Category: Economics

Random thoughts on hysteresis

by  Tyler Cowen in

Let’s say you believe labor market unemployment hysteresis is strong, and you also believe that for political reasons (for better or worse) further monetary or fiscal stimulus is unlikely.  Which policies should you be more likely to support?  Should one be more inclined to limit unemployment insurance, ax the minimum wage, expand EITC, and in general decrease labor market regulation and mandates?  Should one be more likely to favor direct government hiring of the unemployed, if only at “make work” tasks at low wages, and less likely to favor projects run through third-party intermediaries, which may or may not focus on hiring the unemployed?  Let’s abolish Davis-Bacon, yes?  Let’s move away from European models, yes?

I thank J. for a useful comment on this matter.

The Golden Rule of Organ Donation

by  Alex Tabarrok in

Here is Joseph Roth, president and CEO of New Jersey Organ and Tissue Sharing Network:

Caseworkers from our organization recently went to the hospital to visit the family of a woman who suffered a stroke. The woman was dead, but machines continued to keep her organs functioning. She was an ideal candidate to be an organ donor. Her husband, it turns out, was on the waiting list to receive a heart.

Our caseworkers asked the husband if he would allow his wife’s organs to be donated. The husband, to the shock of our caseworkers, said no. He simply refused. Here was a man willing to accept an organ to save his own life, but who refused to allow a family member to give the gift of life to another person.

…Cases like this are rare, thankfully, but are nonetheless troublesome.

Roth continues:

Our proposal — we call it the Golden Rule proposal — would permit health insurers in New Jersey to limit transplant coverage for people who decline to register as organ donors. It would be the first such law in the nation. No one would be denied an organ. But under the proposal, insurers could limit reimbursement for the hospital and medical costs associated with transplants of the kidney, pancreas, liver, heart, intestines and lungs.

I am not in favor of messing with the insurance system for this purpose but have argued for a more direct approach. Under what I call a “no-give, no-take” rule if you are not willing to sign your organ donor card you go to the bottom of the list should you one day need an organ. Israel recently introduced a version of no-give, no take which gives those who previously signed their organ donor cards points pushing them up the list should they need an organ transplant–as a result, tens of thousands of people rushed to sign their organ donor cards.

Hat tip to David Undis whose excellent group Lifesharers (I am an adviser) is implementing a private version of no-give, no take in the United States.

Here is my piece on Life Saving Incentives and here are previous MR posts on organ donation.

The hysteresis effect on unemployed labor, and unemployment scarring

by  Tyler Cowen in

Here is a good WSJ piece on labor market hysteresis, a topic also of recent interest to Bernanke, Summers, DeLong, and others.  I’ve been trying to learn more about that literature, and here is what I came up with.

Pissarides has a seminal 1992 paper on the loss of skill during unemployment.

This very good paper (pdf) looks at women who take time off to care for their elderly parents, though there is an endogeneity problem.  Arguably it is the workers on a lower earnings trajectory who will take the time off.  Here is a much earlier 1980s paper on how intermittent labor force attachment lowers women’s wages.

Holocaust survivors seem to have earned lower rates of return on human capital (though interestingly their children do better on average).

This German paper (pdf) shows that state dependence of earnings is, and should be, much lower when the unemployment has been generally high for the labor force as a whole.  This paper finds there is not much “scarring effect’ in southern Italy, where unemployment perhaps is less socially shameful, but there is a significant scarring effect in northern Italy; social norms may matter.

This paper on Sweden suggests that one year out of work leads to a depreciation of skills — the skill of reading in their sample — is equal to losing five percentage points in the broader distribution of that skill.

Here is one paper from the psychology literature (with good cites); there are adverse psychological effects for the lower net worth unemployed but not necessarily for the higher net worth individuals.

Here is a whole host of papers on “unemployment scarring.”  This one, on the UK, gives a concrete number: “Our results suggest a scar from early unemployment in the magnitude of 13–21% at age 42. However, this penalty is lower, at 9–11%, if individuals avoid repeat exposure to unemployment.”  There are some reasonable controls for education and the like, though none for conscientiousness.

I was surprised to learn that “unemployment scarring” is a much more effective search term than is “labor hysteresis.”

Is there any good paper which seriously takes endogeneity of separation into account?

