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Lets think of the three engines of stagnation: Education, Medicine and Finance.
A couple of points
- All high human capital areas. Higher Ed and Medicine are obvious to the man on the street. There are a lot of “Drs” on Wall Street as well but in addition finance has developed a set of human capital markers all its own. Investment Bank interviews for example, do sometimes offer IQ tests of a sort – they ask brain teaser type interview questions.
- TFP growth depends on the returns to innovation not being captured by the innovator. Otherwise it becomes a return to the factor of production rather than total factor productivity
- Returns to human capital are rising.
Immiseration of physical capital side note. Suppose there are two types of assets: Easy to understand, lets call them stocks and government bonds; and hard to understand, lets call them debt instruments and venture capital.
A low level of global savings implies makes it easier for the return between these two classes of assets to be close. Rapidly increase the global supply of savings without increasing the number of savvy investors and the return to easy to understand assets will collapse, but not hard to understand.
This could result in meager returns to capital generally, but very high returns to specific forms of capital.
There have been interesting comments from my first two Rorty post. Watching my commenters spare a bit has deepened my understanding.
I am still reading Philosophy as Cultural Politics and read through the following piece at UK Prospect, which I found helpful.
I’d be happy to hear other reading suggestions as well as general musing on the topic.
My sense so far is that way I use the term truth differs significantly from the way philosophers do. I think of truth as correspondence between the map of reality I carry in my head and the experiences I experiencing. I say the map is true when I am experiencing what the map says I should be experiencing.
However, I gather this is far too narrow a definition for philosophers. There seems to be sense in which philosophers want to say that the map is or is not “fundamentally true” and that differs from my simply being able to find my way from point A to point B using said map.
Is this much correct? If so, does this mean I am already a proto-Rortian or am I completely outside of Rorty’s paradigm? Perhaps even opposed to it?
In and all comments are welcome including the comment that this is all a ridiculous waste of time.
At significant risk to your perceptions of me, I post this early on a Wednesday. Last week Adam posted an interview with Marion Nestle, who is a strong advocate for something that I can’t really figure out, but being charitable I presume it is adding warning labels for artificial food coloring on foods due to their effect on childhood hyperactivity. Her rationalizations are weak, and the evidence doesn’t seem to be on her side, but I was surprised (and delighted) to find this on my can of horrible high-alcohol malt liquor:
I have no idea where the inclination to add FD&C Blue #1 and Red #40 came from. I certainly didn’t care (not when there’s another label proclaiming 12% alcohol!). I would imagine that it has to be regulatory, since this isn’t even the class of product that do-gooders are worried about. On a related Adam Ozimek note regarding slippery slopes, an Iowa Congressman proposed legislation banning the mixing of alcohol with caffeinated beverages. I don’t think it got anywhere.
Update: Indeed, it looks as if this is due to regulation. So maybe not so much market reform leader as harbinger of regulatory burden. Apparently cochineal extract and carmine carry risks of severe allergic reaction, including anaphylaxis. I actually agree with this, as labels are fairly benign from a cost perspective, and widely illuminating if you happen to have such a condition. Much more rational than a ban based on dubious evidence.
Tyler Cowen says
If currency disappeared, how might negative nominal interest rates come about? The market won’t do it automatically. Let’s say we start with zero price inflation and the real rate of return goes negative. Competitive banks won’t impose negative nominal rates, rather the equilibrium is that they stop further real investments and pay zero on the balances. One constraint is that some form of withdrawals may always be possible, the more important constraint is simply that “storing balances” costs almost nothing at the margin and so competition will bring a zero rather than negative nominal return, adjusting for costs of transacting of course.
Think of the action as moving through the bond market. Suppose currently the central bank wanted to keep buying Treasuries until the interest rate went negative. This would be difficult though not impossible.
Once the yield went even a bit negative banks would simply sell all of their bonds into reserves, which they could – and typically do – convert to cash. However, in our new world there is no cash.
A penalty rate on reserves means that the demand for Treasuries is no longer completely elastic at zero. Thus the interest rate of Treasuries can go negative.
At this point banks lose money holding both reserves and Treasuries. The incentive is to go into some other asset which is yielding some non-negative nominal return even if it yields a risk adjusted negative return.
Right here this should break the ZLB. But, we can take the chain of events forward.
On the consumer side you get higher fees on checking accounts, perhaps even a penalty rate. This pushes consumers into savings accounts. An increase in the supply of savings would then push savings account rate negatives.
You might ask why this would prevail in the market; why the bank not just accept savings for free? Well, because the way the bank accepts savings is by first accepting reserves. Reserves come with a penalty that you now want to get rid off.
That is, you open a savings account at ABC bank. How do you deposit money into that account? By writing a check from XYZ bank. That check clears by XYZ transferring reserves to ABC. Now ABC is paying the penalty. They don’t want to do this and need some incentive from the saver to make this happen.
With no cash outlet the monetary base can become fundamentally costly to hold, which means that you will “pay” people to take it off your hands. This means buying more inventory than you would at a given price or hiring more workers than you would or even purchasing more durables than you would.
Paul Krugman is upset about Obama’s appeasement of the right
The Post says that Obama is going to more or less endorse Bowles-Simpson in his Wednesday talk.
Sigh.
Matt Yglesias joins
Once the President of the United States accepts the premise that it’s reasonable to ask him to make concessions in exchange for an increase in the debt ceiling that both John Boehner and Eric Cantor have conceded is necessary, he’s giving away the game.
Mike Konczal has general disapproval
At the end of last year I wrote a post about how President Obama is bad at losing. I like that conceptual model because the idea that President Obama is bad at losing – that he loses in a way that conflicts his base, concedes too much to his opponents and doesn’t leave liberalism in a better position to fight next round – is robust to many different ideas about the current state of Democratic Party.
I’ll offer some amateur outside the beltway strategery analysis. Given the behavior of the Obama White House, it looks to me like their primary objective is to secure an expansion in the scope of government funded health care by avoiding conflict on all other issues.
This explains the steady even if bloody push to pass the PPACA. It explains the seeming disinterest in meaningful shifts in policy in other areas. It explains why Obama was for the stimulus when it seemed popular and conceded to austerity when it seemed popular.
This is a classic Fabian approach. Avoid engaging the enemy when time is on your side. This also seems like an accurate description of the progressive movements position. While at the moment Progressivism may lose a head-on confrontation, time is indeed on its side. Its opposition is older and grounded in institutions which are losing power. The intellectual base of the right is eroding. Political opinion is solidifying around the notion that there will be some form of universal health care.
As always the Fabian defense is unpopular with hawks, who would prefer that the enemy be engaged and crushed. However, it is successful.
Now as always I think the politics of these big issues is not that important. I suspect that in the end the equilibrium will be determined by fundamentals. However, if you were going to play a pro-progressive political strategy this doesn’t seem like a bad one.
Matt Yglesias responds to my post of Rorty and Truth offering a potential short cut to understanding.
You’re saying things and you’re talking about things that are being said. And while people can (and do) devise formal languages on their own and by stipulation, ordinary language doesn’t work this way. English is a set of social conventions and so is French and so are all the rest. Note that this doesn’t commit you to any kind of outlandish propositions about the nature of the world, it’s an account of the nature of descriptions of the world. It says that there will always be some margins at which the distinctions between advancing false claims and misusing words breaks down.
So, to make sure I am taking this correctly, the Rortian line of reasoning is not addressing whether there are true and false relationships between concepts but the extent to which we can talk about true and false relationships between concepts.
I suppose at some level there is the problem of whether one can even talk to ones self about the truth of a proposition. However, I think there are propositions for which the truth value has relevance even if the proposition cannot be expressed.
Strong statement…but bear with me.
Imagine that you are in a game where you are required to pick a strategy for each round that you think will maximize global benefits. You are the principal strategist, and each round every other player will evaluate your strategy for efficacy against a common goal using proprietary information.
What is the optimal strategy in this game? Is it to announce everything you’ll play this round, or is it to announce your intended target, and never specify a time frame?
I hold that the latter is the optimal strategy. Why? For three reasons:
- Time is always and everywhere a binding constraint.
- The optimal goal in any game is to minimize binding contraints.
- You invite critcism either way.
If you take those three rationalizations seriously, then in the Fed has been playing the wrong strategy all along. If you define a goal for NGDP, then there is no need for much of the criticism that the Fed has received…its problem is that it did nothing of the sort. If the Fed had followed my strategy, then there would have been no need for QE2, and the ensuing debates…QE would have been QE, and that’s it…until NGDP was growing at the previous level trend.
The key in this game is not not have to play a hand every round. You are best to define yourself immediately, and then you set up a defensible position that needs little maintenance after the first round.
The Fed did not play my strategy…and we contine to suffer because of it.
So I am reading Richard Rorty’s Philosophy as Cultural Politics. In part I am reading because I read that Rorty said “truth is what my peer will let me get away with.” This seemed obviously false and I wanted to know what he meant.
So far I have noticed that there is huge strain of philosophy that is unknown to me and that it will take a long time to get to all of it.
However, I think I can report that there is less to my disagreement with Rorty than I first thought. So far, I have encountered the quote
For what counts as an accurate report of the truth is what a community will let you get away with.
