Month: December 2015

Thursday assorted links

The verdict on the Fed’s interest rate hike

Good job, people.  Just to recap what has been my perspective, here is from my September post, The Paradox of No Market Response:

…the good news scenario is if the Fed’s decision doesn’t matter much for the markets.  Woe unto you if your economy is so fragile that a quarter point or so in the short rate, mixed in with some cheap talk, were to matter so much.

So if at first prices were to stay steady, following any Fed decision, then equities should jump in price.  That is the “no news is good news” theory, so to speak.  It’s a better state of the world if it is common knowledge that the Fed’s actions don’t matter so much in a particular setting.

Equity markets did in fact rise across most of the world, after a slight period of no reaction.  And I wrote:

If I were at the Fed, I would consider a “dare” quarter point increase just to show the world that zero short rates are not considered necessary for prosperity and stability.  Arguably that could lower the risk premium and boost confidence by signaling some private information from the Fed.

Someone at Bloomberg — I can no longer remember who — wrote at the time that this was the worst possible argument they ever had heard in favor of what the Fed was thinking of doing and subsequently did.  Was itOther commentators today have called this a “risk rally,” namely that fear of a prior risk seems to have diminished.

And to recap some broader points:

1. In most periods of crisis, central bankers are too reluctant to use expansionary monetary policy soon enough or strong enough.

2. However true that may be, it doesn’t describe our current situation.

3. Beware of models which rely too heavily on the Phillips curve, and two-factor “inflation rate vs. unemployment” considerations, especially in “long run” situations.  I don’t see that any of the commentators working in this tradition had good predictions this time around.

4. The successful “lift off” still probably won’t matter very much, but better a success than not.  Don’t think that America’s major economic problems somehow have gone away.

The Omnibus spending bill on health care policy

Yuval Levin has a very good piece on this, here is one bit:

They’re [the Democrats] no longer offering themselves up as a sacrifice to protect every last bit of the law[Obamacare], as they have done at enormous political cost for the last five years. Now, they’re spending their capital to protect key constituencies (and therefore themselves), even at the cost of allowing the structure of Obamacare to become even more incoherent and unsustainable.

There is a less polemic but still true version of that sentence, if you are so inclined.  Here is another bit:

…They’re thinking past Obamacare, like the Republicans are. Of course, Democrats have a different vision of what comes after Obamacare. Hillary Clinton has started articulating that vision here and there: It’s a move in the direction of the original Hillarycare from 1993, which would add on to elements of Obamacare stricter price controls and more federal micromanagement of the provision of care. (Scott Gottlieb considered what this might look like in National Affairs this summer.)

And this:

The omnibus bill contains a provision, identical to one in last year’s bill, which requires that risk-corridor payments in the Obamacare exchanges be budget neutral.

That will make Obamacare much more difficult to manage.

Furthermore, in the bill Congress restricts federal funding for CRISPR.

Here is a more general piece on the Omnibus.  Overall I would say a lot of gridlock is gone, the Republicans have returned to being bigger spenders, and no one in town — once again — worries about the deficit.  The sequester was a very temporary victory.

Genetic testing may be coming to your office

A handful of firms are offering employees free or subsidized tests for genetic markers associated with metabolism, weight gain and overeating, while companies such as Visa Inc., Slack Technologies Inc., Instacart Inc. recently began offering workers subsidized tests for genetic mutations linked to breast and ovarian cancer.

The programs provide employees with potentially life-saving information and offer counseling and coaching to prevent health problems down the road, benefits managers say.

Screening for genetic markers linked to obesity is the latest front in companies’ war on workers’ weight woes.

Obesity-related conditions such as Type 2 diabetes comprise a large share of overall health-care costs, estimated to run more than $12,000 a worker this year, according to a recent survey from Towers Watson and the National Business Group on Health.

Employers are hoping to help bend the cost curve—and make their workers healthier—by more aggressively targeting obesity and coaxing workers to lose weight.

Fortunately, none of that information ever will be used against the interests of workers, nor will any worker face pressure, explicit or implicit, to submit to such a test…

The story is here, here is another path in.

Wednesday assorted links

December 16, 2015

All the major reviews for Star Wars seem to be positive, but no one is calling it an “intense personal vision.”  So it probably isn’t very good.

My father-in-law was watching the debate last night, and so I caught some of it after giving my final exam for the evening.  I ended up being persuaded by Justin Wolfers’s “signaling theory,” not even mainly for Trump but for most of the candidates.  They feel an extreme need to signal to voters that something is deeply, deeply wrong and that they won’t just leap on the establishment bandwagon if elected.  In this sense the Republican candidates have more in common with the Progressive Left than might be evident on first glance.  That they feel induced to go so far out on various limbs is, most of all, a sign that GOP primary voters still do not believe their sincerity.  Fiorina strikes me as the one who is running “straight up,” and giving some semblance of her actual views, and perhaps that is why she has failed to achieve traction after a boost at the very beginning.  She is signaling she will be a female, conservative member of the Republican political establishment, rather than that she will side with the frustration of the voters.  The former is not such a marketable political commodity these days.