At the Frontier of Personalized Medicine

by  Alex Tabarrok in

In an essay on frighteningly ambitious startups Paul Graham writes:

…in 2004 Bill Clinton found he was feeling short of breath. Doctors discovered that several of his arteries were over 90% blocked and 3 days later he had a quadruple bypass. It seems reasonable to assume Bill Clinton has the best medical care available. And yet even he had to wait till his arteries were over 90% blocked to learn that the number was over 90%. Surely at some point in the future we’ll know these numbers the way we now know something like our weight. Ditto for cancer. It will seem preposterous to future generations that we wait till patients have physical symptoms to be diagnosed with cancer. Cancer will show up on some sort of radar screen immediately.

An amazing paper in the March 16 issue of Cell illustrates the frontier of what is possible. Geneticist Michael Snyder of Stanford led a team that sequenced his and his mother’s genome. Then, over a two year period they used blood and other assays to track in Snyder’s body transcripts, proteins and metabolites. In the process they generated billions of data points and were able to watch in near real-time what happened as Snyder’s body fought two infections and the surprising onset of diabetes.

From a writeup in Science Daily:

…”We generated 2.67 billion individual reads of the transcriptome, which gave us a degree of analysis that has never been achieved before,” said Snyder. “This enabled us to see some very different processing and editing behaviors that no one had suspected. We also have two copies of each of our genes and we discovered they often behave differently during infection.” Overall, the researchers tracked nearly 20,000 distinct transcripts coding for 12,000 genes and measured the relative levels of more than 6,000 proteins and 1,000 metabolites in Snyder’s blood.

…The researchers identified about 2,000 genes that were expressed at higher levels during infection, including some involved in immune processes and the engulfment of infected cells, and about 2,200 genes that were expressed at lower levels, including some involved in insulin signaling and response.

…The exercise was in stark contrast to the cursory workup most of us receive when we go to the doctor for our regular physical exam. “Currently, we routinely measure fewer than 20 variables in a standard laboratory blood test,” said Snyder, who is also the Stanford W. Ascherman, MD, FACS, Professor in Genetics. “We could, and should, be measuring many, many thousands.”

One side-note: the techniques that the authors use to analyze their time-series data seem (to me) to be behind the curve compared to the VARs used in econometrics. Impulse response functions are what they need! With applications from economics to medicine to marketing, the statistics of big data is the field of the future.

Addendum: Derek Lowe offers further thoughts and Andrew S. points us to this TED video on blood tests without needles.

*The Clash of Economic Ideas*

by  Tyler Cowen in

In 1958, on his first visit to India, the Hungarian-British development economist Peter Bauer was eager to meet the Indian economist B.R. Shenoy.  Bauer knew the name from a “Note of Dissent on the Memorandum of the Economists’ Panel,” which Shenoy had written criticizing India’s Second five-Year Plan.  In 1955 the Indian government had recruited twenty-one senior Indian economists for the Panel of Economists, chaired by the minister of finance, to review the plan.  Twenty of the economists had signed a memorandum endorsing the plan.  Professor Shenoy was the lone dissenter  Shenoy’s “Note of Dissent” was an annoyance to members of the Indian Planning Commission; to Prime Minister Nehru, who had initiated the planning effort; to Nehru’s adviser P.C. Mahalanobis, who had drafted the plan; and even to international aid officials, who overwhelmingly supported the planning effort.  Shenoy had become persona non grata in official economic policy-making circles.

Yet Shenoy turned out largely to be right.

That is from the forthcoming excellent book by Lawrence H. White, Amazon link here.  The book is not mostly about India, but it is about the role of economic ideas in shaping economic outcomes.  The chapter on India is my favorite, however, and it is perhaps the very best place to start to understand the failures of India’s planning period.

White also points our attention to Milton Friedman’s 1955 Memorandum to the Indian Government, which is I believe not well known, not even among Friedman fans.

The Age of the Shadow Bank Run

by  Tyler Cowen in

The introduction to my column is this:

I RECENTLY asked a group of colleagues — and myself — to identify the single most important development to emerge from America’s financial crisis. Most of us had a common answer: The age of the bank run has returned.

I would like to see more discussion of how the permanently high demand for T-Bills as collateral will affect the U.S. economy:

Another feature of this new order is that more and more financial transactions will be collateralized with the safest securities possible: United States Treasuries. Demand for them will remain high, and low borrowing costs will ease our fiscal problems. Still, the resulting low rates of return serve as a tax on safe savings, encourage a risky quest for yield and redistribute resources to government borrowing and spending. It isn’t healthy for the private sector when investors are so obsessed with holding wealth in the form of safe governmental guarantees.

