Monthly Archives: November 2013

Wealth Illusions

Posted on by

From Frederick Taylor’s The Downfall of Money:

In the end, no one really got their money, not even the Americans. Germany used the American loans it received under the 1924 Dawes plan to pay reparations to the French and the British, who in turn used the money to service their own debts to the USA. Then, during the Great Depression, all the major powers, including Germany, France and Britain, effectively defaulted on what they owed to America, and into the bargain the Germans defaulted on reparations.

This reminded me of one of Tyler Cowen’s mantras, that we are not as wealthy as we thought we were. His implied model of recent economic events is that we had illusory wealth during the housing bubble and then reality bites. Some random thoughts:

1. Taylor’s picture of the 1920s suggests a possible wealth-illusion story for the Great Depression. The Germans did not think that they were going to pay anywhere near the full amount of reparations, so they did not count that full amount in their liabilities. However, the Allies were counting on receiving the full amount of reparations (as my previous post on the book indicates, the citizens were led to expect even more than the political leaders were really going to try to collect). In effect, reparations were being double-counted as aggregate wealth, with consumers in the Allied countries counting them as assets but without offsetting liabilities in German households. Then, around 1930, Allied households finally marked down their wealth, and you had the Great Depression.

2. Macroeconomists know that Keynesian fiscal policy effectiveness depends on wealth illusion. The question “Are government bonds net wealth?” must be answered “yes” in order for deficit spending to raise aggregate demand. Otherwise, if Barro-Ricardian equivalence holds (so that the increased wealth of the holders of government bonds is offset by the decreased wealth of households who have marked up their future tax liabilities), then deficits are not clearly expansionary.

3. In theory, wealth illusions do not have to be destabilizing. Economic activity does not have to rise and fall just because people have higher or lower perceptions of wealth. Complete wage and price flexibility would be sufficient to maintain full employment. I am not sure that complete wage and price flexibility is even necessary. However, in practice it seems likely that wealth illusions would prove to be destabilizing.

4. From a PSST perspective, one can imagine all sorts of patterns of trade that depend on perceptions of wealth. When wealth illusions break down, it is not as if all households take an equally proportionate hit. Some households lose more than others. For example, when the housing bubble broke, people who had a lot of their (illusory) wealth in housing lost more than people who did not. So when (illusory) wealth is redistributed, old patterns of specialization and trade become unsustainable, and there will be unemployment until new patterns are established.

5. One could argue that the increase in government debt financed by quantitative easing is fostering a wealth illusion in countries where it is taking place. Indeed, that is in some sense the intent–see point (2). Perhaps we should be more worried than we are about how the process of unwinding this wealth illusion can be accomplished without pain. Actually, I am plenty worried about it.

Development, Test, and Production

Posted on by

Here is an interview with Robert N. Charette.

I haven’t seen any indication of who’s doing the configuration management. Typically in a large system, you have a master configuration list and a change control board, so people can say, “This is what you’re going to change; this is what the effects are going to be.” And it’s a fairly rigorous process, especially if you have a system that’s very complex like you do here. What you don’t want is somebody making a change that nobody else knows about. Just getting hold of who’s doing what to what, and understanding what the implications are is itself going to be a huge undertaking. For every bit of software, you want to have some release control. I haven’t seen anything to suggest that type of management. But then again the management has been extremely opaque.

I disagree with his conjecture. I was thinking the other day that they must have really good configuration management in place, or else the thing would have blown up already with all the fixes that they are putting in. You would be seeing things like

When MailOnline visited the website shortly after Carney’s daily briefing, the Obamacare portal spewed a nonsensical mixture of computer code instead of a typical login screen.

Gone were words like ‘Username’ and ‘Password.’

In their place were jumbled programming strings like ‘???ffe.ee.myAccount.login.username???’ and ‘???ffe.ee.myAccount.login.password???’

