Blame the DA’s

John Pfaff says,

Though we have a smaller pool of people being arrested, we’re sending a larger and larger number of them to prison.

the probability that a district attorney files a felony charge against an arrestee goes from about 1 in 3, to 2 in 3. So over the course of the ’90s and 2000s, district attorneys just got much more aggressive in how they filed charges. Defendants who they would not have filed felony charges against before, they now are charging with felonies.

He argues that this, rather than other people’s favorite reasons, accounts for the high incarceration rate. Pointer from Tyler Cowen.

I still have many questions. For example, has the number of mentally unstable, violent individuals gone way up? Or has the proportion of mentally unstable, violent individuals gone way up? Do other countries, with lower prison populations, have fewer mentally unstable, violent individuals? Do they have an alternative way for dealing with such individuals that works better? etc.

Hypocrisy and Cowardice at Brookings

The WaPo reports,

Sen. Elizabeth Warren, stepping up her crusade against the power of wealthy interests, accused a Brookings Institution scholar of writing a research paper to benefit his corporate patrons.

Warren’s charge prompted a swift response, with Brookings seeking and receiving the resignation of the economist, Robert Litan, whose report criticized a Warren-backed consumer protection rule targeting the financial services industry.

My remarks:

1. Robert Litan is one of the most decent individuals in the whole economics profession.

2. Giving Litan’s scalp (sorry for the pun) to Elizabeth Warren does nothing to bolster the integrity of Brookings. It amounts to speaking cowardice to power.

3. Go back and read this post. If Bob Litan crossed a line, then Martin Baily crossed it at least as far. The only charitable explanation for the differential treatment of Litan and Baily is that Brookings changed its policies in the interim (something suggested in the WaPo piece, but I do not know any specifics).

4. If I were in the administration at Brookings, I would not give in to political intimidation. I would obtain peer reviews of Litan’s study and either stand by the study or repudiate it, depending on those reviews.

Matthew Kahn Asks the Tough Question

He writes,

Is Professor Summers saying that the subset of scholars who were studying macro have been collectively wasting their lives?

Pointer from Mark Thoma. I believe that they have been wasting their lives. I believe it even more strongly after reading Randall Wray’s Why Minsky Matters. The time-wasters treat the history and institutional characteristics of financial intermediaries as irrelevant. Minsky, correctly, thought that these things were important.

Minsky Revisited

Olivier Blanchard says,

mainstream macroeconomics had taken the financial system for granted. The typical macro treatment of finance was a set of arbitrage equations, under the assumption that we did not need to look at who was doing what on Wall Street. That turned out to be badly wrong. . .

…As a result of the crisis, a hundred intellectual flowers are blooming. Some are very old flowers: Hyman Minsky’s financial instability hypothesis. . .

Pointer from Mark Thoma.

I have just finished a first reading of a review copy of L. Randall Wray’s forthcoming Why Minsky Matters. It is certain to be on my list of best books of the year. In my opinion, Wray succeeds in clarifying Minsky and in making his views more interesting and persuasive to me than they were previously (I still have my quarrels).

If I think about the economy in terms of patterns of specialization and trade, then Minsky thought of it in terms of financial intermediation. For Minsky, all of us are intermediaries. Because we do not barter, we trade either by issuing IOU’s or by passing along the IOU’s of others (fiat currency being an IOU of the government, if you will).

I am working on a review, which probably will not be out before the book.

Nigerian Entrepeneurs, Not a Scam

The abstract of a study for the World Bank by economist David J. McKenzie reads

Almost all firms in developing countries have fewer than 10 workers, with the modal firm consisting of just the owner. Are there potential high-growth entrepreneurs with the ability to grow their firms beyond this size? And, if so, can public policy help alleviate the constraints that prevent these entrepreneurs from doing so? A large-scale national business plan competition in Nigeria is used to help provide evidence on these two questions. The competition was launched with much fanfare, and attracted almost 24,000 entrants. Random assignment was used to select some of the winners from a pool of semi-finalists, with US$36 million in randomly allocated grant funding providing each winner with an average of almost US$50,000. Surveys tracking applicants over three years show that winning the business plan competition leads to greater firm entry, higher survival of existing businesses, higher profits and sales, and higher employment, including increases of over 20 percentage points in the likelihood of a firm having 10 or more workers. These effects appear to occur largely through the grants enabling firms to purchase more capital and hire more labor.

Pointer ultimately from Tyler Cowen. My cynical thoughts:

1. How does one keep corruption out of such a program?

2. Does this imply that there is an unexploited profit opportunity in lending to would-be entrepreneurs in underdeveloped countries? Note that the money the firms received seems to have been in the form of grants, not loans.

A Short Read

I was sent a review copy of On Inequality, by Harry G. Frankfurt. On p. 11, he writes,

a preoccupation with the condition of others interferes with the most basic task on which a person’s intelligent selection of monetary goals for himself most decisively depends.