The bottom line is this:

The core problem is that the growth of short-term credit has been outracing our ability to protect it, and since 2008 most investors have realized that these shadow-banking transactions are not risk-free.

I didn’t have space to discuss whether this was a corporate governance issue or a moral hazard issue.  Under one view, managers/CEOs could purchase capital insurance to plug the runs, they just don’t have the incentive to do so.  The downside simply isn’t that bad for them.  Under another view, the market for “runs insurance” creates too much moral hazard to be feasible, or to some extent the market exists (CDS, etc.) but it just pushes the problem back another level and may even make matters worse by creating another level of credit.  A third view is that the collateral behind these short-term loans is somewhat of a farce, since it (sometimes) has value problems precisely in those world states when it needs to be called in.  It is probably a bit of each.

The conclusion is this:

In short, no promising financial path is before us. It’s good that the American economy seems to be recovering, and this may shove some problems into the future. But banking and finance remain a mess at their core. Welcome to the 21st century.

Why is the UK economy failing?

by  Tyler Cowen in

Do not heed those who paint with a limited palette and speak only of fiscal austerity.  Via Scott Sumner, Britmouse has one report:

The Office for National Statistics’ current data on quarterly UK nominal GDP growth in 2008 is as follows, at Seasonally Adjusted Annual Rates:

  • Quarter 1: 4.3%
  • Quarter 2: -1.7%
  • Quarter 3: -5.2%
  • Quarter 4: -3.4%

That collapse in nominal spending has no precedent in the data, and is certainly worse than anything since the 1930s. . . .

There was by the way no liquidity trap, as rates were often at five percent and in general not close to zero.  Britmouse now has his (her?  its?) own blog.

Going back in time a bit further:

The stark generational rift emerging in Britain is highlighted by a Financial Times analysis showing that the real disposable household incomes of people in their 20s have stagnated over the past 10 years just as older households are capturing a much greater share of the nation’s income and wealth.

…The FT analysis of 50 years of official data also shows that the living standards of Britons in their 20s have been overtaken by those of their 60-something grandparents for the first time, with the household incomes of pensioners in their 70s and even 80s also catching up rapidly.

The data, which underpins government publications on living standards, takes no account of housing costs or wealth. Had it done so the results would have been even more dramatic, showing median living standards of people in their 20s have now slipped below those of people in their 70s and 80s.

The problems over there are deeply rooted.

Nonetheless, via David Harbottle, we learn that during the Olympics there is a home in London for rent for about $412,646 per month.  So far there appear to be no takers.  The price is listed as negotiable.

“Foreign” Aid

by  Alex Tabarrok in

Astute piece in the NYTimes by Steven Lee Myers on military aid to Egypt Florida.

An intense debate within the Obama administration over resuming military assistance to Egypt, which in the end was approved Friday by Secretary of State Hillary Rodham Clinton, turned in part on a question that had nothing to do with democratic progress in Egypt but rather with American jobs at home.

…“In large part, there are U.S. jobs that are reliant on the U.S.-Egypt strong military-to-military relationship,” a senior State Department official said, speaking on condition of anonymity under rules set by the department.

…“Lockheed Martin values the relationship established between our company and the Egyptian customer since the first F-16s were delivered in the early 1980s,” said Laura F. Siebert, a spokeswoman for the company, which is based in Fort Worth.

…The M1A1 components are built in factories in Alabama, Florida, Michigan, Ohio and Pennsylvania, several of them battleground states in an election that has largely focused on jobs. Because the United States Army plans to stop buying new tanks by 2014, continued production relies on foreign contracts, often paid for by American taxpayers as military assistance.

Corruption and the history of development economics

by  Tyler Cowen in

A few observations, based on some recent reading:

1. It is remarkable how little the topic is discussed in the mainstream literature before the 1990s.  Gunnar Myrdal to his credit does discuss it a bit in his Asian Drama.

2. I have seen more than a few articles suggesting Anne Krueger showed that rent-seeking accounted for 7.3 percent of Turkish gdp (in the 1960s).  That’s not what Krueger said.  Rather she showed that import licenses were equivalent to this value, and that this provided an upper bound for the amount of rent-seeking.

3. The real costs of rent-seeking and corruption are the “limits to technology transfer” argument of Parente and Prescott, not the standard rent-seeking box.  That paper alone could bring a Nobel Prize, and yet it’s hardly ever mentioned in assessments of Prescott.

