Category: Economics

A Coasean solution for New Delhi?

If the late Ronald Coase could be called upon to advise the Delhi government, he would persuade chief minister Arvind Kejriwal to pay farmers in Punjab and Haryana to stop burning crop residue.

In recent times, air quality in Delhi has remained poor throughout the year for various reasons, including the rapid loss of green cover, construction of homes and infrastructure projects, and vehicular as well as industrial pollution. But for a few weeks every November, it gets almost impossible to breathe. The last straw has been the crop residue burning (CRB) by farmers in Punjab and Haryana, which causes a heavy smog to settle over Delhi…

The good news is that these [health] costs—avoidable by Delhi residents if CRB were eliminated—are about 10 times the cost that would be incurred by farmers in adopting substitutes to crop burning. Where policymakers see costs, Coase saw potential for gains from trade.

Here is more from Shruti Rajagopalan.

Do the rich save more?

Yes, not a surprise but here are some details:

We identify a strong negative relationship between the consumption rate and the lifetime net resource. The predicted APC [average propensity to consume] of the highest net resource cohort about 0.03, which is two standard deviations smaller than the lowest resource cohort.

That is from a new paper by Ilin, Ye, and Yu (Yu is on the job market).  Of course this relates to the recent wealth tax debate — almost all of that tax would fall on the investment of the wealthy, not their consumption.  Note, however, that if the wealth tax induced more consumption by the wealthy, consumption inequality could quite easily go up.

Rent control is also not great for labor market outcomes

I had never thought of this before:

This paper, using a novel data set on rent stabilization in New  York City, takes a first step in investigating the policy’s unintended consequences on tenant labor market outcomes, while also exploring the impact of policy awareness on those outcomes. Recognizing the potential endogeneity of living in a rent-stabilized unit, this paper uses three decades of housing vacancy data to construct an instrumental variable leveraging variation in the availability of rent-stabilized units across New York boroughs over time. The sorted effects method in Chernozhukov, Fern´andez-Val, and Luo (2018) is also applied to investigate heterogeneous effects beyond their averages. The main results demonstrate that rent-stabilized tenants are more likely to be unemployed compared with tenants in private market-rate units. These effects are particularly salient among white and high-skilled tenants.

That is from the job market paper of Hanchen Jiang of Johns Hopkins University.

Consistency about elasticities, revisited

From Ross Rheingans-Yoo, the content is all his, I will not do a double indent:

  • If marginal wealth is taxed an additional 0.5%/yr at the high end, then fewer people will amass and invest that much wealth—some will instead disperse it among a wider number of family members, donate it to charitable or political causes, or spend it on expensive consumption. (Saez and Zucman, in their potential-revenue analyses, assume that this effect is quite small, and that the wealthy will mostly accept lower returns on wealth.)
  • Similarly, if the marginal opportunities to invest became worse by 0.5%/yr, fewer people would chose to invest, by the same token. Additionally,the effects should be the same size, as it’s the same decision-makers facing the same incentives!
  • But if pushing on the price (read: rate of return) has little effect on the quantity of investment, then pushing on the quantity of investment should have a large​ effect on the price! (Unless we’re at some magic kink in the supply curve for unspecified reasons…)
  • So a small amount of additional capital competing for investment opportunities should quickly reduce the competitive rate of return.

What’s the practical upshot? Well, if the authors’ assumptions about revenues are right, then Piketty’s r>gr>g “wealth spiral” can’t proceed unchecked, since capital simply can’t accumulate without competition quickly reducing the average rate of return back below gg.

Effort: The Unrecognized Contributor to US Income Inequality

That is a new paper by J. Rodrigo Fuentes and Edward E. Leamer:

This paper provides theory and evidence that worker effort has played an important role in the increase in income inequality in the United States between 1980 and 2016. The theory suggests that a worker needs to exert effort enough to pay the rental value of the physical and human capital, thus high effort and high pay for jobs operating expensive capital. With that as a foundation, we use data from the ACS surveys in 1980 and 2016 to estimate Mincer equations for six different education levels that explain wage incomes as a function of weekly hours worked and other worker features. One finding is a decline in annual income for high school graduates for all hours worked per week. We argue that the sharp decline in manufacturing jobs forces down wages of those with high school degrees who have precious few high-effort opportunities outside of manufacturing. Another finding is that incomes rose only for those with advanced degrees and with weekly hours in excess of 40. We attribute this to the natural talent needed to make a computer deliver exceptional value and to the relative ease with which long hours can be chosen when working over the Internet.

