Monthly Archives: November 2017

Public schools, private goods

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Salim Furth writes,

we do not, in the suburbs, have a system of public schools. We have private, government-run schools. A public good is something available to all—non-excludable and non-rival in consumption, like clean air or a radio broadcast. But access to local school is eminently excludable: those who do not buy or rent a home in the right area cannot access it. And it is at least somewhat rivalrous in consumption, since crowding and peer effects play such a large role, at least in the perception of educational quality.

He says that universal school vouchers are a political non-starter.

The two most stable organizing principles of the political economy of the American family in the twenty-first century are that educational access is purchased with one’s home, and that established suburbs do not change their character.

Health spending negatively correlated with health outcomes

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Tomoaki Katera writes,

life expectancy at age 40 for males in the 90th income percentile is 45.3 years whereas the corresponding indicator in the 10th income percentile is only 35.8. For comparison, according to the report from National Center for Health Statistics, if all cancer deaths were eliminated, life expectancy at birth would increase only by 3.2 years.

…inequality would seem to matter since it can create differences in access to medical services. Interestingly, however, when I compare average medical spending by income groups, low income individuals tend to spend more on healthcare than high income individuals in most ages. The second viewpoint is motivated by the income-health gradient. It is widely accepted that higher income individuals tend to be in much better health than lower income individuals even when they are young. Moreover, the gap widens as they age. Many papers in health economics point out that widening health disparities by income can potentially arise from differences in unhealthy behaviors.

Pointer from Tyler Cowen. In the paper, Katera argues that the lower life expectancy of lower-income individuals reflects differences in their behavior rather than differences in access to medical services. My thoughts:

1. This seems consistent with Hansonian medicine, in which on average the benefits of more health care spending are about zero. But it also could suggest a counter to the Hanson view. That is, it could be that at the margin everyone benefits from more health care spending, but because the people who spend more tend to be people who behave in unhealthy ways, the benefits of more spending are difficult to tease out from the data. It is like trying to measure the relationship between policing and crime. If areas with a lot of crime tend to require more police, then a simple correlation analysis might suggest that adding police does not help to reduce crime.

2. Katera’s findings are not politically correct. I am on the record as saying that academic economics is headed toward a state in which findings like this will make one almost unemployable. Imagine trying to get Katera hired in a sociology department. Katera’s experience as a job candidate will be help to indicate how far along we are on this path.

Cantercap Charlie on finance and the 2008 crisis

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He wrote,

if banks are doing their job, the banking system is illiquid, and the rest of the economy —us— have lots of cash. In Econ 101 this is known as “maturity transformation.” Liquidity-wise, the banking system is simply the mirror image of the economy. Thus, compelling banks to become more liquid inevitably drains cash from all of us who are not banks.

This is another way of saying what I like to say, which is that the public wants to issue risky, long-term liabilities and to hold riskless, short-term assets, and financial intermediaries accommodate this by doing the opposite. This implies that for financial firms, a liquidity crisis blends into a solvency crisis. Banks must shrink their activity if there is sudden pressure on them to make their balance sheets more liquid.

In a more recent post, he writes,

what did cause the crisis? The causes were complex, but one force overwhelmed all others: regulation. Bad regulation. Mainly, the Basel I and Basel II Capital Standards.

He is referring to the Financial Crisis of 2008. Actually, I don’t believe that Basel II was all that important, because it still was mostly unimplemented by the time of the crisis. I would focus on Basel I and also on the Recourse Rule of 2001, which we might think of as Basel I(a).

More interestingly, he goes on to say,

the great untold secret of the crisis was the strength of the US commercial banking industry.

As crazy as this sounds, it may be spot on. Yes, Citigroup was in trouble, as he acknowledges. But most other commercial banks were not in bad shape. Some U.S. investment banks (aka “shadow banks”) were shakier, but the real problems were in Europe. He writes,

European banks in 2007 had aggregate tangible equity of roughly 1 trillion euros (at the time, about $1.1 trillion.) With a sensible leverage ratio of 5.0%, this equity would have supported E20 trillion in assets. But by 2000, the average European bank leverage ratio already had dwindled to 3.8% (insufficient), and then fell further — to 3.0% (wow) in 2007.* That may not sound like a big deal, but it’s more than a 20% systemic increase in leverage in just 7 years. This meant that for European banks alone, the Basel Regs goosed asset demand by at least E7 trillion ($8 trillion).** To think of it another way, European bank assets in 2007 exceeded what would have been prudent leverage (i.e. 5%) by E13 trillion ($15 trillion) — a third of European banking system assets.

I would add that many of the beneficiaries of the “AIG bailout” were European banks.

There is a lot of potential for revisionist history here.

Killer health care policy, thanks to David Cutler

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Ankur Gupta and others write,

These findings support the possibility that the Hospital Readmissions Reduction Program has had the unintended consequence of increased mortality in patients hospitalized with heart failure.

I found the article after seeing a reference in a WSJ editorial.

One of the conceits of David Cutler and health care economists who share his outlook is that technocrats can improve health care quality and lower cost by setting national standards and creating incentives for health care providers to meet those standards. But when you manage remotely, you do not necessarily manage well.