This seems clearly true. Moreover, at least so far, in this book, Rorty seems to be concerned with what we should believe which is, in my terms separate from what is true. You may think – as I do – that we should believe things because they are true, but this is certainly not the only reason to believe something.
Moreover, if you asked me why I want to believe things that are true, my ultimate answer is simply compulsion. Truth is obviously useful in many circumstances but there are circumstances in which it would be more convenient to believe a lie.
Yet, I am compelled towards the truth and I really don’t have any further justification.
Jim Hamilton has a post on health care that excellent because it illustrates precisely what is wrong with conventional wisdom on this issue.
First he says
The historical growth of federal expenditures on health care is unsustainable. Over the last 20 years, Medicare and Medicaid expenditures grew at an 8.4% continuously compounded annual rate (data source: CBO). That’s 3.75% faster per year than GDP grew, and for that difference in growth rates, federal health care expenditures as a percentage of GDP would double every 18.5 years. If those historical growth rates were to continue, federal health expenditures would rise from their current 5.4% of GDP to 10% of GDP by 2027 and 20% of GDP by 2045. Something has to give.
In a very tiny sliver of a way this is true. It is impossible for some segment of GDP to grow by more than GDP indefinitely. However, this will not happen. GDP growth will mechanically converge to health care growth. No intervention is necessary. See below.
However, in the sense that Jim means it, it is wrong. Government health care expenditures of 20% of GDP are completely possible. On the GDP side there is at least 80% of GDP to go.
There is some limit of the ability of government to extract resources from the larger economy, however, this will not be hit at the 45%-ish level implied by Jim’s numbers.
What may be true is the scenario under which government health care expenditures rise to 20% would be undesirable to Jim. I don’t mean this in a dismissive way. If you asked me whether we should we kill all of the elderly and eat their flesh, I would answer that such a scenario is undesirable. It is, of course, however, possible and as things go sustainable.
This is important because under the guise of seriousness people have a tendency to resort to saying things that are false. They often say that they think the truth is “ridiculous” or “absurd.”
What I believe they mean is that truth is too uncomfortable to entertain and so will all agree to start saying things that are not true. This has some usefulness because most people have more emotional problems discussing the details of ghastly scenarios than I do.
Still I feel it is important to remind people that they are engaging is systematic errors and should not be surprised when things don’t work out as planned.
Second he says
The basic reality is that we have found some ways to prolong life and reduce suffering that are very, very expensive. What we need, in my opinion, is a social and moral framework for deciding which of these are worth doing and which are not.
And there are three ways to determine which medical services don’t get provided.
- (a) The government can limit the procedures it will pay for and the people who are eligible to receive them.
- (b) The insurance company or other third party can limit the procedures they will pay for and the people who are eligible to receive them.
- (c) If (a) and (b) both say no and you don’t have the money yourself to pay for it, then you do not receive the treatment.
Each of those options is morally troubling to many of us. But reality forces us to choose some mix of the three. Pretending that there are no tough choices just digs us deeper into a debt that can’t be repaid.
The reality, of course, does not force us to choose a mix of these three. Indeed, the last sentence in the passage details one alternative choice. Simply ignore the problem and continue to mount up massive debt. If reality forced us to do one of the three then the massive debt scenario would, by assumption, be impossible.
The questions, of course, are is this scenario desirable, likely in the face of current policy, sustainable into the reasonable future, etc.
Where Jim is right, however, is that at the core this is a moral issue. This is in part why the politics are to a large extent much ado about nothing. The probability that you are going to convince the majority of the American people to continuously endorse practices they believe to be morally wrong seem extremely unlikely to me.
This is why those who would not like to see health care grow rapidly as a percentage of the budget should focus on how to make a slower rate of health growth consistent with popular morality. In the absence of that, I believe you will get the system in which health care costs grow rapidly as function of the economy and – sans radical technological transformation – consume the entire economy.
This requires tackling the morality of health care at its core. Why is it that people have the health care morals that they do. Robin Hanson provides the most convincing answer to me so far.
Showing That You Care: The Evolution of Health Altruism
_______________________________________________________________
Remember that GDP is simply the sum of of all the things we buy plus net exports. Once health care because most of what we are buying it will become most of GDP, thus its growth rate will dominate the growth rate of GDP. How you measure rising costs will determine whether the stats report an economy with increasing inflation or increasing real growth but the underlying reality will be the same.
I just got around to watching Robin’s diavlog with Brian Christian, on Christian’s book The Most Human Human. I find the comments section fascinating.
Here is one quote
Seems to me Brian raises a valid concern. Don’t act like an animal, and don’t act like a machine. Robin seems to have a hard time understanding the concept, maybe it would help if he’d read EF Schumacher’s book with the very telling (to Brian’s argument) "Small is Beautiful– Economics as if people mattered."
It seemed to me that Christian’s point was that shallow people suck and deep people rock, and that Robin attacked this immediately.
The core split between Christian’s perspective and that of economists is that Christian implicitly assumes that good systems elevate “good people”.
So for example, if the system of an agrarian economy was so good then why did the Kings and Queens of that world spend their time playing like they were hunter-gathers.
Further, scripts whether in sales, dating or politics cannot be good if they allow people who are fundamentally shallow to rise to prominence.
We can go on to analogize that systems which allow computes – which are lessor – to fake at being human are not good because they are elevating the lessor.
Of course, the reply is that makes sense if you have all of the qualities that make a person good. But, what if you don’t? What if you are a less human, human?
Then this entire philosophy is demeaning.
In short don’t act like an animal or a machine is a nice sentiment if you are the type of person who is very different from an animal or a machine. If you are the type of person who is more like an animal or a machine or enjoys being more like an animal or a machine then it is just telling you that you suck.
Here is a chart of Federal revenue as a share of GDP in Canada, posted by Livio De Matteo, one of the newer bloggers at Worthwhile Canadian Initiative:
Many a contemporary American libertarian dreams of the day when US Federal spending is confined to ~15% of GDP. However, in the real world this happens in a country that has a fairly robust single-payer basic health care system*, early-childhood-on education initiatives (a previous Conservative government even passed a fairly robust school choice plan that was subsequently killed by a Liberal government after 2 years), and a generally higher level of simple transfers. Some transfers don’t make a whole lot of sense, and kind of get caught in backflips, but nevertheless, there it is. Canada seems to take in ~15% of GDP in taxes, although there is a fit about the budget deficit, which is measured in the happy-go-lucky millions.
I think this lends some credence to the notion that I know Matt Yglesias and Kevin Drum are partial to. That is, ‘largely release people from sources of grave uncertainty (like spells of unemployment, extreme health care and education bills, etc., which can be done at a relatively cheap cost), and sensible market reforms become much more popular’. I can see Canada leading the way in replacing their income tax with a revenue-neutral carbon tax.
But there is a chicken-and-egg story here, as noted by Joseph Heath**:
…it is important to observe that this lack of a correlation [between redistribution and long-term growth of GDP per-capita per Peter Linder's work] does not show that economic theory is false, that incentives don’t matter, and that government cna do whatever it wants. The lesson to be learned is exactly the opposite. One of the major reasons that big-spending governments tend not to be penalized by the market is that, due to their very bigness, they need to operate more efficiently, and they need to work harder to get incentives right.
The US government, by contrast, has a tax code that is seemingly designed, from the ground up, to keep tax accountants and attorneys employed. Our institutional structure is to blame for most of this, but our relatively low individual tax rates (compared to other rich democracies) enable it.
This is an important story since we’re wading into a battle between spending cuts and raising revenue. As I think about the issue more, I notice that few of my complains come from the entitlement state at all, and the ones that do are about the structure of programs, not the programs themselves. In contrast, I have major complaints about the revenue side of government, and still more major complains about the regulatory side of government (at the local, state, and Federal levels). I think a lot of self-styled libertarians or people who lean that way feel the same way. I don’t think that utilitarian redistribution is a bad trade for some of my other goals (which would likely uncomfortably expose certain segments of the population to the cold whims of the marketplace). How about you?
Note: Provincial spending in Canada pushes government/gdp up to ~32% vs ~28% in the US.
*With the option of pursuing private insurance above and beyond. Not my preferred plan, but it seems work on average.
**Filthy Lucre, pp57-61
Via Arnold Kling this from the Maryland Public Policy Institute
In “Maryland’s Fiscal Slide,” Eileen Norcross, lead researcher for the State and Local Policy Project at the Mercatus Center at George Mason University, notes that in FY 2011, Maryland will enter its third year of recession, and its fifth year of structural deficit. Although Maryland has a constitutionally defined balanced budget rule that requires the Governor to present — and the legislature to pass — a balanced budget, Norcross argues that any appearance of budgetary balance has been achieved not through fiscal discipline but, rather, through fiscal maneuvers such as fund sweeps, debt finance, federal aid, and raiding the state’s Rainy Day Fund. This long-standing game of budgetary Three-card Monte has created the illusion of fiscal restraint, while exploding the state’s structural deficit.
Perhaps there is something more sophisticated behind Norcross’s claim but using the phrase “raiding the state’s Rainy Day Fund” really lowers the credibility of her statements.