I imagine that an egalitarian could respond: yes, I need to focus on calculating what it is that I need to be happy. However, I also need to be concerned that others are taking more than they deserve. High levels of inequality are a symptom that some people are taking more than they deserve. They are defectors in that sense, and it is important that the rest of us punish defectors and reward cooperators, who are people who take only what they deserve.

In other words, I do not think that the book will persuade anyone who does not already agree.

Life Expectancy and Income

Timothy Taylor writes,

the reasons for this growing gap in life expectancy by income are not altogether clear. Some explanations clearly aren’t supported by facts. For example, although overall levels of tobacco use are down, the decline seems to have happened in much the same way across income levels, and thus can’t explain the life expectancy factors. Obesity levels are up over time, but they seem to be up more among those with higher incomes, so that pattern doesn’t explain a growing gap in life expectancy by income, either. One hypothesis recognizes that there is a correlation between education and health, and also between education and income, so perhaps factors related to education and health have become more important over time. For example, perhaps those with higher incomes are better at managing chronic diseases like high blood pressure or diabetes. But again, this is an open question. Other possible explanations are looking at how the nature of jobs and job stress may have changed over time for jobs of different income levels, or whether greater inequality in a society may create stresses that affect health.

Before you comment, note carefully the methods used to assess life expectancy.

My own view is that the distribution of conscientiousness has become more unequal over time, and this has implications for both income and life expectancy.

For a view the conscientiousness is the endogenous variable (rather than exogenous, as I think of it), see Elliot Berkman. Pointer from Mark Thoma. He has another post on a piece saying that educational inequality has widened. Again, I have the same diagnosis–that the distribution of ability has widened.

The Fed and Long-Term Rates

A commenter writes,

you can just look at a graph of the effective federal funds rate and see that (especially in recent years) it’s moved closely — in artificial-looking steps that are surely not the recent of some fundamental market rate process — with the FOMC’s target rate. You can then see that this rate and its near-term trajectory is transmitted almost one-for-one to short-term Treasuries, CD rates, etc., and that there is a heavy influence on mortgage rates, corporate bond rates, and so on as well. The extreme market segmentation needed for B clearly doesn’t seem to be there.

The fact that interest rates generally move together can be consistent with a number of hypotheses. One hypothesis is that the Fed influences all of these interest rates. Another hypothesis is that the views of the Fed are usually not much different from the views of markets. The question to ask is what happens when the long-term interest rate is X and the Fed thinks that it ought to be Y. Can the Fed move the long-term rate from X to Y? My impression is that the answer is in the negative.

The Basic Social Rule and Dissent

From Elizabeth Warren’s book, as relayed by a review in the NYT.

After dinner, “Larry leaned back in his chair and offered me some advice,” Ms. Warren writes. “I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don’t listen to them. Insiders, however, get lots of access and a chance to push their ideas. People — powerful people — listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders.

Pointer from various places–I first saw it from Tyler Cowen.

Remember that the basic social rule is to reward cooperators and punish defectors. I believe that without such a social rule, trust would break down and we could not have markets. However, that does not mean that the social rule is always a wonderful thing. Criminal gangs operate the basic social rule, also–they reward people who cooperate with the gang and punish people who defect from it.

The basic social rule gets applied in politics and in academics. A visitor from Mars would have a really hard time understanding how macroeconomics got into the cul de sac in which it had arrived when Olivier Blanchard wrote that the state of macroeconomics is good. I would say that Dornbusch and Fischer were really good at rewarding cooperators and punishing defectors.

Thoughts on Drug Pricing

A reader asked me to comment on this story, about the guy whose firm bought the license for a drug and then jacked up its price.

1. I don’t know the whole story in the example. My understanding is that with a decades-old drug, the patent is no longer effective, and generics can be made. So there is something going on here that has not been explained in the stories that I have read.

2. In theory, if someone bought a license to a drug, the cost of the license was tied to the potential revenue from the drug. We might want the value of such a license to be high in order to encourage drug research and development. But again, I am missing some important institutional details in this case.

3. Assuming that the value of the license for the drug indeed is high, then this is a fixed cost. Like many products nowadays (electricity, data transmission, digital content), pharmaceuticals are characterized by low marginal cost and high fixed cost. A price that is efficient in that it is close to marginal cost is too low to cover the fixed cost.

4. This means that there is no price that is “correct.” It also means that price discrimination often can improve the outcome. That is, charge a high price to the people willing to pay such a price, but get additional revenue by charging other consumers a price closer to marginal cost. As I tell my economics students, “price discrimination explains everything.”

5. Another option, in the case of pharmaceuticals, would be to offer prizes instead of patents. Prizes could be funded by taxpayers, or they could be funded by associations of people who would benefit from the medications.

6. However, price controls on medications treat only a symptom, without getting at the underlying problem. Price controls will lower the value of licenses to produce a drug, and that means less incentive to undertake research and development.

UPDATE: Alex Tabarrok says that we thank the FDA for the lack of generic competition.

Also, on this post, commenter Matt had an interesting solution. He would have the FDA issue blanket licenses to proven-quality generic drugmakers, so they they could instantly start to copy any drug that goes off patent without having to submit samples of that particular drug for approval.