Month: December 2013

China fact of the day

…the pace of actual trade settlement in renminbi has failed to keep up [with its role in finance]. It still accounts for just 0.8 per cent of the global total, a lower share than the Thai baht or the Swedish krona.

That is from the FT, via Amni Rusli.  The recently reported fact that the renminbi is now the #2 trade financing currency seems to be simply measuring the carry trade, not the true ascendancy of the Chinese currency as a global reserve currency.

Are narrow networks a bad idea for health care?

“Narrow networks may seem like a bad idea,” David Dranove and Craig Garthwaite blogged last month. The two Northwestern University professors acknowledged that excluding some providers from health plans offered through the exchanges runs the risk of disrupting care patterns.

But the model is “not some cruel attempt to limit patient choice foisted upon us by the insurance industry,” the professors added. “Instead, these plans may provide our best opportunity for harnessing market forces to lower prices.”

The simple equation: Insurers say that limiting the size of the network allows them to steer patients to high-quality facilities and doctors; participating providers, meanwhile, may agree to price cuts in exchange for new volumes. (A previous edition of “Road to Reform” took a closer look at the narrow network model.)

And narrow networks aren’t necessarily a new idea, Darius Tahir points out at National Journal. In some ways, it’s the same concept behind payers’ attempts in the 1980s and 1990s to limit their network size, which met with criticism and helped create Any Willing Provider laws.

Could narrow networks be better perceived — and received — with better phrasing? Industry consultant Vince Kuraitis thinks so.

That is from Dan Diamond, via Ezra Klein and Evan Soltas.

The rise of West German wage inequality

This paper (pdf) by Card, Heining, and Kline appeared earlier this year and is published in the QJE and somehow it escaped my notice.  Here is the first part of the abstract:

We study the role of establishment-specific wage premiums in generating recent increases in West German wage inequality. Models with additive fixed effects for workers and establishments are fit in four sub-intervals spanning the period from 1985 to 2009. We show that these models provide a good approximation to the wage structure and can explain nearly all of the dramatic rise in West German wage inequality.
P.4 offers perhaps the most useful statement of the concrete results:

…two-thirds of the increase in the pay gap between higher and lower-educated workers is attributable to a widening in the average workplace pay premiums received by different education groups. Increasing workplace heterogeneity and rising assortativeness between high-wage workers and high-wage firms likewise explain over 60% of the growth in inequality across occupations and industries. Finally, we investigate two potential channels for the rise in workplace-specific wage premiums: establishment age and collective bargaining status. Classifying establishments by entry year, we find a trend toward increasing heterogeneity among establishments that entered the labor market after the mid-1990s, coupled with relatively small changes in the dispersion of the premiums paid by continuing establishments. The relative inequality among newer establishments is linked to their collective bargaining status: an increasing share of these establishments have opted out of the traditional sectoral contracting system and pay relatively low wages.

I would put it this way: there are “high human capital firms” and “low human capital firms” to a greater extent than before.  This change represents increasing German wage inequality fairly well, although it cannot be inferred that this increasing segregation causes the inequality increase.

Since newer firms reflect higher inequality and higher segregation, and I don’t foresee a major return of unionization, I take this as prima facie evidence that wage inequality in Germany (and many other places) is likely to continue to rise.  This is another example of “the great reset,” as the newer firms offer a greater glimpse into the German economic future.

By the way, it is papers like this which increase my skepticism about the signaling model of education.  The relevant signals being fed into these markets haven’t changed that much.  Wage patterns are changing a lot.

For the pointer I thank Christian Odendahl.

Singapore bleg for Yana

Daughter Yana (“Dotchka”), who is almost 24, will visit Singapore (!) for the first time in the second half of December, flying from her current abode in India.  What do you recommend she do and see there?  When it comes to the social and economic dimension, she is interested in market urbanism, economics of infrastructure, Jane Jacobs and Adam Smith, health care management, and civil society more generally, not to mention historical narratives on the regularization of goods and services delivery toward cheapness and reliability.  She has had a good meal or two as well.

Both she and I thank you in advance for any guidance you are able to offer.

Portugal fact of the day

In 2008, 1.9 million Portuguese workers in the private sector were covered by collective bargaining agreements. Last year, the number was down to 300,000.

The article is by Eduardo Porter and is interesting throughout.  Here is one additional bit:

The drop in unionization in Portugal “is going to blow the wage distribution apart,” David Card, a labor economist at the University of California, Berkeley, said.

Perhaps the most compelling evidence that Europe’s tentative new path will lead to deepening inequality comes from the country that adopted the strategy earliest and came out at the other end a paragon of success: Germany.

Average really is over, for Western Europe too.