The entire idea of a Rainy Day Fund is to support the state during tough economic times. This is a tough economic time. Thus it makes sense to use money from such a fund during our currently tough economic times.
One of Byran Caplan’s 40 lessons is that there are moral facts.
It makes sense to me that there might be a native moral grammar, an organization of moral beliefs to which virtually all people subscribe. Further, there may be moral belief systems that are nonsensical. No normal person could make sense of what is being asserted.
However, I am not convinced that there are moral facts, that there are things which are right and wrong in and of themselves. Reading the link that Bryan provided fails to persuade me that this is the case. The author states
. . . it has been argued from time to time that moral relativism presents a simpler picture of the universe than objectivism. Objectivism postulates these entities, objective moral values, that we could explain the world just as easily if not more easily without. Therefore, the burden is on the objectivist to prove the existence of these things.
I think this argument is insincere; that is, nobody ever became a relativist because of this. It was invented after the fact to confuse objectivists.
The argument is exactly analogous to the following argument for mathematical relativism: Objectivism postulates these entities, objective numbers and numerical relationships, that we could explain the world just as easily if not more easily without. Therefore, the burden is on the objectivist to prove the existence of these things. Since he cannot do so, I conclude that all mathematical statements are arbitrary and subjective.
First the analogy strikes me as false. Is it easier to explain the world without postulating the existence of the counting numbers? That is 1, 2, 3 etc? Once you have that you can derive everything else from pure reason. Moreover, we have an even more primitive derivation of the counting numbers that comes from set theory. If we simply assume that we can group things into a set and say “I mean these things as opposed to other things” then we can derive the counting numbers.
Its hard for me to see how the world could be simpler if we suggest that there is no meaningful way to distinguish one group of things from another.
Second the author goes on to say
If anything, we should say that the burden of proof is on the moral relativist, for advancing a claim contrary to common sense.
I am not sure this holds but in any case it doesn’t seem to be true once people are introduced to competing norms. When people observe that kissing before marriage was considered immoral in some societies the immediate reaction of many is to jump to relativism and say “what is wrong for them is not wrong for us.”
Thus in a world where people observe competing moral norms relativism seems to be the common sense reaction. That is not to say its correct because of this but simply that the common sense appeal to moral facts can’t claim the unambiguous ground of common sense.
To the central question, are there moral facts, its not clear to me what could be meant by this statement. For example
Suppose we live in a world where there are moral facts that extend beyond our moral norms. Suddenly and by magic we are transported to a world in which there are no moral facts but only moral norms.
What would have changed? Even in theory how would we know? If there is no conceivable way to tell the difference between the world in which there are moral facts from the world in which there are not then how can this be a meaningful concept.
To be clear let me draw an analogy with God. Under most conceptions of God that I am aware of there is a conceivable, if not practically achievable, way of establishing a difference. For example, many theist assert that there is an afterlife in which one will be able to interact with God on some level. Then its case that if God exists I will be able to interact with him in the afterlife and if he does not exist I will not.
It seems to me that any meaningful conception of God has to have some potential state like this. If it could never be the case under any conceivable conditions that I could experience something in the world where God exists that I couldn’t experience in the world where God does not exist then I don’t know what it means to say God exists.
What is the corollary for moral facts? Supposing they do exist what happens if suddenly they went away?
And offers 40 pieces of wisdom.
My first foray into blogging was as a graduate intern at the Institute for Emerging Issues. I didn’t even know what blogs were but my boss Roland Stephen was convinced that they were the future and so insisted that I contribute to Institute’s blog. I contributed a bit, but I read more and in the early days I mostly read Bryan.
Everyone should.
If you find his point of view shocking and distasteful, all the better. Bryan’s writing is not a place where you get to hear a clever person weave together elegant rhetoric defending things you already thought were true.
It’s a place where your most basic notions are repeatedly challenged and where your intellectual sacred cows are gleefully dined upon before your very eyes.
Ultimately you may find some of his arguments compelling. You may find some of them thought provoking and you may find some of them flat out wrong. But, in all cases you will find argument, which if you take seriously will stretch your understanding of your own beliefs. If you do nothing but carefully convince yourself why Bryan is – as you suspected – out of his mind, you will have done yourself a favor.
So today, read Bryan’s 40 points and tell the world, in grave detail, why at least one of them is absolutely wrong.
It is hard for some people to believe this, but markets can and do provide people with products and services produced in accordance with their values in a way in which many presume requires regulators. A lot of what we would think of as unethical behavior on the part of firms could be done away with if consumers demanded it.
I think progressives would disagree with me here by pointing to surveys that show consumers want all sorts of goods produced in accordance with progressive values that the market isn’t providing. Yes, I’m sure if you ask them, consumers say they would pay $.01 more per pound to give tomato pickers a $2 an hour raise. I’m sure people tell survey respondents they’d love organically grown food, or higher gas mileage cars, and that they would definitely pay a lot more for it, it’s just that companies are providing them. The progressive response here is that businesses must be forced, nudged, or subsidized into providing what consumers want. But what people will tell a surveyor that they want and what they say they’d be willing to pay for it doesn’t actually determine the market-wide willingness to pay. It’s what they actually would pay. This is what economists call “stated preference” versus “revealed preference”. As you can imagine, revealed preference holds a lot more weight among academics.
I think the demand for more environmentally friendly and ethical agriculture is a good thing, and will in the long-run lead to improved conditions better than what regulations alone can or would provide. Sometimes regulations can even get in the way of market outcomes that would be more in accordance with progressive values.
Case in point is slaughterhouses. A recent story in the New York Times details how a slaughterhouse shortage is stymieing a variety of local, organic, and more humane meat producers:
One might expect the Bay Area — as the epicenter of the eat-local movement and a region with a long tradition of cattle ranching — to be a mecca for producers of organic and grass-fed beef. But there is a problem: a shortage of slaughterhouses is so acute that it is stunting the growth of this emerging industry….
Slaughterhouses have been on the decline nationwide, but a demand for more niche products has led to an increase of small slaughterhouses nationwide. In California however, there remains a shortage. The story explains why:
…Mr. Thiboumery is pessimistic about the chances for new facilities in California. Here, potential operators face stringent state regulations, unforgiving zoning laws and the dreaded Nimby factor.
“Basically, if I were to build a slaughterhouse, the last place I would build it is California,” Mr. Thiboumery said.
The article doesn’t go into it, but as I’ve written before, USDA regulations set equipment mandates designed for large, industrial, high volume slaughterhouses in a way that is too costly for smaller slaughterhouses ones to afford at the scale and volume demanded from them. Loosening these regulations seems like an area for cooperation between progressives and libertarians.
Of course, libertarians would argue that once you decide to set equipment standards you’re destined for regulatory capture such that the only way to really prevent this type of subtle protectionism is to stop setting equipment standards. Progressives would counter that if you don’t set these standards, then the companies will race to the bottom and use the least safe equipment possible, the costs of which will be borne by workers. The libertarian counter-counter-point is that more dangerous conditions will mean they will need to pay higher wages, but progressives would respond….. Wait, why did I think this was a possible area for libertarian and progressive agreement again?
Recently a panel of experts was convened by the FDA to re-examine whether artificial food coloring causes hyperactivity in children. They concluded that evidence did not show a link between the two, stating the following:
Based on our review of the data from published literature, FDA concludes that a causal relationship between exposure to color additives and hyperactivity in children in the general population has not been established
Marion Nestle, a frequently quoted expert on food policy and Professor of Public Health and Sociology at NYU, wrote about the issue on her blog and at The Atlantic. It was unclear to me from what she wrote whether or not Dr. Nestle agreed with the panel’s decision to not ban these products, so I emailed her to see if she would answer a few questions for me, and she kindly complied. I think the exchange is illustrative of two very different ways of thinking about regulation, and what regulators should consider. Below is a lightly edited version of our email exchange:
AO: I’ve been reading what you’ve written on food coloring, it’s not clear to me whether you’d support a ban on food coloring or not. I was hoping you could tell me what your position on the policy is.
MN: Since they are unnecessary and deceptive, I can’t see any reason to do anything to protect their use.
AO: You say that food coloring is “unnecessary and deceptive “. But couldn’t you say the same thing of essentially any garnish or cooking technique designed to make food appear more appealing without physically modifying the flavor?
MN: The issue is artificial. Food garnishes and cooking techniques are usually not.
AO: You say that food additives aren’t “needed” but there are many ingredients and foods which aren’t “needed” given the variety of substitutes and choices we have. If you’re looking at how much a product is worth to consumers, and trying to understand how consumers will be harmed by banning it, isn’t ”valued” a more appropriate criteria than “needed”? Shouldn’t that be what regulators consider?
MN: Valued by whom? Industry, certainly. Food is fine as it is. It doesn’t need artificial enhancements. Foods that “need” artificial dyes are not really food. They are “food-like objects.”
AO: You imply in your blog post that if this food coloring is banned, people will eat less of the unhealthy foods that use it. Why would people eat less of these foods when artificial coloring is taken out if they didn’t value that coloring? Doesn’t it have to be the case that they like it less, or that prices go up? And in either case don’t consumers have less of something they value?
MN: Surely, artificial food dyes can be replaced by something better.
