Month: January 2014

Inequality and the Masters of Money

This post isn’t about inequality and money it’s about inequality and the masters of monetary policy. Consider Janet Yellen, her recent confirmation to chair the Fed has made her the most powerful woman in the world, the most powerful woman in world history, the world’s second most powerful person, or the world’s most Yellenpowerful person depending on who you believe. In anycase, Yellen is powerful. Moreover, Yellen is married to Nobel prize winner George Akerlof. The fact that two such outstanding individuals should be married to one another is an illustration of assortative mating. Yellen-Akerlof are the 1% of the 1% and all that political and cultural achievement concentrated in one family is an example of the growth of inequality. Tellingly, one of the drivers of this inequality was greater equality of opportunity for women.

Now consider, President Obama’s nomination for Fed vice-chairman, Stanley Fischer. Fischer was born in Zambia, holds dual Israeli-American citizenship and was most recently the governor of the Bank of Israel. In all of US history there is almost no precedent for a former major official of a foreign country to become a major official of the United States. Given all the economists in the United States one might have thought that a suitable candidate could be found without this peculiar history and yet it’s not hard to understand why President Obama has nominated Fischer–to wit, I wouldn’t be surprised if everyone President Obama asked for advice on this question to told him that Fischer would be one of the best people in the entire world for the job.

Bernanke-Fisher

Indeed, many of the people Obama spoke to, including Ben Bernanke, would have been Fischer’s students, themselves a large subset of the tiny elite of the world’s top monetary economists. Perhaps the world of monetary economics is an inbred clique, a supplier-controlled cartel. Maybe so, but I see this as part of a larger story. Stanley Fischer, rather than thousands of other nearly equally-qualified people, is being nominated to the U.S. Federal Reserve for the same reasons that large firms, compete madly for a handful of CEO’s (in the process bidding up their wages to stratospheric levels).

Consider that even in the rarefied world of monetary policy Fischer’s appointment isn’t unique. In 2012, the British appointed Mark Carney, a Canadian, to be the Governor of the Bank of England, the first non-Briton to ever hold the role. When even Great Britain and the United States find that their home-grown talent isn’t good enough that tells you that the demand for talent is immense. My favorite example of this from the business world is Sergio Marchionne. Marchionne is the CEO of Italy’s Fiat and the Chairman and CEO of Chrysler, among several other positions. He commutes between Italy and the United States, lives in Switzerland, and has dual Italian and Canadian (!) citizenship. Appointments and potential appointments like those of Carney and Fischer illustrate that the demand for talent and the winner-take-all phenomena of a globalized world are not limited to the business world.

Small differences in quality at the top have a greater impact the larger the firm, the market, or the economy. How many truly great decisions did Bill Gates make at Microsoft (compared to another plausible CEO)? I would guess that fewer than 10 decisions made billions of dollars of difference. And if Yellen-Fischer make just a few better calls than their next best counterparts, well that could easily be worth hundreds of billions.

It’s also notable that the Federal Reserve is trying to create the highest-quality team. O-ring production tells us that you maximize the value of production by matching high-quality workers with other high quality workers. In the private sector, O-ring production magnifies inequalities of talent into even larger inequalities of income. In the public-sector, O-ring production magnifies inequality of talent into even larger inequalities of power.

The bottom line is this, a common set of factors is driving inequality: equality of opportunity,  assortative mating, O-ring production, increases in the demand for talent driven by the leveraging of talent through technology. The forces are similar and so are the results, the money elite, the monetary elite, the power elite.

Measure for Measure (affective computing as a means of social control)

Cognitive psychologist Mary Czerwinski and her boyfriend were having a vigorous argument as they drove to Vancouver, B.C., from Seattle, where she works at Microsoft Research. She can’t remember the subject, but she does recall that suddenly, his phone went off, and he read out the text message: “Your friend Mary isn’t feeling well. You might want to give her a call.”

At the time, Czerwinski was wearing on her wrist a wireless device intended to monitor her emotional ups and downs. Similar to the technology used in lie detector tests, it interprets signals such as heart rate and electrical changes in the skin. The argument may have been trivial, but Czerwinski’s internal response was not. That prompted the device to send a distress message to her cellphone, which broadcast it to a network of her friends. Including the one with whom she was arguing, right beside her.

There is more here.

How well do minimum wage increases target poverty?

David Henderson writes:

Economists Joseph J. Sabia and Richard V. Burkhauser examined the effects of state minimum wage increases between 2003 and 2007 and reported that they found no evidence the increases lowered state poverty rates.

