Monthly Archives: July 2016

Hansonian Medicine

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Although I have scheduled posts through the weekend, blogging might be light after that. A relative is struggling from an encounter with Hansonian medicine.

A robust finding in health care economics is that when you compare two populations with similar characteristics, the population on which more is spent on medical care enjoys no better outcomes, where outcomes are usually measured in terms of mortality. Given that we know that some treatments do work, this represents a puzzle.

The most radical way of resolving the puzzle is due to Robin Hanson. He suggests that the treatments that work are offset in the aggregate by treatments that cause harm. It is the latter that I have dubbed “Hansonian medicine.” I have myself witnessed Hansonian medicine take the lives of elderly relatives, although their lives were not shortened by much and their lives almost certainly had been prolonged by previous treatments.

The current episode concerns a recent procedure on a not-so-elderly relative that resulted in a severe infection. Moreover, the condition for which the procedure was undertaken is something that I always suspected may have been brought on by taking statin drugs, so that for years I have said no to doctor recommendations for me to take statins. (Just now, I googled and found that some recent research might support my hypothesis. However, I believe that the consensus is that my personal views are wrong and that statins are a low-cost, high-benefit treatment, which is the opposite of Hansonian medicine.)

An Outbreak of Laziness, or ?

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Andre Boik, Shane Greenstein, and Jeffrey Prince write (the link goes to an ungated but outdated version),

We find that higher income households spend less total time online per week. Our results suggest that a household making $25-35K a year spends 92 more minutes a week online than a household making $100K or more a year in income, and differences vary monotonically over intermediate income levels. Relatedly, we also find that the level of time on the home device only mildly responds to the menu of available web sites and other devices – it slightly declines between 2008 and 2013 – despite large increases in online activity via smartphones and tablets over this time. At the same time, the monotonic negative relationship between income and total time remains stable, exhibiting the same slope of sensitivity to income.

Think of allocating your time among three activities: work, online leisure, and off-line leisure (plus housework). Are we seeing some households choosing to work less and instead consume more online leisure (thus earning less income), or are we seeing households who earn less per hour worked finding offline leisure activities too expensive (Tyler Cowen seems to think it’s the latter).

War and Mobility

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Concerning Civil War veterans, Dora L. Costa, Matthew E. Kahn, Christopher Roudiez, and Sven Wilson write,

Veterans preferred to move to a neighborhood or a county inhabited by men from their same war company. This co-location evidence highlights the existence of persistent social networks. In our study, the social network already exists but an individual veteran seeks out economic opportunities. A co-ordination game arises and by co-locating in cities, veterans can achieve the mutually beneficial gains from cities while still preserving their network.

I believe that something similar happened after World War II. I think that this new mobility might have been a significant factor in making the economy stronger after the war than it had been in the 1930s. It is easier for new patterns of sustainable specialization and trade to form if people are willing to move.

Jason Collins reviews Jonathan Last

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Collins writes,

So, if government can’t make people have children they don’t want and can’t simply ship them in, Last asks if they could help people get the children they do want. As children go on to be taxpayers, government could cut social security taxes for those with more children and make people without children pay for what they’re not supporting. (Although you’d want to make sure there was no net burden of those children across their lives, as they’ll be old people one day too. There are limits to how far you could take that Ponzi scheme.)

Keep in mind that lower birth rates are an international phenomenon, so I am reluctant to place much weight on U.S.-specific factors. My sense is that the decline in birth rates is correlated with, if not caused by, increased education of women. If that is the main causal factor, then it probably is not something that is going to be reversed.

Also, I am not convinced that there is such a down side to slower population growth and eventual decline. Yes, it messes up entitlement programs for the elderly, but that is because those programs are ill conceived, particularly in not indexing the age of government dependency to longevity. You should fix the entitlement programs to deal with the demography rather than try to fix demography to deal with entitlement programs.

The Fed and Lehman

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Laurence Ball writes,

The people in charge in 2008, from Ben Bernanke on down, have said repeatedly that they wanted to save Lehman, but could not do so because they lacked the legal authority. . .