AO: If a parent wants to know whether a food contains coloring, can they find out that information today?
MN: To some extent, but the labeling rules leave lots of room for loopholes.
AO: In your blog you also say that parents of hyperactive kids can easily do their own experiments. Are the available labels sufficient for this? Or are clearer labels needed?
MN: My advice to everyone (only slightly facetious) is not to buy foods from the center aisles of supermarkets, and to avoid buying anything with more than five ingredients, anything they can’t pronounce, anything artificial, and anything with a cartoon on the package. That should take care of most problems.
In several posts Krugman complains that Paul Ryan’s Budget is impossible in multiple respects
First, the plan assumes that tax cuts will set off a literally unprecedented boom. Here’s again, is what is assumed about unemployment:
[…]
Notice the marked area at the bottom: Ryan is assuming that everything aside from health and SS can be squeezed from 12 percent of GDP now to 3 1/2 percent of GDP. That’s bigger than the assumed cut in health care spending relative to baseline; it accounts for all of the projected deficit reduction, since the alleged health savings are all used to finance tax cuts. And how is this supposed to be accomplished? Not explained.
[…]
More from that Heritage forecast the Ryan plan relies on (2011 is an estimate interpolated from the baseline, the rest directly from the report):
So, do you find this plausible?
I should note that every single one of these projections is utterly possible and indeed internally consistent. Paul Ryan and Heritage are implicitly assuming a repeal of US immigration restrictions.
Such a restriction would drive up GDP and down the portion of GDP spent on defense. It would result in an enormous housing boom and the aftermath of that boom will bring down the rate of unemployment.
If this had simply been made explicit I would have endorsed the plan immediately.
In an earlier post Arnold Kling says
Ordinarily, my philosophy is "catch them doing something right." If you try to correct people when they do something wrong, they just take offense, and you accomplish nothing
Which explains why Arnold references me so infrequently. 
But more seriously if you think I am wrong don’t hesitate to say so. I picked up from another post of Arnold’s that he disagreed with my take on Mike Mandel. Mandel himself wrote a response and I agreed with one his main critiques of my critique.
I think Mandel and I ended up agreeing that the key question is whether or not an improvement in the terms of trade is equivalent to a productivity increase and Mandel noted he has a paper coming out soon detailing why he thinks they are not. This is the blogosphere at its best.
Our ultimate hope is not have been right but to be right. This can only happen when (1) risk saying things that are wrong (2) get called out on it and correct ourselves.
Also, I don’t always read all the comments so if there is something you really want to call my attention to email me.
Lastly, I meant to post on this but I don’t think I did. Arnold’s talk at Kauffman gave me still better insight into where he is coming from and the folk dancing and doves bit actually helped. I am serious about that.
From Calculated Risk
Housing economist Tom Lawler predicted this afternoon: ‘Rising rents combined with a substantial reduction in the “excess supply” of housing (single family as well) will also help stem the recent “renewed” downturn in US home prices well before the end of this year.’
I think prices might fall for another year or two in real terms (inflation adjusted), but I agree that it is likely that nominal house prices will bottom this year.
This seems more or less right to me but I want to be clear that I am not focused on home prices.
I am focused on the actual number of homes. Further, when these guys talk about “excess supply” they mean potential market transactions. I am thinking more in terms of the fundamentals of units per US resident.
There are lots of reasons why market transactions in general and price in particular would deviate from core fundamentals. The most obvious is financing. When its easy to get a loan then people will buy more houses. When its hard to get a loan then people will buy fewer.
However, unless there is a permanent change in housing affordability we should expect the market to trend back to the fundamentals. We don’t even have to invoke inefficient markets to get this result, though it could be exacerbated by inefficient markets.
In a perfectly efficient world with no mistakes ever, it would still be the case that there will be periods of high returns in other sectors draw resources out of housing and periods of low returns in other sectors push resources into housing.
Yet, as long as these trends are not permanent, fundamentals will reassert themselves and right now the fundamentals suggests that the US has a wildly unsustainable shortage in home construction and is closing in on a shortage in the actual stock of existing homes.
Matt writes a post which displays American diet composition in 1970 vs 2008.
He concludes
If everyone ran an hour a day at eight miles per hour, that would actually make up for the increase, but obviously that’s not what’s happening.
The experimental and historical evidence suggests that this is not the case. The experimental evidence says that if we induce people to exercise more and let them eat freely, they will on average not lose weight. Most people will change weight but some will lose and some will gain.
As always, no one disputes that wedging will result in weight loss. That is driving calories-in and calories-out in opposite directions will lower the caloric content of the body. Excluding water there is a rough relationship between caloric content and mass. For most fat, which is our primary concern in obesity, the relation is about 3500 calories per pound.
The tendency of all animals is to try to get calories-in and calories-out to move in harmony. If you have to wedge then that means that this system has failed. At a minimum we would like to know why.
Historically people worked a lot more than they do now. They also ate a lot more than they do now. From the year 1400 to 1970 average calories expended fell dramatically but so did average caloric intake. Obesity was never a severe problem. The system did not fail.
Then from 1970 to 2010 average calories expended actually rose but calories consumed rose more and obesity exploded. The system failed.
If you go and look at the actual graph though, you can see Gary Taubes’s thesis on display. This is natural since the dataset used to make the graph is one of Gary’s favorites. First you see meat falling, then fat falling/stalling, then sugar falling as various healthy eating theories rose to prominence.
The only thing that rises consistently is grains. Gary insinuates and sometimes outright says that obesity was caused by the encouragement international health authorities for people to eat more grain. The naturally tendency is for people to eat more meat as calories become easier to obtain. He suggests that consciously overriding this mechanism led to an excess of insulin and possibly deficiency of peptide YY, which are key regulators of caloric balance.
I am skeptical of this theory, but it is one that at least recognizes the underlying theoretical problems.
Oh and just for uber-nerds, Andrea Jezovit, the chart creator says
By calculating such food losses, the USDA data closely approximates the amount of food that actually makes its way from the farm into the average American stomach.
This is hotly debated. The general charge is that the USDA loss adjustments are outdated at best and methodologically suspect in the first place. The charge that comes up the most is that the USDA is overestimating fat consumption because they are not properly accounting for the way fat is used as a cooking medium.
Yglesias is distressed over the fact that Very Serious People are focused on the long run budget but not long run climate problems
No matter how hard I try, I can’t quite get my head around the combination of Washington’s obsession with decades-away projected fiscal shortfalls and it’s total lack of interest in decades-away projected climate disaster. If you asked me why the political prospects for addressing the climate crisis are so bleak, I’d say it’s easy to understand.
The worst effects of it are in the fairly distant future, the rich old people who run the country will be dead by then, etc. But at the same time, everyone’s obsessed with the idea that Medicare will be too costly in 2070. It’s considered both brave and serious to focus like a laser on the problem even while simultaneously insisting that it’s politically unrealistic to propose any changes that take effect sooner than 2022. It’s absolutely insane
I agree that its insane but of course in the other way around. 2070 is a long way away and being overly committed to highly sensitive projections is silly. Still my baseline guesses are that
- The US is broke is a theme that resonates with people
- Being “responsible” with money is a sign of high status
- People are more familiar with budget disasters
- Money spent by Washington has the feel of money spent on Washington. That is people act as if the politicians get a particular joy out of spending other people’s money though the politicians have no equity position on that money.
In both cases I think people are overly concerned about both of these issues. I am not sure which one represents the most overconcern. With climate disasters the possibility for complete mitigation is probably higher than the budget. That is, there is the possibility of technology that could render this problem about as bad Y2K. Not saying that we should count on this, but we shouldn’t ignore it either.
With the budget deficit the path is a bit clearer though, it is possible that either the economy generally or health care will radically change rendering this problem moot. Yet, more importantly with the budget there is no credible current mitigation strategy. Any plan put in place today depends on people in the future deciding to go along with it and so its not immediately clear why forming a plan today is way better than just letting the people in the future deal with it.
Earlier I fretted about the possibility of an Aggregate Supply shock to housing. Well what if that doesn’t happen and resources do move as freely as my mental model of the economy predicts. It could produce roaring growth.
I draw a parallel to prediction I made earlier about the Great Recession. In early 2008 I began to become concerned about the possibility of a recession within a recession.
In a sense this means that we will be in the midst of a recession (high unemployment), at the same time that we are experiencing leading indications of a recession (construction slowdown). This sets up the possibility for a vicious cycle in which unemployment further depresses housing which leads to even greater unemployment, or a recession within a recession.
Again, I want to pile caveat on caveat but I would be remiss to point out that this dynamic does not have the potential to reverse itself in the next 18 months.
We are seeing signs of a recovery at a time when investment in housing is at extreme lows. This sets up the possibility that increasing employment could lead to increasing demand for housing which could in turn lead to increasing employment – the boom within a boom.
This atypical. Usually housing leads in and housing leads out. The fact that housing was still falling even as the recession was in full gear was a factor in my original recession with a recession prediction. The fact that housing is still depressed even as the economy shows signs of life would be the driver behind boom within a boom.
I am not calling it at this point. Not by a long shot. But, the fundamentals are building.
More bad news for hydrodynamic macro. We are not having a good week. From Reuters.