The law of one price almost holds:

…most fancy bills trade only slightly above face value. And many of the most sought-after by collectors really have only sentimental or personal value, like their child’s birthday or an anniversary (04072004, say, for April 7, 2004); ZIP Codes (00090210, where the final five digits in this instance represent the postal designation for Beverly Hills, Calif.); tombstones (19182014, here representing the birth and death years of a long life as they might appear on a gravestone; and others known by such names as Fibonaccis after the mathematical sequence and flippers whose digits look the same right-side up or upside down.

One well-known fan in this universe of collectors, Jim Futrell, for a long time focused on bills featuring the number 27 in some fashion—for example, 27000027. “The number 27 is pretty special in my family,” he says. “Not only is it my birthday, but my mom’s, grandfather’s and at least 10 others that I know of.”

The solstice approaches, and I am waking up slightly later than usual.

By the way, Lemin Wu remains highly undervalued

Lemin is recently out of UC Berkeley, and I have heard that he is on the American market right now.

Here is Lemin’s paper on the Malthusian trap (pdf), one of the most interesting papers of the last few years.  The key point is that some kinds of production drive down living standards and other kinds of production do not, therefore enriching and disaggregating Malthus’s theory, some might say overturning it.  Here is one excerpt:

It follows that the Romans were rich not because technological progress temporarily exceeded population growth—as Malthusianists claim—but because Rome had a business-friendly legal system and an active market economy. Well-functioning courts and market-places boost industry more than they boost agriculture. Thus biasing production structure to luxury, they raised the average living standards of the whole society. Conversely, the Agricultural Revolution left an unfortunate legacy: the hunter-and-gatherer-turned peasants failed to achieve the level of leisure and nutrition their ancestors once enjoyed (Diamond, 1987). Growth was immiserizing because agriculture biased production structure to subsistence. The same tragedy recurred when potato dominated the Irish diet in the late 18th century.

Lemin then introduces cross-societal migration into the model and shows that “…A tiny bit of bias in migration (say, if people are extremely reluctant to move and slow to learn) can still suppress a strong tendency of growth.”  The Industrial Revolutipn did not come to Song China because there were insufficient mechanisms for exclusion.

Here is Lemin Wu’s home page.  Here are some of his other papers and ideas.

Assortative mating is returning to Gilded Age levels

There is a new and interesting paper by Robert D. Mare on this topic, here is the abstract:

Patterns of intermarriage between persons who have varying levels of educational attainment are indicators of socioeconomic closure and affect the family backgrounds of children. This article documents trends in educational assortative mating throughout the twentieth century in the United States, using socioeconomic data on adults observed in several large cross section surveys collected between 1972 and 2010 and on their parents who married a generation earlier. Spousal resemblance on educational attainment was very high in the early twentieth century, declined to an all-time low for young couples in the early 1950s, and has increased steadily since then. These trends broadly parallel the compression and expansion of socioeconomic inequality in the United States over the twentieth century. Additionally, educationally similar parents are more likely to have offspring who themselves marry within their own educational level. If homogamy in the parent generation leads to homogamy in the offspring generation, this may reinforce the secular trend toward increased homogamy.

Having read through the paper, my immediate wonder was to what extent assortative mating is an effect rather than a cause of inequality?

The pointer is from Claire Lehmann.

Very good New York Times sentences Arlington fact of the day

Consider Arlington, Va., our best guess for where you might be reading this article.

That is from an excellent NYT piece on health care and prices.  The very interesting original research is here (pdf), main point is that where (properly adjusted) Medicare spending is high is surprisingly uncorrelated with where private health care spending is high.  Furthermore policy may have been encouraging too many hospital mergers.

Here is Kevin Drum summarizing the study’s results on the importance of competition.

The new Cato eBook on understanding the growth slowdown

Brink Lindsey writes to me:

The book is an outgrowth of last year’s Cato conference on the future of U.S. economic growth. Chapters explore the U.S. economy’s long-term growth outlook, debate the future of innovation, and examine whether economic dynamism is in decline.

FYI, here are links to sites currently offering the ebook for sale and download.


Cato Institute:


Google Play:

Alex T. is in this book…

Tuesday assorted links

The FDA and Magical Thinking

Vox had a piece yesterday on the Cruz-Lee proposal to make it easier for U.S. patients to access drugs and devices already approved in other developed countries. The Vox piece had some howlers. Most notably this:

“There’s no evidence the FDA blocks innovation or makes innovation harder or makes it more costly,” said Kesselheim.

Frankly, that would be laughable were it not coming from a professor of medicine at Harvard Medical School. It costs well over a billion dollars to get the average new drug approved and much of that cost comes from FDA required clinical trials. Longer and larger clinical trials mean that the drugs that are eventually approved are safer. But longer trials also mean that good drugs are delayed. And the more expensive it is to produce new drugs the fewer new drugs will be produced. In short, longer and larger trials mean drug delay and drug loss.