Stephen Williamson on the intuition behind liquidity traps and inflation

He writes:

Next, conduct a thought experiment. What happens if there is an increase in the aggregate stock of liquid assets, say because the Treasury issues more debt? This will in general reduce liquidity premia on all assets, including money and short term debt. But we’re in a liquidity trap, and the rates of return on money and short-term government debt are both minus the rate of inflation. Since the liquidity payoffs on money and short-term government debt have gone down, in order to induce asset-holders to hold the money and the short-term government debt, the rates of return on money and short-term government debt must go up. That is, the inflation rate must go down. Going in the other direction, a reduction in the aggregate stock of liquid assets makes the inflation rate go up.

Do read the rest for the full picture.  I understand how this works if one postulates a strict equality between (risk-adjusted?) rates of return on currency, T-Bills, and other assets in the economy.  But given current T-Bill and inflation rates, that is going to mean negative real rates of return on a variety of other physical assets, which I take to be at variance with some rather overwhelming data to the contrary, including stock market returns, internal hurdle rates at corporations, investment trends, measured profits, asset prices, and so on.  I also fully endorse Scott Sumner’s point that short-term asset price and exchange rate reactions to QE pretty clearly show it is expansionary, although by how much is arguably not clear.

The most likely alternative, in my view, is that some kind of funny asset market segmentation is going on, and that risk premia and collateral demands for T-bills are high in funny ways, so that (risk-adjusted?) rates of return are not so strictly negative all over.  What that means concretely is that if the Treasury issues more debt and liquidity premia on debt fall, there is not an offsetting shift in the rate of price inflation to restore the previous set of relationships across asset returns; rather some of the incidence of the quantity change falls on T-Bill returns themselves.  I have yet to see that well-modeled and do not have a preferred approach of my own which will in some simple way preserve a zero profit condition.  (We also may need to talk about knife edge conditions and whether these rate of return equalities must be truly and exactly equal for the model to work, besides how well do we understand the substitutability of money and T-Bills anyway?)  Williamson may damn me for that non-foundational approach, but I see that as the least indefensible answer to this question given our current state of knowledge.

I like many of Williamson points in macro, but in general I prefer to put the empirical evidence in the driver’s seat more than he does.  He does write:

What’s the qualification [to my argument]?  There are various short-run effects of monetary policy that could come into play. However, I think it’s fair to argue that any of those short run effects have played themselves out in the financial crisis and its aftermath, and now we’re looking at the effects I’ve described.

That’s the right question, but it’s not nearly a close enough engagement with the evidence, which does pretty clearly show some short-run effects are still operating, even if those effects are diminishing with time.  The evidence also does not clearly indicate that the long-run effects (e.g., check out the term structure of interest rates) have to move in the direction Williamson is indicating.

It’s still a puzzle exactly what is going on, but we need to be very careful about how we use the overly seductive argument from elimination.  When in doubt, reread David Hume.

Addendum: I do get Scott’s and Yichuan Wang’s argument about the hot potato effect for monetary injections, but I am not sure this can handle the case of an increase in the supply of Treasury securities.  Go back to my earlier remark about how little we understand money-T-Bill substitutability.

And here is more from Williamson.

Brad Delong on stagnationist arguments

He has a very long and interesting post — over 9000 words —  so do read the whole thing.  Here is one excerpt:

…we have an argument that we were not as rich as we thought we were, an argument which indeed seems to me to be true, but that is not an argument that future growth will slow but rather that past growth was misperceived because of irrational exuberance. Only with “no new net job creation in the last decade…” is there even a datum that I see as about a “great stagnation”. But then Tyler branches off into failures of American governance, failures that seem to me to be no greater than the failures of American governance have always been. Yes, failing governance. Yes, overestimated wealth at the end of the 1990s and in the mid-2000s. Yes, a somewhat more sclerotic-appearing labor market as far as cyclical adjustment is concerned. Yes, a successful class war waged by the 1% on the rest of us–or, rather, if my household income in 2014 is what I think it will be, on the rest of you. Yes, a huge demand shortfall-driven business-cycle downturn.

Where in all of this is the promised “great stagnation”? I do not see it.

The latter part of his post, however, is more sympathetic to stagnationist arguments, so do read the whole thing.

I would offer a few points in response:

1. I am not the “pessimist” Brad thinks I am; I sometimes say I am a revenue pessimist, but a happiness optimist.  In this regard Brad’s case for an ongoing growth in well-being is not opposed to all stagnationist ideas.  But we are still short a few transformative technologies compared say to 1870-1960, and that matters for what kinds of changes we are going to get.