Further, they calculated the effects of a proposed increase in the federal minimum wage to $9.50 on workers then earning $5.70 (or 15 cents less than the minimum in March 2008) to $9.49. They found that if the federal minimum wage were increased to $9.50 per hour:

. Only 11.3 percent of workers who would gain from the increase live in households officially defined as poor.
. A whopping 63.2 percent of workers who would gain were second or even third earners living in households with incomes equal to twice the poverty line or more.
. Some 42.3 percent of workers who would gain were second or even third earners who live in households that have incomes equal to three times the poverty line or more.

There is more from David here.

Is there a new decentralized system for funding scientific research?

EMBO reports:

The new approach is possible due to recent advances in mathematics and  computer technologies. The system involves giving all scientists an annual, unconditional fixed amount of funding to conduct their research. All funded scientists are, however, obliged to donate a fixed percentage of all of the funding that they previously received to other researchers. As a result, the funding circulates through the community, converging on researchers that are expected to make the best use of it. “Our alternative funding system is inspired by the mathematical models used to search the internet for relevant information,” said Bollen. “The decentralized funding model uses the wisdom of the entire scientific community to determine a fair distribution of funding.”

The authors believe that this system can lead to sophisticated behavior at a global level. It would certainly liberate researchers from the time-consuming process of submitting and reviewing project proposals, but could also reduce the uncertainty associated with funding cycles, give researchers much greater flexibility, and allow the community to fund risky but high-reward projects that existing funding systems may overlook.

“You could think of it as a Google-inspired crowd-funding system that encourages all researchers to make autonomous, individual funding decisions towards people, not projects or proposals,” said Bollen. “All you need is a centralized web site where researchers could log-in, enter the names of the scientists they chose to donate to, and specify how much they each should receive.”

The authors emphasize that the system would require oversight to prevent misuse, such as conflicts of interests and collusion.

The (short) paper itself is here, by Johan Bollen, David Crandall, Damion Junk, Ying Ding, and Katy Börner.

For the pointer I thank Charles Klingman.

Do activists have an image problem?

From BPS Research Digest:

When you picture a feminist or an environmental campaigner, what kind of a person do you think of? If you’re like the US and Canadian participants in this new paper, then you’ll have in mind an eccentric, militant, unhygienic person. Nadia Bashir and her colleagues say this commonly held stereotype of an activist is partly responsible for the sluggishness of social change. Large sections of the public agree with activists’ messages, but are put off by not wanting to affiliate themselves with the kind of person they think makes an activist.

…The findings have obvious real-life implications for activists. “…. seemingly zealous dedication to a social cause may backfire and elicit unfavourable reactions from others,” the researchers said. “… [T]he very individuals who are most actively engaged in promoting social change may inadvertently alienate members of the public and reduce pro-change motivation.”

Writers take note.  There is more, including a link to the original research, here.

Scottish independence: the bottom line

Christopher Pissarides, professor of economics at the London School of Economics, said being part of the Union gives a small economy like Scotland assurance that help will be forthcoming if something goes wrong.

“The last thing any Scot should wish is to give up the support potentially available from the UK (England?) for support from the European Union under Germany’s rules,” he said.

Here are related opinions:

Philip Rush, chief economist at Nomura investment bank, said: “Higher taxes on income would push many wealthy individuals and some companies they work for south of the Border, harming Scotland’s economy.”

Keith Wade, chief economist and strategist at Shroders, said “massive wrangling” between Holyrood and Westminster over tax and spending would be required for a currency union to work “to avoid a rerun of the euro crisis”.

“When combined with the considerable uncertainty over whether Scotland can remain in the EU, Scottish businesses would start to head south,” he said.

There is more here.

Will we be bailing out the insurance companies?

Megan McArdle has the latest:

This is the plan that Republicans hope to cleverly foil by framing the risk-adjustment provisions [of ACA] as an insurer bailout and repealing them. As designed, the risk-adjustment mechanism was supposed to be revenue-neutral, and that is how the Congressional Budget Office scored it in their last estimate. But unless the demographics of the exchanges improve pretty quickly, the three temporary risk-adjustment programs are probably set to transfer a large hunk of cash to the insurance companies. That’s what the administration, and the insurers, want to happen; it’s how they are going to keep the insurers on board for 2015. Phil Klein at the Washington Examiner points out that Humana Inc.’s latest filing with the Securities and Exchange Commission warns of a “more adverse than previously expected” mix of customers enrolling through the exchange — but it doesn’t change its earnings forecast for 2014. So either it thinks its losses will be trivial relative to overall earnings or Humana thinks the chances of a bailout from the administration are basically 100 percent.