I conclude that the explanation offered by Fed officials is incorrect, in two senses: a perceived lack of legal authority was not the reason for the Fed’s inaction; and the Fed did in fact have the authority to rescue Lehman. I base these broad conclusions on the following findings:

  • There is a substantial record of policymakers’ deliberations before the bankruptcy, and it contains no evidence that they examined the adequacy of Lehman’s collateral, or that legal barriers deterred them from assisting the firm.
  • Arguments about legal authority made by policymakers since the bankruptcy are unpersuasive. These arguments involve flawed interpretations of economic and legal concepts, and factual claims that do not appear to be accurate.
  • From a de novo examination of Lehman’s finances, it is clear that the firm had ample collateral for a loan to meet its liquidity needs. Such a loan could have prevented a disorderly bankruptcy, with negligible risk to the Fed.
  • More specifically, Lehman probably could have survived by borrowing from the Fed’s Primary Dealer Credit Facility on the terms offered to other investment banks.

In short: Bernanke lied, Lehman died.

My thoughts:

1. Whenever you look at government policy in financial markets, assume that the primary goal is to allocate credit to preferred borrowers, particularly toward governments themselves. This goes for regulatory policy and so-called monetary policy.

2. I am inclined to interpret the decisions made in 2008 as credit allocation decisions based on Hank Paulson’s personal whims. Note that Ball says

The record also shows that the decision to let Lehman fail was made primarily by Treasury Secretary Henry Paulson. Fed officials deferred to Paulson even though they had sole authority to make the decision under the Federal Reserve Act.

The decisions helped some investment banks, including Goldman Sachs (the “AIG bailout” was mainly a funneling of short-term Treasury securities to Goldman and other investment banks). The decisions hurt Freddie Mac, Fannie Mae, and Lehman. I think that is what Paulson wanted to see happen.

3. Whereas Ball seems to suggest that the Fed should have bailed out Lehman, I am more inclined to believe that the government should have allowed institutions to go through bankruptcy or to make concessions among themselves. By the latter, I mean that if nobody bails out AIG, then maybe Goldman and the others decide that “collateral calls” are only going to hurt themselves in the long run, so they allow AIG to keep some near-term liquidity, and it ultimately survives.

4. The consensus story from the establishment is that Bernanke and Paulson saved the country from another Great Depression. Maybe that story is right, but with my heterodox views I do not believe it. I think that many ordinary citizens do not believe it, either. The widespread suspicion of the establishment gave rise to such phenomena as the Tea Party and, arguably, Donald Trump. It would be easier to defend the establishment if you could say that Bernanke was telling the truth.

An Outbreak of Laziness

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Erik Hurst says,

In our culture, where we are constantly connected to technology, activities like playing Xbox, browsing social media, and Snapchatting with friends raise the attractiveness of leisure time. And so it goes that if leisure time is more enjoyable, and as prices for these technologies continue to drop, people may be less willing to work at any given wage. This explanation may help us understand why we see steep declines in employment while wages remain steady – a trend that has been puzzling economists.

Right now, I’m gathering facts about the possible mechanisms at play, beginning with a hard look at time-use by young men with less than a four-year degree. In the 2000s, employment rates for this group dropped sharply – more than in any other group. We have determined that, in general, they are not going back to school or switching careers, so what are they doing with their time? The hours that they are not working have been replaced almost one for one with leisure time. Seventy-five percent of this new leisure time falls into one category: video games. The average low-skilled, unemployed man in this group plays video games an average of 12, and sometimes upwards of 30 hours per week.

Pointer from Tyler Cowen.

Back in the 1980s, during the Macro Wars, Franco Modigliani taunted freshwater economists with the line, “Was the Great Depression an outbreak of laziness?”

Paul Romer on Economic Growth

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He writes,

One of the biggest meta-ideas of modern life is to let people live together in dense urban agglomerations. A second is to allow market forces to guide most of the detailed decisions these people make about [how] they interact with each other.

Pointer from Mark Thoma.

Relevant because apparently he will be chief economist at he World Bank. I am not sure that his personality and that institution are meant for one another.