Oops, well maybe Charette is right. But anyway, I was about to say:

A computer system is not like a house, where you make fixes to the house by hammering nails directly to the actual house. Instead, think of having three versions of the house. You hammer your nails into a development version. When you think it is fixed, you call it a test version. When it’s been tested, you replace the defective house with the test house. When the new house goes “live,” it is called the production version.

I can imagine that back in early October, when things were just awful with the production site, they cycled from development to production pretty quickly, because they needed to show improvement. But my guess is that they have stopped doing that, and that now they are taking more time to test stuff before they release it.

In fact, it could be that by the time the chief fixer, Jeffrey Zients, came on the scene, the development version had most of the known issues taken care of. However, rather than put that version into production, they set a release date of November 30th. Some time before then, they will freeze (or have already frozen) that version and have it moved over to Test. They will try to rigorously test the Test version, which will result in a list of problems found during testing. They fix simple problems right away, and they defer complex problems until a later release. Then, on November 30th, they move the test version into production.

I am oversimplifying things here. But my main point is that I bet that there is more technical competence on the project than some critics are inclined to give them credit for.

Healthcare.gov Could Have Been Worse

Posted on by

CNN reports,

On the first day, there was a big problem that we hadn’t heard about before. “There was a fix regarding residency for Medicaid and CHIP that was not fixed correctly and is denying … 90% of people based on residency,” the war room notes from the day read.

As the documents move on and issues are tackled one by one, sweeping problems continue to appear.

October 9: “A new problem in the system has been identified: for about 30% of the 70,000 applicants, the system has skipped applicants through ‘events’ that are required to complete the application.” In other words, nearly a third of applicants couldn’t fill out the form, because the website was skipping “events” or entries they needed to make.

Imagine what would have happened had there been no issues with speed on the site, and tens of thousands of people had been able to use it at once. The results would have been so catastrophic that they would have had to shut down the site. Of course, if this were a private-sector project, it would not still be live. I cannot imagine any private-sector company willing to take the sort of risks that the government is taking right now.

As an aside, here is columnist Suzanne Fields picking up on the suits vs. geeks divide.

As another aside, in another article from several years ago, the geek, Robert N. Charette writes,

If there’s a theme that runs through the tortured history of bad software, it’s a failure to confront reality.

That might serve as an epitaph for the healthcare.gov rollout. The entire article is worth reading.

What I’m Reading

Posted on by

1. The Nov.-Dec. issue of Technology Review is one of the best in a long time. I liked the article on the fall-off in editorial participation at Wikipedia, the article on the challenges with making driverless cars practical, and especially the business report on health care cost containment

2. The Downfall of Money, about Germany’s hyperinflation. I will say more when I am finished. At this point, I am inclined to think that the key driver of hyperinflation was the politics of reparations. It was in the interest of both Allied and German politicians to overstate what Germany was being asked to pay. The Allied leaders could boast to their home constituents and the German politicians could ask for sympathy from theirs. Had Germany cut spending or raised taxes, this would have been perceived as making ordinary Germans suffer in order to pay the hated reparations. So the political process kept seeing deficit spending as the least-bad alternative. Many Germans suffered under hyperinflation, but this was politically easier to swallow than making it easier for the Allies to extract their tribute.

Judging the Education Olympics

Posted on by

Timothy Taylor writes,

The OECD has also published its own first tabulation of these results, with much additional discussion, in OECD Skills Outlook 2013: First Results from the Survey of Adult Skills. It note that only three countries have below-average scores in all of these domains: along with the United States, the other two are Ireland and Poland. In a fact sheet summarizing the US results, the OECD writes: “U.S. performance is weak in literacy, very poor in numeracy, but only slightly below average in problem solving in technology-rich environments.”

Taylor sees this as an indictment of the U.S. educational system. I am not confident that better teaching methods would have produced adults with more skills. However, I am pretty sure that we could have gotten the same mediocre results while spending a lot less money.