I like that last sentence in particular.

Can we spend another $52 trillion without raising middle class taxes?

The question seems like a joke, right?  Yet because so much of our elite media class wants Elizabeth Warren to win, they are contorting themselves into every possible direction to make this one sound coherent.  It is not a question of whether total nominal expenditures on health care go up or down, but rather of thinking through incidence and opportunity cost and where the real burdens of the plan will fall.  Those are the core themes of my Bloomberg column, here is one excerpt:

Another part of the plan is to pay lower prices — 70% lower — for branded prescription drugs. That is supposed to save about $1.7 trillion, but again focus on which opportunities are lost. Lower drug prices will mean fewer new drugs are developed. There is good evidence that pharmaceuticals are among the most cost-effective ways of saving human lives, so the resulting higher mortality and illness might be especially severe.

And the close:

Warren’s proposals, when all is said and done, are best viewed not as a way of paying for her program but as a series of admissions about just how expensive it would be. Whether or not you call those taxes, they are very real burdens — and many of them will end up falling on the middle class.

By the way, here is a good NYT summary of Warren’s financing plan.  Here is a good Maxim Jacobs tweet:

It’s really hard to pick out which part of her plan is most insane?: – Lowering brand drug pricing by 70%? – CMS paying specialists less money – Taxing unrealized capital gains – Claim hiring more IRS agents will raise $2.3 trillion – “Not one penny in middle-class tax increases”

Here is more from Peter Suderman.

The Global Kidney Exchange Programme

In my WSJ review of Al Roth’s excellent book Who Gets What—and Why I wrote about Roth’s proposal to extend the idea of kidney swaps globally:

It’s often the case that a living donor is willing to give a kidney to a loved one, but the loved one can’t accept it because of immunity mismatch. But if a pair of such mismatched donors could be found (call them A and A´ and B and B´), then perhaps a match could be found by a crisscross pairing: Donor A could give to recipient B´ and donor B could give to recipient A´, thus solving the mismatch problem and saving lives.

…Today such multi-way exchanges are becoming common….Mr. Roth, however, wants to go further….why not open U.S. transplants to the world? Imagine that A and A´ are Nigerian while B and B´ are American. Nigeria has virtually no transplant surgery or dialysis available, so in Nigeria patient A’ will die for certain. But if we offered a free transplant to him, and received a kidney for an American patient in return, two lives would be saved.

The plan sounds noble but expensive. Yet remember, Mr. Roth says, “removing an American patient from dialysis saves Medicare a quarter of a million dollars. That’s more than enough to finance two kidney transplants.” So offering a free transplant to the Nigerian patient can save money and lives.

It’s hard to think of a better example of gains from trade (or a better PR coup for the U.S. on the world stage).

Recently, Rees et al., (including Roth) announced the first such global kidney exchange:

We report the 1‐year experience of an initial Filipino pair, whose recipient was transplanted in the United states with an American donor’s kidney at no cost to him. The Filipino donor donated to an American in the United States through a kidney exchange chain. Follow‐up care and medications in the Philippines were supported by funds from the United States. We show that the logistical obstacles in this approach, although considerable, are surmountable.

Naturally, some people aren’t happy because of “ethical” objections. Minerva, Savulescu and Peter Singer write in defense of the program:

Lurking behind all the arguments against the GKE is the assumption that people who are poor are incapable of autonomous choices. So, if they appear to choose to act in ways that benefit not only themselves, but people in HICs, they must have been coerced, exploited, or commodified.

…Poverty does not necessarily make a person unable to choose to donate a kidney to a loved one, nor does it make someone incapable of weighing the pros and cons of an option like that offered by the GKE. Poverty does narrow down the options available to people, and often forces them to settle for an option that is not as good as a wealthy person would choose. That, however, is irrelevant to the ethics of the GKE if that programme provides a better option to patients in LMICs who need a kidney than any other option currently available to them.