What I am Reading

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Jonah Lehrer’s new book, mentioned by Tyler Cowen.

Spare me comments about Lehrer’s past.

The central theme of the book is “attachment theory,” which is on the “nurture” side of the “nature vs. nurture” debate. For example, Lehrer suggests that the Flynn effect may be due to better parenting practices, with parents doing a better job of making their children feel securely attached.

This leaves Bryan Caplan with three possible reactions.

1. Lehrer is wrong. The evidence Lehrer cites for attachment theory consists of observational studies that do not establish causality and “natural experiments” that are unconvincing for other reasons.

2. Lehrer is right, but it is only through the attachment process that nurture affects children. Nothing else that parents do matters.

3. Lehrer is right, and perhaps this means that other parental behaviors matter also. Caplan’s world view has to change.

Barry Eichengreen’s GDP-factory Economics

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He writes,

Just as tariff protection is not a macroeconomic problem in deflationary, liquidity-trap-like conditions, freer trade, the economist’s familiar nostrum, is not a solution.

Pointer from Mark Thoma.

This illustrates the difference between thinking about the economy as a GDP factory and thinking about it in terms of Specialization and Trade. For those, like Eichengreen, who think in therms of ae GDP factory, there is no heterogeneity of goods or labor, and hence no benefits from trade of any kind. The key question is whether or not there is enough spending to keep the factory going at full capacity.

In contrast, the way I look at the economy, the key question is how well the economy is creating patterns of sustainable specialization and trade. Entrepreneurs must attempt, through trial and error, to find ways to utilize the available work force as tastes and technology evolve. From this perspective, Eichengreen’s ideas about the supposed costs of free trade and the supposed benefits of restrictions make no sense.

What I’ve Been Reading

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Field of Fight: How We Can Win the Global War Against Radical Islam and its Allies, by Lieutenant General Michael T. Flynn. About a week ago, he was mentioned as a potential Trump running mate. His book became available on Tuesday, and I finished it on Thursday, just before the attack in Nice. My thoughts:

1. The ratio of rhetoric to substance is too high for my taste.

2. The endorsement from Michael Ledeen is fitting. Like Ledeen, Flynn views the regime in Iran as the root of much evil.

3. Flynn frequently says that “we are losing” the war against radical Islam, without spelling out his basis for that assessment. At one point, he cites a figure of 30,000 deaths from terror attacks in 2014, compared to fewer than 8,000 in 2011. He also cites figures indicating that there are now 35,000 ISIS fighters in Syria, compared to 20,000 in 2015. Otherwise, I did not find any data, anecdotes, or analysis that justifies the claim that we are losing.

4. He asserts that

contrary to conventional wisdom, Radical Islam played a major role in Saddam Hussein’s Iraq long before our arrival in 2003

He provides support for that contention. Nonetheless, he says that

It was a huge strategic mistake to invade Iraq militarily. . .our primary target should have been Tehran, not Baghdad, and the method should have been political–support of the internal Iranian opposition.

5. He argues that we should use social media against radical Islam.

6. He says that we should call for a reformation of Islam.

7. He argues that we need to gain support of local populations, and what they most value is security. They will join whatever side they believe is winning.

Relative to the goal of gaining the confidence of the local population, I would imagine that the effect of drone strikes is small, and not necessarily positive. I do not believe that Flynn offers an opinion on that issue.

For me, (7) raises the question of whether we should send troops to the Middle East to try to defend local populations against Islamic radicals.

Suppose that we were to follow the libertarian policy of avoiding all foreign intervention. One scenario could be that as a result local populations in the Middle East decide that they have to accommodate the Islamic radicals. Then the radicals become strong enough to destabilize Europe and perhaps even take over some countries there. By the time they get around to attacking the U.S., they could be much closer to parity with us militarily than they are now.

On the other hand, I could argue against intervention by saying that the local populations appear to have too little capability and motivation to defend themselves against Islamic radicals for us to try to do the job for them. I would like to have seen this issue addressed in Flynn’s book.

Here is an op-ed by Flynn.