There is more here, including background context if you are not up to speed on this issue.

Assorted links

1. The NYC Union Square [correction: 5th Ave.] Barnes & Noble is closing, it was the city’s best.

2. There is no great (governmental) stagnation, context here for squares like me.  Frankly, if I were a stoner I would want one of those new signs even more.

3. Facebook as a source of envy and sadness.

4. A short essay on technical privilege.

5. What is the best movie set in each state?

6. William Beveridge’s “Mock Trial of the Economists.”

7. Chris House now has a blog, covering macro and, he claims, chess.  He needs to study Adam Smith, however.

8. Is the tide rising for America’s libertarians?

Which are the most and least emotional countries in the world?

I would take this study to be “fun” rather than “scientific” (and yet why do I believe most of the results?), but here goes.  The least emotional country is measured as Singapore and by far the most emotional country is measured as the Philippines.  The Americas are quite emotional and Canada turns up in the world’s top fifteen.  Oman and Bahrain measure as very emotional and place in the top fifteen.  Madagascar, Nepal, and the post-Soviet countries all register as quite stoic and non-emotional.  Africans are mostly stoic, with Nigeria as an outlier, and in the New World Haiti is a stoic outlier.

It is from a Gallup Poll and it works like this:

The more times that people answer “yes” to questions such as “Did you smile or laugh a lot yesterday?”, the more emotional they’re deemed to be.

Here is the tally in chart form.

The pointer is from @RaySawhill.

The “devalue and dismiss” fallacy, methodological pluralism, and DSGE models

One of the most common fallacies in the economics blogosphere — and elsewhere — is what I call “devalue and dismiss.”  That is, a writer will come up with some critique of another argument, let us call that argument X, and then dismiss that argument altogether.  Afterwards, the thought processes of the dismisser run unencumbered by any consideration of X, which after all is what dismissal means.  Sometimes “X” will be a person or a source rather than an argument, of course.

The “devalue” part of this chain may well be justified.  But it should lead to “devalue and downgrade,” rather than “devalue and dismiss.”

“Devalue and dismiss” is much easier of course, because there then will be fewer constraints on what one can believe and with what level of certainty.  “Devalue and downgrade” keeps a lot of balls in the air and that can be tiresome and also unsatisfying, especially for those of us trained to look for neat, intuitive explanations.

Enter DSGE models.  There are plenty of good arguments against them.  Still, they provide a useful discipline and they pinpoint rather ruthlessly what it is they we still do not understand.  We can and should devalue them in a variety of ways, and for a variety of reasons, but still we should not dismiss them.  Better yet than “devalue and downgrade” might be “devalue, downgrade, and…yet…de-dogmatize,” because these models usually point out the limits of our understanding.  Those models defeat us, and thus it is odd when we attempt to portray the situation as us defeating them.

Note that very smart people are often good at “devalue and dismiss” because they can come up with a lot of good reasons to devalue the arguments or frameworks of others.  But still they should not leap so quickly to the “dismiss.”

I would mention that Alex, while he did criticize DSGE models yesterday, also appreciates their uses.

Addendum: Here is Chris House, defending DSGE models.

Maryland as guinea pig for health care price controls

Sarah Kliff reports:

The Obama administration is set to announce Friday an ambitious health-care experiment that will make Maryland a test case for whether aggressive government regulation of medical prices can dramatically cut health spending.

Under the experiment, Maryland will cap hospital spending and set prices — and, if all goes as planned, cut $330 million in federal spending. The new plan, which has been under negotiation for more than a year, could leave Maryland looking more like Germany and Switzerland, which aggressively regulate prices, than its neighboring states. And it could serve as a model – or cautionary tale – for other states looking to follow in its footsteps.

“You can put Maryland in the company of Massachusetts and perhaps Vermont as the three states furthest out in trying to invent a new future for cost accountability in health care spending,” added Harvard University’s John McDonough. “Success creates a model that other states will want to look at emulating. And failure means it’s an option more likely to be crossed off the list.”

For Maryland, the new rules build on past success. Since the mid-1970s, it has been the only state to set the prices that hospitals charge patients. Typically, hospitals negotiate with each health insurer individually, leading to disparate rates. In Maryland, all customers — whether a private insurance plan, public program or uninsured patient — pay the same price. Researchers estimate the system has saved $45 billion for consumers over four decades and prices have grown more slowly in the state.

I am glad there is an experiment, but I’m also glad I live in Virginia.  And there is of course a problem with drawing inferences from such experiments.  A small area can institute price controls without much discouraging health care innovation, but perhaps the larger area cannot.