2. For all the usefulness of the AD-AS model for the short run, I don’t see AD and AS as so clearly separable over the medium term and certainly not over the long term.  In this regard I think today’s Keynesians are often taking that model too literally.  Had we done a better job of generating wealth, demand today and looking forward would be stronger.

3. I don’t see a belief in the efficacy of institutional changes as an  alternative to stagnationist views.  One can and probably should believe both a) big institutional changes could bring us significant growth benefits, and b) given some approximation of the current set of policies, we have been on a relatively unfruitful part of the technology yield curve.  On top of that c) policies don’t always change so quickly and so “b)” remains an important consideration, and d) the “golden years” for growth themselves had some pretty terrible policies and institutions, not the least of which was an extreme legacy of racial, gender, and other kinds of (grossly inefficient) discrimination.  Transformative technologies can overcome a lot of human stupidity, and it would be nice to have more of those.

The cheerleader effect

Whether you’re a casual user of social media sites like facebook and twitter or an avid online dater accessing eHarmony or, chances are you’ve created a personal online profile and been faced with a decision: What should you post for your profile picture? Many people post head shots or selfies, while others opt for pictures of their children, spouses, pets, or even favorite quotes or symbols. If your goal is to be perceived as attractive (and let’s be honest, whose isn’t?), then new research by Drew Walker and Edward Vul at the University of California, San Diego suggests your best bet is to opt for a group shot with friends.

A photo with friends conveys the fact that you are amiable and well-liked, but oddly enough that is not what makes you more appealing. Instead, the new research shows that individual faces appear more attractive when presented in a group than when presented alone — a perceptually driven phenomenon known as the cheerleader effect.

And why does this work?:

Walker and Vul posit that the cheerleader effect arises from the interplay of three different visuo-cognitive processes. First, whenever we view a set of objects like an array of dots or a group of faces, our visual system automatically computes general information about the entire set, including average size of group members, theiraverage location, and even the average emotional expression on faces. Thus although the group contains many individual items, we naturally perceive those items as a set, and form our impressions on the basis of the collective whole.

In addition, the impression that we have of the group as a whole influences our perception of any one individual item. We tend to view individual members as being more like the group than they actually are. Thus when we see a face in a crowd, we tend to perceive that face as similar to the average of all the faces in that crowd.

As it turns out, we find average faces very attractive. Composite faces, which are generated by averaging individual faces together, are rated as significantly more attractive than the individual faces used to create them. According to Walker and Vul, if presenting a face in a group causes us to perceive that face as more similar to the average, we are likely to find that face more attractive.

In one experiment, the researchers found that a group of four was large enough to create that effect.  Does this have implications for rock and roll?

That is from Cindi May, via Gareth Cook.

Mexico fact of the day

…high-tech exports such as machinery, the aerospace sector, computers and electronics accounted for more than 17 per cent of Mexico’s GDP last year, only trailing South Korea and Germany and even ahead of China, according to state trade and investment promotion agency, ProMexico.

Mexico’s central state of Guanajuato, for example, was once a prime New World silver supplier, accounting for nearly a third of global supply at its height.

Now it claims to house the country’s most dynamic car producing and auto parts cluster, netting investment of $7.7bn in the past seven years, and boosting output in the first eight months of this year by nearly 18 per cent, compared with last year, according to regional officials.

That is from Jude Webber at the FT.

Assorted links

When are minimum wage hikes most likely to boost unemployment?

When the wage profile for low-skilled workers is sloping upward with time, minimum wage increases are less likely to increase unemployment (for the moment put aside your estimate of the absolute likelihood that minimum wage increases will boost unemployment, just ask the question in relative terms).  After all, the employer might feel that with rising wages and rising productivity, those low-skilled workers might “grow into” the higher and legally mandated new wage rate.  So maybe keep them, noting that the search costs of pulling in a good replacement will be higher too.  Furthermore, even if some of those workers are laid off they have a higher chance of being reemployed elsewhere, due to the relatively strong labor market.

What about when the wage profile for low-skilled workers is sloping downward over time?  One would expect the opposite result to hold, namely that employers are less likely to hold on to workers when confronted with a mandated wage increase.

For much of the 1990s, the labor market for less skilled workers was in decent shape.  Since 1999 or so often it has been in bad or declining shape, excepting the “bubbly” years of 2004-2006.  Therefore a minimum wage hike today would be more likely to boost unemployment than the minimum wage hikes of the past.  And that unemployment is more likely to be long-term, corrosive unemployment than in previous decades.

I do understand that a minimum wage hike, in the eyes of some, is more “needed” today, perhaps for distributional reasons.  But can we admit it is more likely than average to lead to additional unemployment?

Does anyone disagree with this logic?

Addendum: Scott Winship offers some relevant comments.