Growth of permanent and temporary hiring slowed from the 10-month high hit in February with the permanent placements index falling to 59.7 from 62.7, the monthly survey from the Recruitment and Employment Confederation and KPMG showed.
However, permanent staff vacancies rose at the fastest pace since April 2010 and temporary and contract staff vacancies increased at the sharpest rate since July 2007.
Permanent salary inflation accelerated to the highest pace in eight months, but was still below the survey’s thirteen-year average
Yet unemployment has not yet collapsed. These are classic signals for a structural employment problem.
Am I convinced yet, no. But, my priors are shifting. Am backing off on cheerleading for QE3? I would still support it but at this moment I would feel less comfortable screaming from the rooftops over it.
I don’t want to be alarmist but it is important to be sensitive to cracks in your paradigm. If you wait until it is obvious that you are wrong then it is too late.
It is time to begin considering contingency plans for deep structural problems. What can and should be done if the economy takes off, while leaving many of the unskilled without jobs.
Those concerned about the fate of the unskilled should begin ruminating on these issues. The probability that “fixing it” will make everything ok is dipping somewhat.
So I have been an unabashed inflation dove for the last few years. I still remain convinced that in the short term unemployment is our largest problem and that the upside risks to inflation are low.
As a side note I am particularly interested in Noah Millman’s response to this contention. He has raised some important – though I believe incorrect – concerns about our international finance position.
Yet, in the spirit of intellectual honesty I have to point out that the prospects for near term inflation are being under-estimated by the economics community generally. I know the goldbugs have been yelling about it, but the rest of the community has remained somewhat sanguine.
My concern is over Owner’s Equivalent Rent. The data suggest to me that there is a shortage of housing in the United States. We should expect rents to begin rising in the near term. This will push up Owner’s Equivalent Rent which accounts for somewhere around 35% of core CPI.
Now, I also think it is likely that this will be accompanied by a building boom. However, this is not assured. Financing is still tight. Immigration controls may prevent construction specific labor from coming into the United States. In short the financial crisis and immigration policy may be combining to produce and Aggregate Supply shock to the United States.
In many ways this may be a great test of hydrodynamic macro. If the economy works as I have suggested then resources will flow seamlessly into the housing sector. The only thing holding things back would be the financial disruptions on Wall Street which I have argued can be overcome with sufficiently loose monetary policy.
We may soon see. If rent inflation comes to the United States and the unemployment rate does not begin to collapse rapidly – at least on par with the 1980s – then my framework will be proven wrong.
I have previously argued that the data suggests that the “overbuilding” of the late 2000s was mild at worst in comparison to the growth in population. Indeed, it is reasonable to argue that there was no overbuilding at all.
We can argue about the types of homes and their location, but in terms of pure units coming online the building was well within historical norms given the increase in US population.
It is the housing bust that was hugely anomalous.
There may have been some problems in the price of housing but if anything the US is short on homes. I further predicted that housing finance problems will mean an apartment boom.
Reporting from CNBC backs up this contention
The vacancy rate for U.S. apartments posted a steep decline in the first quarter and rents crept higher as the job market improves and many Americans remain unwilling or unable to buy a home.
Many of those newly employed younger people, however, cannot come up with the tens of thousands of dollars often needed for down payments, turning them into renters.
"All of those things are reflecting in the home ownership rate that is still somewhat declining, and it’s generally favoring the rental market," Victor Calanog, Reis’ vice president of research and economics, told Reuters.
New renters plowed into an apartment market where supply grew by only a net 44,184 units.
Eli Dourado and I don’t disagree as much as one might gather from open volleys on whether Presidents matter. He identifies several reasons why politics matters less than people think, and I agree with all of them. This part of his post I think characterizes our agreement:
There are not as many degrees of freedom as it may at first appear. Adam emphasizes the discretion that presidents have, and undoubtedly they do have some. But if Obama can’t even close Guantanamo, something that I believe he really wants to do, then the presidency probably matters less than people think.
I have interpreted Obama’s presidency as a clear signal that Presidents have less discretion than I thought, even though I already thought they had less than most people do. But some discretion for one of the most powerful people in the world is still a huge amount of discretion. Think about the CEO of Walmart. His choice set is even more limited, and the extent to which the market disciplines him is far greater. And yet he clearly does matter to the fortune of his company, and to the tune of billions of dollars. Here’s how one recent study summarized their results on this issue:
Compiling a sample of 149 executives who suddenly died in the United States from 1991 to 2008, we find that, following death, stock prices drop by 1.22% on average. Since the average capitalization of firms in our sample is $1.5 billion, average firm value decreases by almost $18.8 million. We also find large variation in stock reactions: the stock price declines (increases) for around 60% (40%) of the executives.
With a market cap of $184 billion, that puts the value of the CEO of Walmart at around $2.2 billion.
Another thing to consider is that there is an endogeneity problem for Presidents, in that those who get elected president tend to be those who the American people believe would use their discretion relatively wisely. So what you observe is that the political system and the American voters try to pick someone who will not use their discretion incredibly foolishly. Thus one should not conclude that the observed variations in overall Presidential performance reflect how much damage an incredibly foolish President could do. I think we get Presidents who fall within the 95% confidence interval of reasonable. This, and the system of checks and balances, is why most Presidents fall within a narrow performance range relative to how badly they actually could mess things up.
But this is not an iron law, and I think Vice President Palin would have been damn close to two standard deviations away from reasonable. And this brings us back to the point at hand, which is that Presidents Trump and Bachmann would fall well outside the 95% confidence interval. This is why they probably won’t get elected: because Presidents matter, the American people know that, and they won’t elect someone who would ruin the country…. or at least they haven’t yet. Perhaps America will prove both me and Eli wrong by electing President Bachmann, who proceeds to ruin the country.
As a final point I want to disagree with this from Eli:
Worst case scenario, I’ll reoptimize to another country. Probably such a move would make me worse off (or else I would do it now), but it still places a real limit on how much the president is likely to harm me. I am probably more elastic in this respect than most Americans, but nevertheless if the worst possible outcome is that you move abroad, something that many people do voluntarily every year, it’s not that hard t relax about politics.
I think his is vastly underestimating the costs that the average American would tolerate before they moved to Canada, and the amount of emotional turmoil that would bring them. I think people with cosmopolitan values vastly underestimate how different their values are from large swaths of America. While “if you can’t find a job, move to one” and “if you don’t like the country, leave” may often be the best advice, and advice that people need to hear, I think the flippancy with which it is frequently delivered (and I’m sure I’ve been guilty here too) suggests a lack of appreciation of the psychic costs such a decision would entail for many people.
Anyway, I don’t want to end this post on such a sanctimonious note, so let me just say that when President Trump is inaugurated, I think both Eli and I will be watching from Toronto.
Eli Dourado made the claim on twitter that he is indifferent between between Obama, Palin, Trump, Bachmann, and Romney as President. When asked if he was indifferent to policies, given that all of these people varied greatly on policy beliefs, he replied “Of course not. They all suck in their special ways and it pretty much washes out. After reoptimization, no real change.”
I find this to be extremely dubious. First of all, if any President eventually “washes out” and comes out equal to all others, then you should be indifferent to all of the current President’s exiting policies choices. After all, Presidents have discretion. You can appeal to the median voter theory all you want, but on any given policy different politicians would do things differently were they president. So if a President is using his discretion poorly today relative to other possible presidents, it will wash out in the long-run, presumably by using his discretion in a good way.
This type of thinking tells us we should all have Zen-like reactions to bad policy choices, with the response always being “it all washes out in the long-run”. This is further implied by indifference between possible Obamas. There were many possible ways for Obama to be president. And at every turn, according to Eli’s theory, for every bad choices he has made, some future good choice will be made to undo it. Would you have preferred Obama not go into Libya? Why? If he didn’t do that, he would have done something else you didn’t like, but now he’s not going to do that thing. Just tell yourself “it all washes out”.
My favorite example for how worse off we could be is always John Edwards. This man was a contender. If he were president, he and Treasury Secretary Stiglitz would have tried to nationalize Citigroup, had a 100% infrastructure $1.5 trillion recovery act. They would have used their political capital to pass something stronger than Card Check, and they would have been throwing up protectionism wherever they could, trying to rebuild America via manufacturing and textiles. Our handout to GM would have been way more egregious were Larry Summers and Austen Goolsbee replaced by Stiglitz and Richard Freedman.
But let’s look in the other direction. You know who else ran for President in 2008? Ron Paul. President Paul would have yanked out Bernanke and put in a gold bug, which would have outdone anything any other president could do, short of unnecessary nuclear war, in terms of a welfare loss. President Paul would have heralded in the Great Depression 2, not the Great Recession.
