity numbers have been dismal,” he says. That is an explanation this fragile economy can do without and that policy makers shouldn’t ignore.

I don’t myself see an additional short-run fall in productivity (I don’t much trust the short-run statistics in any case), though of course I have been a productivity pessimist more generally.

First and foremost, I see the very latest data as evidence for the Garett Jones hypothesis.  Employers are going back to the idea of investing in workers who build up the future of the company, but who may not produce much output now.

Second, higher exports and moderating health care costs (the latter over the last two years) mean that “real gdp” is higher than traditionally measured gdp; see for instance Matt’s remarks.  This supports Michael Mandel’s view about the importance of offshoring and, presumably, reshoring, to the extent that is going on.  In general we undermeasure the gdp gains of successful export nations, because their outputs tend to have lower percentages of rent-seeking expenditures and more real stuff of value.

Karl Smith has interesting posts on related questions.  Scott Sumner wrote an early and important post on the same topic.  His bottom line was this:

So what are the likely explanations?

1.  Trend growth really is slowing somewhat.

2.  People are leaving the labor force.

3.  RGDP data is measuring “payroll GDP,” not household GDP

Counting benefits does not much change the income stagnation story

Lane Kenworthy reports:

A third worry is that the income measure used to calculate median family income is too thin. If a growing portion of GDP has gone to employer benefits, that would help middle-class households, but it wouldn’t show up in these income data.

To address these second and third concerns, we can turn to a more encompassing measure of household income. The data are from the Congressional Budget Office (CBO). The measure includes all sources of cash income. It adds in-kind income (employer-paid health insurance premiums, food stamps, Medicare and Medicaid benefits), employee contributions to 401(k) retirement plans, and employer-paid payroll taxes. Tax payments are subtracted.

We can use average household income in these data as a substitute for GDP per capita. The CBO data set doesn’t tell us the median income, but it provides something quite similar: the average income of households in the middle quintile of the distribution (from the 40th percentile to the 60th). The following chart adds these two series. The story is virtually identical.

He considers some other adjustments too, and this is the final story:

Addendum: Matt Yglesias comments.

What is the real source of the medical adverse selection problem?

Ray Fisman reports on the job market paper of Nathaniel Hendren, an MIT student on the job market this year.  Here is an excerpt from Fisman’s piece:

…sufferers of heart disease and cancer have greater self-knowledge than healthy people in terms of what their likely medical care costs will be. The market for insurance unravels, in Hendren’s model, when patients have a clear view of their future health care costs and people who anticipate lower-cost futures self-select out of insurance coverage.

It’s not about knowing more about your state of health, it is about knowing more about how costly your treatment will be.