…It would be tragic if such misguided objections were to prevent the GKE from realising its potential to reduce suffering and save the lives of rich and poor patients alike.

Hat tip: Frank McCormick.

The Prescription Escalator

Ask anyone and they will tell you that their prescription costs are rising. But generic drug prices are falling (also here) and generics are 80-90 percent of all prescriptions. Moreover, although branded drugs are expensive total out-of-pocket costs for the population as a whole are flat or even decreasing as Michael Mandel points out:

[A] May 2019 research report from the Agency for Healthcare Research and Quality reported that average out-of-pocket spending for prescribed medications, among persons who obtained at least one prescribed medication, declined from $327 in 2009 to $238 by 2016, a decrease of 27 percent. Data from the Bureau of Labor Statistics Consumer Expenditure Survey shows that average household spending on prescription drugs fell by 11% between 2013 and 2018.

Moreover, OECD data shows that average out- of-pocket spending on prescribed medicines in the United States ($143 per capita in 2017) is actually lower than countries such as Canada ($144), Korea ($156), Norway ($178), and Switzerland ($215).

So are people simply mistaken about what they are experiencing? Not quite. Mandel uses the metaphor of the prescription escalator to explain the apparent paradox:

It turns out that an escalator is the appropriate model for prescription drug costs for individuals. As people get older, they unwillingly ride the prescription escalator, with their average spending on prescription drugs rising by about 5-6% per year. This figure assumes no change in the underlying price of drugs. Rather, people fill more prescriptions as they age.

In other words, every individual experiences an increase in prescription costs as they age even though for the population as a whole prescription prices are flat or falling–a form of Simpson’s paradox. The driver of higher costs is usage not price. People aged 65-74 have on average 25 (!) prescriptions to fill, more than two and half times as many as people aged 25-34 (about 9 per year).

Understanding the prescription escalator is important because regulating drug prices–aside from being a bad idea–won’t solve the perceived problem.

…even if drug reform efforts were successful and there were no more increases in drug costs, every individual would still face a 5.6% increase each year in drug spending as they got older. That would total 30% after five years, and 70% after ten years, across the board.These are enormous increases.

Indeed, the prescription escalator is a sign of success. If drugs weren’t successful we wouldn’t buy more of them when we were older and sicker and costs wouldn’t rise.

Opioids and labor market participation

The onset of the opioid crisis coincided with the beginning of nearly 15 years of declining labor force participation in the US. Furthermore, the areas most affected by the crisis have generally experienced the worst deteriorations in labor market conditions. Despite these time series and cross-sectional correlations, there is little agreement on the causal effect of opioids on labor market outcomes. I provide new evidence on this question by leveraging a natural experiment which sharply decreased the supply of hydrocodone, one of the most commonly prescribed opioids in the US. I identify the causal impact of this decrease by exploiting pre-existing variation in the extent to which different types of opioids were prescribed across geographies to compare areas more and less exposed to the treatment over time. I find that areas with larger reductions in opioid prescribing experienced relative improvements in employment-to-population ratios, driven primarily by an increase in labor force participation. The regression estimates indicate that a 10 percent decrease in hydrocodone prescriptions increased the employment-to-population ratio by about 0.7 percent. These findings suggest that policies which reduce opioid misuse may also have positive spillovers on the labor market.

That is from a job market paper by David Beheshti at the University of Texas at Austin.

Learning is Caring: An Agrarian Origin of American Individualism

I am looking forward to reading this one, from Itzchak Tzachi Raz, who is on the job market from Harvard this year:

This study examines the historical origins of American individualism. I test the hypothesis that local heterogeneity of the physical environment limited the ability of farmers on the American frontier to learn from their successful neighbors, turning them into self-reliant and individualistic people. Consistent with this hypothesis, I find that current residents of counties with higher agrarian heterogeneity are more culturally individualistic, less religious, and have weaker family ties. They are also more likely to support economically progressive policies, to have positive attitudes toward immigrants, and to identify with the Democratic Party. Similarly, counties with higher environmental heterogeneity had higher taxes and a higher provision of public institutions during the 19th century. This pattern is consistent with the substitutability of formal and informal institutions as means to solve collective action problems, and with the association between “communal” values and conservative policies. These findings also suggest that, while understudied, social learning is an important determinant of individualism.