We live in a world of tradeoffs. Let’s debate the tradeoffs. But let’s not engage in magical thinking where there are no tradeoffs and “no evidence” that the FDA makes drug development more costly.

A more subtle error was committed by the author who writes:

But it’s not clear that this legislation can solve the biggest problem here — the lack of promising treatments in the pipeline. In other words, a faster approval process can’t fix a dearth of innovation from labs themselves.

Many factors go into drug development that are outside the FDA’s purview. Nevertheless, faster drug approval can and does increase innovation. Approving drugs more quickly is equivalent to a decrease in the costs of research and development. Time is money. Reducing the cost of development increases the incentive to develop new drugs.

The Prescription Drug User Fee Act, for example, reduced drug approval times by about 10 months. Philipson et al. calculate that:

…the more rapid access of drugs on the market enabled by PDUFA saved the equivalent of 140,000 to 310,000 life years.

(PDUFA does not appear to have materially affected safety but Philipson et al. calculate that even under a worst case scenario the benefits of PDUFDA far exceeded the costs).

Moreover, Vernon et al. find that the reduction in approval time from PDUFA increased new drug development:

Controlling for other factors such as pharmaceutical profitability and cash flows, we estimate that a 10% decrease (increase) in FDA approval times leads to an increase (decrease) in R&D spending from between 1.4% and 2.0%. Combining this estimate with recent research on the link between PDUFA and FDA approval times…we calculate PDUFA may have incentivized an additional $10.8 billion to $15.4 billion in pharmaceutical R&D. Recent economic research has shown that the social rate of return on pharmaceutical R&D is very high; therefore, the social benefits of PDUFA (over and above the benefits of more rapid consumer access) are likely to be substantial.

Finally, return to the issue of reciprocity. Many of the critics of reciprocity respond with simple appeals to nationalism. We are the best! Rah, rah, rah! But if the critics were German or French they would argue that the EMA is superior to the FDA. Indeed, when I raise the issue of reciprocity with Europeans they respond in exactly the same way as Americans. How could anyone suggest that the EMA automatically approve drugs approved by the FDA! The horror.

The argument for reciprocity, however, isn’t that the FDA is uniquely bad or always worse than the EMA or vice-versa. The argument is that it’s wasteful to duplicate the lengthy approval process and that both agencies sometimes make mistakes. As a result, it’s simple common sense to let Americans avail themselves of drugs and devices approved in other developed countries.

Is America’s middle class diminishing?

I’ve been reading through the new Pew report (pdf) on this question.  I found these to be the two most interesting passages:

As the middle-income population hovers near minority status, the population of upper-income adults is growing more rapidly than the population of lower-income adults. From 1971 to 2015, the number of adults in upper-income households increased from 18.4 million to 51 million, a gain of 177%. During the same period, the number of adults in lower -income households increased from 33.2 million to 70.3 million, a gain of 112%.

I would say America is developing its top twenty percent rather nicely.  The future refrain will have to be: “We are the eighty percent!”, or something like that.  Then there is this:

The biggest winners since 1971 are people 65 and older. This age group was the only one that hada smaller share in the lower-income tier in 2015 than in 1971. Not coincidentally, the poverty rate among people 65 and older fell from 24.6% in 1970 to 10% in 2014. Evidence shows that rising Social Security benefits have played a key role in improving the economic status of older adults. The youngest adults, ages 18 to 29, are among the notable losers with a significant rise in their share in the lower-income tiers.

That part augurs not so well for our future, given a certain degree of persistence of earnings.

I was part of an NPR On Point discussion of the study.

In which English counties was the Industrial Revolution most strongly rooted?

There is a new and very interesting paper by Morgan Kelly, Joel Mokyr, and Cormac Ó Gráda on this topic, here is the abstract:

We analyze factors explaining the very different patterns of industrialization across the 42 counties of England between 1760 and 1830. Against the widespread view that high wages and cheap coal drove industrialization, we find that industrialization was restricted to low wage areas, while energy availability (coal or water) had little impact Instead we find that industrialization can largely be explained by two factors related to the human capability of the labour force. Instead of being composed of landless labourers, successful industrializers had large numbers of small farms, which are associated with better nutrition and height. Secondly, industrializing counties had a high density of population relative to agricultural land, indicating extensive rural industrial activity: counties that were already reliant on small scale industry, with the technical and entrepreneurial skills this generated, experienced the strongest industrial growth. Looking at 1830s France we find that the strongest predictor of industrialization again is quality of workers shown by height of the population, although market access and availability of water power were also important.

Garett Jones, telephone!  Here is a related paper on human capital and industrialization (pdf), in that study it is the elites who matter.  And here is a new Eric Chaney paper (pdf) on the decline of Islamic science and the role of political elites.

I also found this summary bit from the first paper interesting: “…the early Industrial Revolution was less about the sudden appearance of radically new technologies than about improving fairly familiar technologies to the stage where they became commercially viable…”