So what does this mean for the current crop of politicians gaming up for 2012? Well, it’s early in the campaign and neither have given much in the way of specifics. In general, I think Bachmann and Trump are fun mixes of crazy and stupid, and that they will use their presidential discretion in crazy and stupid ways. I think both would make relations with China much worse with the sort of dumb, blustery rhetoric they both always and forever use. I think a China that is even 10% less cooperative is a serious problem. I think the probability of a war with Iran, however small that is now, would more than double under either of these clowns. This will be due too their dumb, blustery styles, their ideologically clouded thought processes, and their likelihood of having a poorly chosen cabinet that advises them badly. Nobody who has been president in the last 100 years* would be dumb enough to say something like this:
“I very simply said that Iran is going to take over Iraq, and if that’s going to happen, we should just stay there and take the oil. They want the oil, and why should we? We de-neutered Iraq, Iran is going to walk in, take it over, take over the second largest oil fields in the world. That’s going to happen. That would mean that all of those soldiers that have died and been wounded and everything else would have died in vain– and I don’t want that to happen. I want their parents and their families to be proud,”
Importantly, it seems there’s a decent chance whoever is president in 2012 will have a Republican controlled House and Senate. What particular policies would Bachmann or Trump pass with a friendly house and senate? I think they would both pass terrible immigration laws, generally make things worse off for existing illegal immigrants, and it would mean less immigrants overall. Trump is the guy who once said “I’m opposed to new people coming in… We have to take care of the people who are here.” I think Romney and Daniels would have better sense than this. Even Palin knows better.
Perhaps most importantly, I think both Bachmann and Trump would not look credible to our lenders. The next president will nominate a Fed Chairman in 2014, again, with the possible support of Republican congress. The mere prospect of these two being able to nominate someone (Fed Chairman Vince McMahon? Makes about as much sense as President Trump) could cause people to lose faith and decide to stop buying treasuries well in advance of 2014, sending interest rates skyrocketing. The consequences here could be disastrous.
I can understand how someone with a particular set of political beliefs could be indifferent between President McCain or President Obama. But if you’re indifferent between Present Trump and… well, almost any other candidate, I think your crazy. I mean, if this is the case, would you be indifferent to President Glenn Beck? There is a button, and his finger would be on it… constantly. Is there anyone you wouldn’t want to be President?
You shouldn’t be indifferent to President Bachmann or President Trump, if for no other reason, because of what them being elected would say about America.
*Teddy Roosevelt, the last President who would have said something like this, ended his term 102 years ago.
Derek Thompson did a good write-up on private currencies for The Atlantic, and even included a sidebar on the Fureai Kippu currency of Japan! I am quoted as saying, in regard to the question of where money gets it’s value:
“Imagine that we are on a gold standard and a severe drought hits,” economist Nick Blanchard explained to me in a useful example. “Suddenly water is in extremely high demand relative to gold, and everyone would be happy to rid themselves of bullion for water. Would you say that the dollar derives its value from gold, or the fact that people will accept it to buy water? The gold price of water is a floating exchange rate as much as is the dollar price of yen.”
“The real value of any currency comes from the reasonable assumption that when you demand goods and services, the paper/metal/lint/whatever in your pocket will be accepted in exchange for that thing,” he continued. “Currency loses all its value when people no longer want it in exchange for what you want.”
Indeed, I focus very heavily on money as a medium of exchange. It’s pretty common that people get the price of money and the value of money confused, and switch between thinking of (and talking about) money as a medium of exchange and unit of account willy-nilly. I almost never think of money as a store of value. The fact that we store value in dollars is an artifact of our currency featuring positive interest rates.
A little more on Fureai Kippu: It is an all-electronic currency, and has two central clearing houses, one in northern and southern Japan. FK credits are easily transferable, and many younger people transfer their credits to older relatives so that they can pay for care. The biggest thing (other than health care) to spend FK credits on is education. Private teachers are very popular in Japan, and many of them accept the credits as partial payment of tuition. And finally, a survey of elderly in Japan found that they preferred workers who were paid in Fureai Kippu to those paid in Yen, because the care was better (or more “authentic”). The absence of interest rates is what creates this effect — different currencies foster different relationships between people. Bernard Lietaer is fond of referring to this as “Yang money”, and “Yin money”.
As always this is my preferred solution
What about the political economy situation has been improved here? A true individual choice model would scrap Medicare entirely and then triple Social Security benefits (or some such) and then force providers to directly market their services to retirees as worth the money.
I put the odds on it being passed as less than 40-to-1.
Let me start off by saying that I don’t have a huge dog in this fight. I think the picture is so hazy on whether it is possible to control health care cost growth and if so how, that I can’t be strongly in favor of anything.
That having been said there are a couple of points worth noting.
1) A voucher plan will probably entail some short term bloodiness for the poor. The push will be for the vouchers to grow slower than medical costs. Rather than forgo medical expenditures folks will simply bankrupt themselves. This is part of my larger thesis that the question is not whether health care will bankrupt America, it is whether it will bankrupt us as private citizens or as a polity.
Anyway, so a bunch of folks go bankrupt trying to afford their cancer treatments. Eventually this will lead to us raising the voucher size but in the short term you get a lot of privately bankrupt people. This fact should not be ignored
2) Megan McArdle says
It seems quite likely to me that vouchers are going to be better at controlling health care cost growth than a central committee. Every committee decision that cuts off a potentially useful treatment (and I’m afraid it can’t all be back surgery and hormone replacement therapy) will trigger a lobbying explosion from affected groups. Each treatment is a decision with a small marginal cost to the taxpayer; it’s in aggregate that they become expensive.
I am doubtful about this logic. The ability of a regulatory apparatus to kill an industry is strong. You don’t actually have to deny treatment but you can just make the barrier to passage so high that the industry enjoys a slow painful death. As a single payer, of course, you can always be stingy about the money and complain that the industry is just a bunch of greedy crooks.
Conversely, the idea that people – especially old people – are left without health care because their voucher is too small is really heartbreaking.
At some point the in the far future the tax hike might bite so badly that both approaches will start to seriously slow the growth of medicine. However, its not clear which one will do it first. One of the things that people forget is that folks are attracted to jobs like public budgeting and procurement because they enjoy saving money.
I’ve given talks at government procurement conferences and at private sector finance conferences. Guess which group has no problem spending like there is no tomorrow and which group literally serves beans and rice for lunch. And remember at both events the conference planning committee is spending someone else’s money.
When Milton Friedman originally argued against government involvement in health care his point wasn’t that government was going to spend a bunch of other people’s money, it was that government was going to choke the industry to death. I think he underestimated the desire of the electorate to purchase more health services, but I still buy his understanding of public official decision making.
3) Reihan Salam says
Many of us suspect that a decentralized, trial-and-error process that uses price signals rather than administrative guidance is the best way to go.
This is the case if what you want to do is satisfy consumer preferences. However, you must remember that the goal of this entire process is to stymie consumer preferences. What consumers want to do is throw a whole bunch of resources at the problem with little to no regard for efficacy.
And this is important: the fact that there is no regard for efficacy makes the throwing of resources all the more appealing. A cold calculating choice is not as emotionally satisfying as saying “I just want to know that we did everything we could.”
The reason consumers want this is the same reason they want to get married, win at sports or or invest a lot of money in making their houses look nice on the outside. These actions trigger the reward centers in the brain which evolved to make them more successful members of the tribal community.
Spending lots of resources on “wounded warriors” – which is the reward system that health care expenditure triggers – is a great way to show loyalty to the group.
People are also driven to spend both private and public resources on folks who are already dead. This is the entire funeral and memorial industry as well as the motivation for the structure of much of the criminal justice system as well as foreign policy.
Try to argue that it is a waste or resources to honor a police officer slain in the line of duty because he is dead and will not actually benefit from any of these honors and see how far it gets you. Try telling someone whose mother is dying of cancer that “she is as good as dead anyway” and so we should save some money by just cutting her off and see how far it gets you.
As such there are only two ways to play this game.
First, we more or less give in to people’s preferences and just ratchet way up the amount of resources devoted to health care irrespective of whether they improve health outcomes or not.
Second, we create some sort of system that chokes the health care industry without overtly denying any particular person the health care that they want. This allows people to satisfy their loyalty impulse to “get the best care money can buy” by actually limiting the quality of care that money can possibly buy.
At this point I am (A) not confident that choking the health care industry with either vouchers or committees will be wildly effective (B) not completely convinced its worth doing anyway.
Which is again, why I am largely agnostic about the way this shakes out. All that having been said I am willing to try the voucher thing if that’s what people want to go for.
My concern is helping to shield the poorest citizens from its short term costs.
Though I profess a deep and abiding pessimism I am often accused of being an optimist. Part of this is because I laugh and smile a lot. There is no rule that pessimists must be grumpy folks.
However there is a quip that explains this duality much better and it has the fortunate side effect of also being almost true.
An optimist thinks this is the best of all possible worlds. A pessimist knows that it is.
Those who would be blasé about government debt must remember that the world is complex and unpredictable. Consider the tragedy that has befallen Japan, whose long-term debt trajectory was already dubious, even before the tsunami. True, spreads on eurozone periphery bonds are already high. But this is because it is clear that there will have to be some large and significant debt restructurings, even if eurozone officials prefer to insist default is unthinkable. And as yet, the markets have not even begun to think about what might, and could, happen elsewhere – even in the US.
There are many things to be said here but I imagine I will have to say them often. So I’ll leave you with this – does uncertainty tend to raise or lower your discount rate? Which is associated with saving a lot for the future, a low discount rate or a high one?
If you are unsure about the future should you then care more or care less about the present?