You think that high readmission rates are an indicator of inefficiency, so you tell hospitals to lower their readmission rates. They do so, and you get the “unintended consequence of increased mortality.” In your technocratic wisdom, you kill people.

Many years ago, when I heard Cutler speak on pay for performance (P4P) in health care, I was appalled.

During the Q&A at the event, I compared government trying to implement P4P in health care to trying to implement government P4P for middle management. After all, middle management in America’s big corporations and other organizations is also “hit or miss.” Yet nobody thinks that a big project to have government pay bonuses to good middle managers at Intel or General Motors would solve the problem. Even government itself does not attempt to determine the pay of individual managers in such a centralized fashion. We don’t think that people in Washington know more about your performance than the people who work most closely with you. My guess is that, using a program designed and implemented in Washington, we have about the same ability to affect the correlation between compensation and quality in medicine as we would in middle management.

The Paradox of Profits, parts 2 and 3

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Part 2 talks about the necessity of the profit system.

In a modern, large-scale economy, coordination takes place through a combination of bosses and profits. Bosses order people to undertake particular tasks. Profits and losses provide incentives to engage in certain economic activities and to curtail others.

Part 3 talks about the risks of trying to “fix” outcomes of the profit system.

1. The profit system is partially self-correcting.
2. Attempts to impose corrections are not as successful as one might hope.
3. Rather than attempt to identify and correct market failures, it would be better to advocate policies that enhance the self-correcting mechanisms of the profit system. In particular, government interventions should be focused on enabling competition to overcome entrenched economic power.

The essays are now attracting readers. But my guess is that I am almost entirely preaching to the converted.

Handle’s theory of consolidation

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Referring to Hayek’s claim that local knowledge favors decentralized decision processes, Handle comments,

IT and increasingly capable and sophisticated management information systems, which themselves benefit from massive economies of scale, and the management techniques they enable, has invalidated this argument. If anything, big companies now seem to have a clear advatange with regards to acquiring and leveraging ‘local knowledge’, and combined with the other advantages of brand recognition, size and sophistication and capacity for, e.g., rent-seeking and bearing the burden of compliance overhead, that leaves “the little, genuinely-independent guy” with zero chance in the long run

1. I wonder if this applies to government. If the U.S. federal government took advantage of Big Data, could we be as well-run as Singapore or Norway? I tend to doubt it. Perhaps someone wants to argue that we could be that well-run if we had an epistocracy.

2. Once again, I am reminded of a Diamond Age world. Technology can allow giant enterprises to meet everyone’s needs cheaply. By the same token, luxury consists of goods and services provided by small artisan craftspeople.

3. This is another instance in which the Internet vision of the 1990s, the days of the “hippie Internet,” is turning out to be wrong.

4. Will there be sufficient dynamism in this big-firm economy? Where will competition come from? From small firms that can suddenly get big and unseat big incumbents? From big incumbents trying to encroach on one another’s turf?

Disaggregating the economy: clusters ten years later

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A dozen years after coming out with The Clustering of America, Michael Weiss published The Clustered World, in 2000. This incorporated census data from 1990, which moved the analysis 10 years forward, but still leaves it well out of date as of 2017.

There was a movement to outlying locales that Weiss described as “repopulating rural America,” which struck me as a questionable description. I wonder if instead it represented metro areas spreading out into “edge cities.”

There was a rise in the Hispanic population, and Weiss claimed that this population was showing signs of wanting to stick together, rather than to assimilate into the rest of the country. He also saw an increase in isolation of the African-American population, which is the opposite of what one would have extrapolated based on prior trends toward integration.

Weiss used a survey of journalists to find that they lived predominantly in a few clusters toward the upper end of the income and status scale. It was already clear to him that they would have difficulty relating to people in middle-class and poor clusters.

Writing in 2000 and looking ahead, Weiss foresaw a continued increase in growth in far suburbs. Also, he made the straightforward projection that the Baby Boom generation would be headed toward a lifestyle characterized by retirement. With aging in general, he expected to see new clusters emerging with the age 55-75 bloc, as well as a cluster of people over 85 and ensconced in assisted living facilities.

He thought that there would be a distinctive Asian cluster, but my impression is that this has not developed. If I am correct about that, then the explanation is pretty simple. The “Asian” category is too broad, encompassing mainland Chinese, Taiwanese, Japanese, Koreans, Vietnamese, Indians, Pakistanis, and so on. These disparate nationalities do not all naturally congregate with one another. Instead, one is likely to find them dissolved into the rest of the U.S. population.

I would be curious to see what clusters would show up today. I assume that Charles Murray’s Coming Apart story means that we would see clusters that differ dramatically by marital status. We would see households with two married adults in relatively large numbers in affluent zip codes, and we would see single parents prevalent in poor zip codes.

I speculate that we would see a decline in the share of employment in the for-profit sector and an increase in employment in non-profits. This is based in part on the growth of the New Commanding Heights of education and health care. Also, I am guessing that the super-rich are inclined to fund non-profits, so that the size of that sector goes up as more wealth accrues to the super-rich. I do not know how significant a trend this is, or how well it can be measured.