James Stock and Mark Watson on the Great Recession

by  Tyler Cowen in

Binyamin Applebaum summarizes their new paper:

The paper, entitled “Disentangling the Channels of the 2007-2009 Recession,” will be posted on the general conference Web site Thursday afternoon.

The authors argue that the slow pace of recovery reflects a long-term deterioration in economic prospects. Specifically, they estimate that the trend growth rate of gross domestic product fell by 1.2 percentage points between 1965 and 2005.

…the key reason for the faltering pace of growth is that the work force is expanding more slowly. Population growth has slowed, and so has the pace at which women are entering the labor market.

“These demographic changes imply continued low or even declining trend growth rates in employment, which in turn imply that future recessions will be deeper, and will have slower recoveries, than historically has been the case.”

Indeed, recent growth has actually outpaced their expectations.

“The current recovery in employment is actually faster than predicted,” they write. “The puzzle, if there is one, is why the recovery was as strong as it has been.”

This general theory about the power of women has been propounded before, notably by the economist Tyler Cowen in his recent book “The Great Stagnation.”

The paper itself can be found here (pdf). By the way, for market monetarists, equity markets seem to agree.  Stock and Watson, of course, are two of the most technically accomplished macroeconometricians.  This is further evidence — perhaps the most thorough empirical paper on the topic to date — that the Great Recession has been about the interaction of cyclical and structural forces.

Other interesting papers from that symposium are here, including a DeLong-Summers defense of stimulus as possibly self-financing.

Selgin reviews Bernanke on the Gold Standard

by  Alex Tabarrok in

George Selgin reviews Bernanke’s course at GWU. He is not happy:

Bernanke’s discussion of the gold standard is perhaps the low point of a generally poor performance, consisting of little more than the usual catalog of anti-gold clichés: like most critics of the gold standard, Bernanke is evidently so convinced of its rottenness that it has never occurred to him to check whether the standard arguments against it have any merit. Thus he says, referring to an old Friedman essay, that the gold standard wastes resources. He neglects to tell his listeners (1) that for his calculations Friedman assumed 100% gold reserves, instead of the “paper thin” reserves that, according to Bernanke himself, were actually relied upon during the gold standard era; (2) that Friedman subsequently wrote an article on “The Resource Costs of Irredeemable Paper Money” in which he questioned his own, previous assumption that paper money was cheaper than gold; and (3) that the flow of resources to gold mining and processing is mainly a function of gold’s relative price, and that that relative price has been higher since 1971 than it was during the classical gold standard era, thanks mainly to the heightened demand for gold as a hedge against fiat-money-based inflation. Indeed, the real price of gold is higher today than it has ever been except for a brief interval during the 1980s. So, Ben: while you chuckle about how silly it would be to embrace a monetary standard that tends to enrich foreign gold miners, perhaps you should consider how no monetary standard has done so more than the one you yourself have been managing!

Read the whole thing for more.

Why Don’t Women Patent?

by  Alex Tabarrok in

In Why Don’t Women Patent?, a recent NBER paper, Jennifer Hunt et al. present a stark fact: Only 5.5% of the holders of commercialized patents are women. One might think that this is explained by the relative lack of women with science and engineering degrees but Hunt et al. find that “women with such a degree are scarcely more likely to patent than women without.” Instead, most of the difference is “accounted for by differences among those with a science or engineering degree” especially the fact that women are underrepresented in patent-intensive fields such as electrical and mechanical engineering and in development and design.

Predictably, the authors do not ask why women might self-select into non patent-intensive fields, perhaps because this would require at least a discussion of politically incorrect questions. The failure to investigate these questions leads to some dubious conclusions, notably:

Closing the [gender] gap among S&E degree holders would increase commercialized patents by 24% and GDP per capita by
2.7%.

Right; and since only 10% of construction workers are women, closing the gender gap would result in many more houses. In the case of construction, my suspicion is that gender equality would reduce not increase the amount of construction. In the case of patents, I am not sure what would happen, indeed the point is that without a much better understanding of what causes differences in patent proclivities one shouldn’t jump to conclusions.

The quick jump from patents to innovation is also unwarranted–there is very little evidence that patents increase innovation. Moreover, most innovations are not patented. If we measured innovation more closely it wouldn’t surprise me if women accounted for a larger share of innovation than they do of patents.

By the way, both my wife and I are working to rectifiy these statistics, she has half-a-dozen patents and I have none.

Addendum: Freakonomics/Marketplace has a podcast on this topic.