Here is the home page, the paper is not yet available.  Here is his actual job market paper, on adverse possession.  I do hope the author lets me know once this paper is ready, I am very much looking forward to reading it.

Public employee pension and municipal insolvency

This paper studies how governments manage public employee pensions and how this affects insolvency risk. I propose a quantitative model of governments that choose their savings and risk exposure by borrowing/saving in defaultable bonds, borrowing in non-defaultable pension benefits, and saving in a pension fund that earns a risk premium. In insolvency, the government can receive transfers from households who may differ from the government in their preferences for public services and private consumption. I match the model to a panel of CA cities and a hand-collected record of fiscal emergencies. The model predicts that governments are highly vulnerable to another stock market bust. A hypothetical shock to pension funds in 2015 produces twice as many fiscal emergencies as the original 2008-10 shock. In the quantified model, the government undersaves and take excess risk relative to what households would choose. Savings requirements that limit spending to essential services plus 0.3% of cash-on-hand produce large welfare gains for households. Requiring the pension fund to invest more in safe assets decreases household welfare because the lower average return discourages the government from saving.

That is from the job market paper by Sean Myers of Stanford University.

Economists and non-economists on elasticity

From a recent paper by Joanna Venator and Jason Fletcher:

In this paper, we estimate the impacts of abortion clinic closures on access to clinics in terms of distance and congestion, abortion rates, and birth rates. Legislation regulating abortion providers enacted in Wisconsin in 2011-2013 ultimately led to the closure of two of five abortion clinics in Wisconsin, increasing the average distance to the nearest clinic to 55 miles and distance to some counties to over 100 miles. We use a difference-in-differences design to estimate the effect of change in distance to the nearest clinic on birth and abortion rates, using within-county variation across time in distance to identify the effect. We find that a hundred-mile increase in distance to the nearest clinic is associated with 25 percent fewer abortions and 4 percent more births. We see no significant effect of increased congestion at remaining clinics on abortion rates. We find significant racial disparities in who is most affected by abortion clinic closures, with increases in distance increasing birth rates significantly more for Black, Asian, and Hispanic women. Our results suggest that even small numbers of clinic closures can result in significant restrictions to abortion access of similar magnitude to those seen in Texas when a greater number of clinics closed their doors.

There are (at least) two possible responses to such results, and that is without even getting into one’s underlying view of the ethics of abortion.  One is to say that a great deprivation has occurred because many fewer women end up having abortions.  Another response is to infer that the marginal value of the abortions could not have been so high to begin with, if the number drops off so readily.

The same issue comes up with Obamacare.  If the price of health insurance goes up, quite a large number of people decide to go without coverage.  Is the size of that number a measure of the human tragedy resulting from the price increase?  Or is it a measure of how little those people actually value health insurance?  Or somehow both?

I have yet to meet a person who can think through these issues rationally and absorb what is interesting and valid in each of those two perspectives.

Release Bad News on a Friday

Politicians have long known to release bad news on a Friday and it appears that pharmaceutical firms may do likewise.

Safety alerts are announcements made by health regulators warning patients and doctors about new drug-related side effects. However, not all safety alerts are equally effective. We provide evidence that the day of the week on which the safety alerts are announced explains differences in safety alert impact. Specifically, we show that safety alerts announced on Fridays are less broadly diffused: they are shared 34% less on social media, mentioned in 23% to 66% fewer news articles, and are 12% to 51% less likely to receive any news coverage at all. As a consequence of this, we propose Friday alerts are less effective in reducing drug-related side effects. We find that moving a Friday alert to any other weekday would reduce all drug-related side effects by 9% to 12%, serious drug-related complications by 6% to 15%, and drug-related deaths by 22% to 36%. This problem is particularly important because Friday was the most frequent weekday for safety alert announcements from 1999 to 2016. We show that this greater prevalence of Friday alerts might not be random: firms that lobbied the U.S. Food and Drug Administration in the past are 49% to 56% more likely to have safety alerts announced on Fridays.

From The Friday Effect in Management Science by Diestre, Barber and Santalo.

Hat tip: Kevin Lewis.