I speculate that we would see an increase in the urban-rural divide. That is, compare average incomes in zip codes where most households are within, say, 25 miles of a major city (one of the top 20, say) with zip codes where most households are more than 50 miles from a major city.

I speculate that differences in average levels of education across zip codes now are even more predictive of income differences than they were twenty years ago.

I speculate that we would see little progress in integration of African-Americans and Hispanics. They would continue to appear in their own distinctive clusters more often than mixed in with clusters of non-Hispanic whites.

Disaggregating the economy: levels of digital skills

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Mark Muro writes,

the wage premium for digital skills (highlighted above) has nearly doubled since 2002. That means that the mean pay of workers in higher-level digital occupations (about $73,000) now more than doubles the $30,000 wage of low-digital workers.

…women—despite having slightly higher mean digital scores—remain heavily under-represented in highly digital computer and engineering occupations (but over-represented in office admin, education, and health occupations). Likewise, blacks are overrepresented in medium-digital occupations like office support and health care support, while Hispanics are greatly underrepresented in highly digital tech positions and overrepresented in low-digital domains such as farming, construction, and building and grounds maintenance.

… the digital rich among metro areas appear to be getting even richer, and now—as a consequence—are pulling away from the rest of metros on basic measures of prosperity.

Turning to the full report by Muro and co-authors, I find

In 2002, 56 percent of the jobs studied required low amounts of digital skills. Nearly 40 percent of jobs required medium digital skills and just 5 percent required high digital skills.

A lot has changed. By 2016, the share of jobs requiring high digital skills had jumped to 23 percent. The share requiring medium digital skills rose to 48 percent. And in a huge shift, the share of jobs requiring low digital skills fell from 56 to 30 percent.

Revive this research

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I just finished re-reading The Clustering of America, by Michael J. Weiss. It is a narrative description of forty different socioeconomic clusters, derived primarily from census data, mixed with some market information. It was published in 1988.

1. Somebody should keep this project going. Weiss published an updated version in 2000, which I will read next. But there would be much to be gained by providing a narrative that describes socioeconomic clusters based on the most recent data available (2010 if you take the most recent census, but my guess is that you could get reasonable estimates for 2015). It would be valuable to look at the cluster evolution over time.

2. The company with the data, Claritas, still exists. Elsewhere, of course, there is much more data, at companies like Google and Amazon. I suppose it is easier for those firms to merge census data in with their own proprietary data than it is for someone outside of those firms to start with the Claritas data and attempt to acquire and integrate the information from the web giants.

3. Weiss offered a brief section, called “clusters of the future.” One of them, which he called Gentrification Chic, seems spot on. Other predictions are not as easy to defend.

Stanford University reports that twenty occupations will account for 35 percent of the new jobs in the ’80s, but only two of them, elementary-school teaching and accounting, require college degrees. The AFL-CIO predicts that by 1990 the nation will be home to 500,000 “surplus college graduates” with outmoded skills. The end of the decade may bring about a cluster for the postindustrial age: New-Collar Condos. In city condo and townhouse developments, singles and couples will work in service-industry professions, as paralegals, computer programmers and medical assistants.

Before you snort at the prediction of “surplus college graduates,” consider why that prediction appears to be wrong. Yes, if you compare incomes of people with college degrees with those lacking a college degree, the gap is wide and has gotten wider. However, (a) it may nonetheless be true that a lot of college graduates are doing jobs that use skills not acquired in college; (b) some of the “college premium” represents returns to signaling or licensing requirements; (c) the ordinary BA has not done so well in the market. Graduate degrees and STEM undergraduate degrees account for much of the college premium.

Weiss does not appear to have obtained an advanced degree. However, The Clustering of America is a classic work of social science.

Crowded and Unsanitary

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Glenn Reynolds writes,

It wasn’t until you crowded thousands, or tens of thousands of them, along with their animals, into small dense areas with poor sanitation that disease outbreaks took off. Instead of meeting dozens of new people per year, an urban dweller probably encountered hundreds per day. Diseases that would have affected only a few people at a time as they spread slowly across a continent (or just burned out for lack of new carriers) would now leap from person to person in a flash.

He is talking about the effect of urbanization on disease. But the point is to use this as a metaphor for social media’s effect on our mental life. He says that perhaps diseases of the mind are now spreading quickly. As with urbanization, the trick with social media will be to obtain the benefits and to contain the risks.

Possibly related: in the Peterson/Haidt discussion I referred to the other day, they talk about how the sense of disgust may have evolve to protect people from disease. We tend to feel an instinctive disgust toward groups with customs and manners that differ from our own. If you can overcome this instinct to feel disgust when you are around foreigners, then you can benefit from their ideas and culture. But you increase somewhat your risk of contracting disease. Peterson describes Adolf Hitler as operating on the theory that having Jews or Gypsies in a population was like having rats in a factory. He was so concerned about the disease that might be spread by such creatures that he wanted them eradicated.