Krugman takes a stab
If QE really is working through stocks and the dollar, are there further implications? I’m not sure — in a highly indebted society, you might hesitate at policies that would increase private debt further, but if stocks are driving the story, the consumers now spending more aren’t the same people who are in debt trouble — so that’s actually OK. And as for the weaker dollar, if the Chinese and the Brazilians don’t like it, they are free to let their currencies appreciate.
Anyway, that’s my casual take on what has happened. I would say that if it’s right, it’s far from clear that the recovery will prove self-sustaining.
We want to think about both what we would have predicted before and the evidence that we have seen.
When I was pushing for greater Fed stimulus I had two primary mechanisms in mind.
- The decline of the dollar
- A decline in corporate cash holdings
As Krugman notes we see that the dollar has declined and that net exports have been a major contributor to the recovery – as one would predict. Indeed, in the days after QE was floated at Jackson Hole we saw the dollar declining and at here at Modeled Behavior cheered that on as a sign of recovery on the way.
I should note that this is not because I wanted the US to grow at the expense of foreign nations. It was because I was convinced that the majority of the industrialized world was not going to give up on its contractionary monetary policy and so this would be the channel. We would like to see surging growth everywhere, but the ECB and Bank of Japan had already pre-committed to gouging there economies to the greatest extent possible.
Now what about corporate cash. The data from the flow of funds report isn’t fresh enough to tell. The last report in October of 2010 had corporate cash still rising
What about other proxies for the release of corporate cash. Below is year over year change in new orders for Capital Expenditures Excluding Aircraft.
Nothing that we could call a QE2 surge. Indeed a bit of a drop off.
How about wage and salary disbursements
A rise but again nothing we could call a QE2 surge.
Lastly we might want to look at nonfinancial commercial paper outstanding. Perhaps, cash heavy companies are lending more heavily to cash poor ones. That in and of itself should be supportive of growth.
Here we see a bit of a burst since the onset of QE2 but nothing like what I would have expected.
At this point it looks like the corporate cash channel is not moving.
On the other hand US asset prices do seem to be rising. As Krugman mentions this is a plausible channel. Indeed, I think Scott Sumner focused a lot on this channel. Its not, however, a channel that I had previously considered important.
I am also not sure it is consistent with my view of the macro-economy. Yes, consumer spending should rise if asset prices rise, however, those should both be a response to higher expected future profits. So what’s causing higher expected future profits? It can’t simply be higher spending because that’s circular.
It could be that be that a cheaper dollar implies both more sales and higher value sales of US exports which in turn implies higher profits which in turn juices consumer spending. In that way that asset effect is like a multiplier.
Perhaps, but off the cuff the rise in consumer spending seems to large to make sense through that channel.
On balance I would say that the evidence suggests that much of the boost in consumer spending is not through channels consistent with my theory of monetary policy and quantitative easing.
While I would like to claim victory in the intellectual battle over QE, at most the export story is my favor. The rest is not.
I confess, I did not see this one coming: the Center for Science in the Public Interest has asked the government to ban food coloring. They argue that the coloring worsens hyperactivity in some children. Marion Nestle recently provided a rundown of the science behind food coloring and hyperactivity, and I think you’ll agree with me that the evidence is less than overwhelming. She only discusses two studies in detail. The first had problems, and the second found that 1 out of 23 kids showed a reaction. She links to another, more recent study but doesn’t discuss it. You would think we would need clear and strong evidence of a serious affect before we talked about banning a product.
Nevertheless, whether or not food coloring causes hyperactivity in some children is absolutely besides the point. Surely a cup of black coffee would cause hyperactivity in children, and yet we haven’t banned it. The absolute most this implies is for a clear labeling of products that include food coloring. I say a “clear labeling”, because I was under the impression that product packages already had to list their ingredients, including food coloring. Am I mistaken?
Food paternalists may find this unimaginably barbaric, but some people like a little color on their cakes, and prefer their cheese curls orange. In fact, given the prevalence of orange cheese curls, colored cakes, and a million other uses for food coloring it would appear that lots of people really do like them. But the fact that people prefer them is exactly why food paternalists are targeting them, and the hyperactivity claim is really just an excuse. You can see this in the quote from Marion Nestle:
“These dyes have no purpose whatsoever other than to sell junk food,” Marion Nestle, a professor of nutrition, food studies and public health at New York University.
This issue isn’t really about hyperactivity, it’s about another cudgel with which to try and get people to eat healthier foods. This is an invasive, overreaching, and dishonest attempt at regulating food. I hope that the more extreme the proposals get the more people will hesitate to support the groups like CSPI when they call for bans on stuff they don’t like. Because today they may be coming for a product or ingredient you don’t value, but rest assured, tomorrow they’ll be after something you do.
Many things Modeled Behavior come up in Matt Ridley’s suggestion that we use vouchers to combat obesity.
After all, as Friedrich Hayek pointed out, the true genius of markets is that they discover things. Perhaps the answer to obesity is to spend money not on the producers (of gyms, diets, surgery, vegetables) but on the consumers.
Well somewhat.
The genius of the market is the way it aggregates masses of information that no single individual could possibly possess and subjects scores of untestable hypothesis to the forces of economic evolution. This allows us to do without knowing what we do and to design without a designer. Great and beautiful things.
However, raw scientific and administrative knowledge are powerful things as well. Indeed this is revealed by the emergence of socialism as a doctrine. It was in large part the ability of technocracy to win wars, purify water and cure diseases that inspired folks to believe that technocracy could do anything.
Drawing a direct analogy with the effect of vouchers in the education system, Messrs. Seeman and Luciani suggest “healthy-living vouchers” that could be redeemed from different (certified) places—gyms, diet classes, vegetable sellers and more. Education vouchers, they point out, are generally disliked by rich whites as being bad for poor blacks—and generally liked by poor blacks. A bottom-up solution empowers people better than top-down government fiat.
This is certainly true, though I am not sure it really gets you anywhere. Lack of empowerment doesn’t seem to be the core problem here. The number of private weight loss attempts that fail every year far exceed those that succeed. People can and do try wacky individualized weight loss programs. Entrepreneurs can and do promote all manner of weight loss products. The overwhelming majority just fail.
After all, the root causes of obesity are multifarious and new ones are being added all the time—such as diet sodas, gut bacteria, genes, sleep apnea, leptin levels, medication, depression, poverty and peer pressure. So the solutions need to be multipronged, too. What works for you may not work for me.
The underlying notion here – that the obesity epidemic is a multipronged problem with lots of individual causes – is likely wrong. There are lots of levers with which one can attack obesity. There are lots of failsafe systems that exist in the regulation of appetite and activity and they can be overridden in different ways. However, the odds that an epidemic with the steady widespread march of obesity is multi-factor are slim. There is probably a single cause and it probably operates directly on the endocrine system. Of course at this point we don’t know what it is, but I suspect that it is a particular molecule or class of molecules.
People in the future will think it as toxic and find it amazing that we were so careless with it. The same way we think it maddening that children used to play with mercury.
In due course, the obesity problem will be solved, I suspect. The ultra-rich have already solved it. Most of them are very thin these days, quite unlike in ancient times. That’s because they can afford the solutions that work for them, from low-carb diets to personal trainers.
In due course I expect it to be solved as well. However, the notion that the ultra-rich have solved it is wrong. First, off there are obviously selection effects that decrease obesity levels among the rich. You are more likely to become rich, by business success and especially by marriage, if you are thin.
Second, we know that susceptibility to obesity is highly heritable. This means that the children of a rich spouse and a thin spouse are more likely to be both rich and thin. A similar effect happens with height. The rich are likely to be tall. Yet, this isn’t because they’ve found a solution to shortness.
Third, as Ridley suggests the rich are spending lots of time and money on combatting what obesity they have. This is not solving the problem. This is managing the symptoms of the problem. Whatever underlying condition is forcing you to expend all of this effort still exists. Its that underlying condition that we want to cure.
For example, managing Tuberculosis by moving to a dryer climate is better than dying in the sewers of Paris, but its not the same as curing TB. Tuberculosis in some ways provides an analog to obesity. It is a disease that has been with us since antiquity yet saw an enormous, at the time inexplicable, spike in the 18th century.
Theories on the cause of tuberculosis ranged from vampirism to masturbation to impure air. It was argued that a variety of maladies could lead one to succumb to Consumption, as it was then known. Consumption was also endemic among the urban poor, a fact sometimes attributed to their low moral character.
Yet, in the end it was a single disease with a single cause and streptomycin was the cure.
A few on my friends on the right have publically and many more privately, suggested that egalitarian efforts were foolish or unwarranted because income distribution is pretty much all genetic.
Poor parents have poor children because they pass on genes for irresponsibility, violence, promiscuity, impulsiveness, etc.
The empirical truth of this statement aside, it seems to me that this is overwhelmingly an argument for egalitarian measures.
No one asks to be born. And, certainly no one asks to be born with impulsive genes. To the extent those genes strongly predispose them to a life of misery this is something that was done to them without their consent.
I argue that miserable lives can be worse than no life at all. Some suggest that this is impossible since you can always kill yourself if things are that bad. Yet, as I’ve said before, ending your life is not free. At a minimum people who care about you will be sad, and to the extent you have any concern for what happens after you are gone there are costs to shuffling yourself off this mortal coil.