The Real Government Balance Sheet

Posted on by

Cullen Roche writes,

total fossil fuel resources owned by the Federal government are valued at over $150 trillion alone.

Pointer from Mark Thoma.

My guess is that land is the largest real asset of the government. So there is a case for saying that even with all the unfunded liabilities that the government has accrued, the government is not broke.

I think that the best argument against those of us who say that the U.S. will have to inflate away its debt at some point is the argument that the government could sell assets if it wanted to.

Fantasy Despot Syndrome

Posted on by

In this essay, I offer a deeper diagnosis of the problems with healthcare.gov.

Cutler’s memo strikes me as shallow and self-serving. He is shocked, shocked to find that when his pet health care reforms are passed through the political process, their implementation is hampered by politics. In that sense, Cutler suffers from Fantasy Despot Syndrome.

I go on to contrast people who try to solve problems and undertake reforms by starting businesses with people who try to impose solutions through the political process.

Meanwhile, I’m seeing reports of progress on fixing the web site. It is impressive that the tech folks have been able to improve the performance of the system without any major setbacks (data losses or multi-day outages). They must have a pretty robust release process in place.

Getting the front-end enrollment process functioning should give them time to iron out the remaining technical problems. However, other business issues remain with this startup-without-a-CEO. Will individuals who are not experienced health insurance shoppers be able to figure out how to choose?. Do the insurance plans have enough doctors willing to participate to sustain consumer satisfaction? etc.

Judging the Health Care Olympics

Posted on by

Avik Roy writes,

What’s just as interesting is that Japan, the country that tops the overall life expectancy tables, finished in the middle of the pack on cancer survival.

He finds, as have others (John Goodman comes to mind), that the five-year cancer survival rates tend to be higher in the U.S. than in other countries. The one issue I would raise with this is that survival is measured from the point of diagnosis, so that if we diagnose cancer sooner (or diagnose more non-lethal cancers), then we would come out ahead on that measure.

Roy continues,

A few years back, Robert Ohsfeldt of Texas A&M and John Schneider of the University of Iowa asked the obvious question: what happens if you remove deaths from fatal injuries from the life expectancy tables? Among the 29 members of the OECD, the U.S. vaults from 19th place to…you guessed it…first. Japan, on the same adjustment, drops from first to ninth.

I think this study offers more reason to believe that the U.S. is really number 1 when it comes to health care outcomes. Still, it may not show that the U.S. is number 1 in terms of cost-effectiveness of health care. My guess is that comparing the additional amount that we spend on health care to the additional longevity we obtain would yield a very large cost per year of life saved.

I have long argued against using longevity statistics to judge what I once called the international health care Olympics. As I pointed out in that essay, it would lead policymakers to make some really perverse choices. But even if we are number 1 in terms of medically-treatable life expectancy, that is no reason to be complacent that our system is cost effective.

Social Heterogeneity in Real Wages

Posted on by

From my latest essay.

for middle- and upper-income parents, it is a matter of taste if one chooses to spend a substantial sum to send a child to an elite preschool, or to live in a neighborhood with an elite public school, or to send a child to an elite college. Given the child’s ability, such schooling decisions make relatively little difference at the margin.

The point of the essay is that long-term calculations of “the” real wage assume homogeneity of tastes.

The Minogue Litmus Test

Posted on by

My review of The Servile Mind is available. I do not think liberaltarians or bleeding-heart libertarians will be comfortable with Minogue’s swipes at cultural decadence. My conclusion:

Overall, I would say that for libertarians Minogue’s book provides a litmus test. If you find yourself in vigorous agreement with everything he says, then you probably see no value in efforts to work with progressives to promote libertarian causes. The left is simply too dedicated to projects that Minogue argues undermine individual moral responsibility, and thus they are antithetical to liberty. On the other hand, if you believe that Minogue is too pessimistic about the outlook for freedom in today’s society and too traditional in his outlook on moral responsibility, then you would feel even more uneasy about an alliance with conservatives than about an alliance with progressives.