Still even if you are not willing to accept that some lives are worse than never having lived the belief in genetic poverty is a strong argument for egalitarian measures.
If we could we would like buy insurance against having been born with bad genes. However, bad genes are the ultimate pre-existing condition. By definition there was never a moment in your life were you didn’t have them and thus could have had the opportunity to buy fairly priced insurance against them.
So purely for the sake of economic efficiency it makes sense society at large to insure you against risks for which the free market cannot possibly create insurance.
From research done the Inon Inon Pricing Research Centre, and Leigh Caldwell:
Everyone knows – or thinks they know – that prices such as £1.99, £5.99 or £9.99 are optimal price points for retail goods. Customers read the first digit first, and the last two are ignored – or at least, they have much less cognitive impact. In general, consumers were thought to put a subjective value estimate of about ten per cent less on an item priced at £3.99, than one at £4.00.
This has been a fairly robust result in the past, and is intuitive for a number of reasons, “but WAIT!” say Leigh:
[And] the results were a surprise. At first we thought that the effect we have discovered was just a previously unnoticed artefact, hidden by the fact that no proper experiment has been published before. But after further exploration, we think it is also an effect of changing consumer preferences. As customers become more aware of marketing tactics and more cynical about any communication from companies, their psychology and behaviour inevitably changes.
So, to the results. The summary points are:
- Prices ending in .99 no longer have any advantage in consumer value perception, and do not lead to higher sales.
- The optimal penny value varies by country. In the United States, it is .01. So, instead of $3.99, companies should charge $4.01. In European countries, the optimal price point is different for different product categories, but there is a peak at .04 for many products. So, British or European retailers currently charging, say, £0.99 should increase the price to £1.04.
- By switching in this way to a “dollar-plus” price instead of “dollar-minus”, retailers can increase sales volume by an average of 8% and increase profit margins by 1-3% (depending on the exact price point).
- Consumers, when presented with the new price point, report an increased level of trust and affinity with the brands of the retailer and manufacturer. We believe this arises from the “honesty signal” that comes from abandoning a discredited and manipulative sales practice.
This is indeed very interesting, and I eagerly await reading the full study (which Leigh is offering as a pre-print!). Head over to Leigh’s blog for more rather counter-intuitive findings from his new research!
Update: If not a bit late, April fools!
I swear it isn’t “pick on Ezra Klein day” here at Modeled Behavior, but he has been covering fairly thoroughly the proposal in the Senate (?), signed by every GOP member, for a balanced budget amendment to the Constitution. Unfortunately, it is not just a balanced budget amendment — and end in and of itself, and one that I would consider if done properly — but an amendment to a) limit Federal spending to 18% of GDP and b) make raising future revenue extremely difficult.
I think “stupid” is the wrong word. “Dangerous” is more like it. And maybe “radical.” This isn’t just a Balanced Budget Amendment. It also includes a provision saying that tax increases would require a two-thirds majority in both houses of Congress — so, it includes a provision making it harder to balance the budget — and another saying that total spending couldn’t exceed 18 percent of GDP. No allowances are made for recessions, though allowances are made for wars. Not a single year of the Bush administration would qualify as constitutional under this amendment. Nor would a single year of the Reagan administration. The Clinton administration would’ve had exactly two years in which it wasn’t in violation.
I agree with most of what Ezra (and Bruce Bartlett) say about the proposal. I’m not a fan of large government, but I’m also not a fan of creating problems. This proposal seems to be all about creating problems under the auspice of “starve the beast”. Or rather, creating a big enough problem, and engineering your preferred solution from the front end, which is cuts (ostensibly to Medicare and discretionary spending). This is a poor way to govern, whether you like or dislike the welfare/warfare state.
However! Ezra has a follow-up post in which he ties California, taxation in the south, and the likely effects of the GOP’s amendment together, noting that by blocking the ability to directly raise revenue, the government would be forced into regulatory and budgetary tricks to fund itself. Tricks that would likely be more inefficient and economically damaging than simple direct taxation itself.
It’s fairly obvious why rules making it hard to pass new taxes would lead to more regressive taxation: If passing taxes is extremely difficult, then passing taxes plus overcoming the opposition of powerful interests becomes almost impossible. And so you focus on passing taxes that don’t arouse powerful interests. In practice, that means passing more regressive taxes, as the poor have less political power than the rich. It’s an amplified version of the reason it’s easier to cut spending on programs that benefit the poor, like Medicaid, than on programs that benefit the rich, like Social Security — which is, incidentally, exactly what Republicans appear to be proposing in their 2012 budget.
All of which is to say, the Republican Balanced Budget Amendment, which requires a two-thirds majority in both houses of Congress to raise taxes, would probably lead to much more regressive taxation. Our budget process would look like California’s and our tax code would look like the South’s. That’s winning the future!
Here is Ezra’s graph of the composition of revenue generation in four regions:
Low and behold, taxes in the south are much closer to my own vision for taxation! No, the taxes are not exactly the same, but I would welcome a shift toward consupmtion taxes and away from (capital/labor) income taxation. You can design a VAT or carbon tax to be as progressive as you would like. I also prefer a tax on the value of land, and not on the “improved value” of building (which, along with eliminating land use regulations would incentivize dense construction). The final piece of the puzzle is a progressive payroll tax. I think you could copy this model on both the state and Federal levels. It is almost the exact opposite of the “Northeastern” model of high income and property taxation. I think it’s a better model.
If we shifted our taxation toward consumption it would, in fact, be wining the future.
I think Paul Krugman is being a little touchy in his criticism of John Taylor. Taylor may feel that Obama’s antibusiness stance is the problem – I don’t know his personal views – but his posts didn’t say that. On the other hand I think Taylor’s points are somewhat empty.
First, lets consider the relationship between Business Investment and Unemployment. I like the time series better than the scatter plot. You lose information in the scatter plot.
This is a nice relationship. But, is it any different from what anyone would expect?
Suppose that you though the animal spirits of investors had took a turn for the worse and that they stop building factories and hiring new workers. Then you would see a rise in unemployment along with a decline in investment.
Suppose you thought the economy was suffering from poor sales as a result of the hording of cash. Then businesses have both more workers and more capital than they can use. It would make sense that they would hire fewer workers and build fewer factories.
Suppose you thought that some productivity shock had led people to reduce their work effort. You would expect a decrease in labor which in turn would lower the marginal productivity of capital and decrease investment. You are basically optimally downsizing the economy.
Suppose you thought that an overinvestment boom due to cheap money had led the economy into an unstable equilibrium from which it needed to readjust. Then you would expect to see a decline in investment and an increase in unemployment.
Suppose you thought that there was a great recalculation in which new forms of economic production using new capital and new workers needed to be found and this took time to work out. In the interim you would see a lack of investment in capital and a lack of hiring.
The reason all these theories match up with this graph is that its primary message – that investment is particularly sensitive to the business cycle – is a key building block for most theories.
Further, the conclusion that more investment will lead to decreased unemployment uncontroversial among theories. The question is how do we get there? Should we perk up final demand? Should we increase the long run return to capital? Should we just wait it out while new investment patterns emerge?
Now, on to where I think Taylor makes a mistake and that is in this graph.
Here he shows that government spending as a fraction of GDP is high when unemployment is high. Likewise, isn’t this exactly what anyone would expect?
GDP is low when unemployment is high. As long as government spending is simply insensitive to GDP you will get this relationship. Even worse, the government spends more money both automatically and discretionarily to combat unemployment that it sees coming. Unless we have a clear measure of government expectations we cannot even rule out reverse causation.
Here is the scatter plot between the growth rate of government spending and the unemployment rate.
Here is the same chart as time series
Finally we can first difference both variables.
The scatter
The time series
In both we see a single period of strong correlation that is associated with the Great Recession and the Stimulus bill. Though in the time series you do see the speed up in unemployment coming first, which is consistent with what I think most of us remember.
In short, in either of these basic comparisons I just don’t see a lot of there there.
Ezra Klein has a post where he calls the balanced budged constitutional amendment Republicans are pushing and calls it both terrible policy and dangerous. I haven’t read the actual amendment or taken a close look at it, but based on Ezra’s description I’m tempted to agree with him. But that’s not why I’m writing. I’m writing because I want to disagree with this statement of his:
But the problem isn’t simply that the proposed amendment is extreme. It’s also unworkable. The baby boomers are retiring and health costs are rising. Unless you have a way to stop one or the other from happening — and no one does — spending as a percentage of GDP is going to have to rise.
While economists may disagree about the fiscal impacts of past immigration, there is a general agreement that higher skilled immigrants have a positive impact on government budgets. Part of our long-term budget problem is demographic, so, as Rick Santorum so usefully implied, we should be letting in more immigrants who are on average younger in order to counteract our country’s aging (that was Santorum’s intended point, right?). Also, more immigrants also allow us to spread the fixed defense costs over a more people, and lower defense spending as a percent of GDP. Illegal immigrants are even better from a budgetary standpoint, since they frequently contribute to social security but don’t take out of it, and have thus put around $120 to $240 billion into the system. So what we really need is a massive influx of highly skilled illegal immigrants.
