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Several bloggers have pondered the question of vacant urban storefronts.

A few point to lock-in for both the landlord and the tenant. The landlord is afraid of locking in to low of a rent by offering a long term lease in a bad market.  Tenants are afraid of short leases because they have lock-in lots of investment to make their space just right and don’t want the landlord jacking up the rent.

Matt Yglesias doesn’t buy that answer

If you look at suburban strip malls, the same long lease dynamic applies, but widespread strip mall vacancies are normally a sign of specific economic distress. The current recession has less to a lot of them, but in normal economic times you tend not to see this. Instead, even depressed areas reach a low-rent equilibrium.

The difference is that a mall has a single owner who internalizes all of the externalites associated with vacant storefronts (and trash and crime, etc). An ugly mall is a less popular mall and thus commands lower rents overall. Typically its worth for the mall owner to take a hit on one store if he can make it up in higher rents for the others. This, of course breaks down when demand for the whole mall declines.

The externality problem means that, in general, communities will be more pleasant, though much more expensive, if one landlord owns the whole shebang. I think this one reason many people find University campuses to be so nice.

Out of the crooked timber that is humanity no straight thing was ever made

Yes, but some timbers are more crooked than others.

Via MelodyMaker


The story is this:  a girl was out with friends having drinks on King St (in Toronto ).  This guy approaches her and won’t leave her alone -saying how cute she is. She finally gives in  and hands the guy her business card to get rid of him. 
The attached  is an MP3 file of not one, but TWO voicemails this guy left. This goes down  in the history books – especially the second voice mail. 
After hearing them you can clearly see why she didn’t call him back – instead she called in to the Z103.5 morning show & had them play this on the air.
Ladies: He is out there… 🙂

Update: There MP3 doesn’t appear in my feed but it shows up on the website. Its worth a listen.

Via Bryan Caplan, Scott Sumner writes

I think we all listen to our friends, relatives, and colleagues complain about their predicament, and then silently think, "Well what do they expect?  Their predicament perfectly reflects their character."  If they are a lazy spendthrift, then they will go through life thinking that adverse circumstances are always denying them the money they need.  If they are envious, then their colleagues will be unfairly promoted ahead of them.  Etc, etc.

But when we think about ourselves, well then things are very different.  If only we could get out from under burden X, our life would be so much easier…  While reading the Portuguese writer Pessoa, I recently came across this quotation:

Whenever I’ve tried to free my life from a set of the circumstances that continuously oppress it, I’ve been instantly surrounded by other circumstances of the same order, as if the inscrutable web of creation were irrevocably at odds with me.

%$@#& that inscrutable web of creation.

One of the things that I always found curious is our intensely held desire to blame others for things that go wrong in our lives. Not because this represents some weakness or moral failing but because it is distinctly to our disadvantage.

Imagine that something has gone horribly wrong in your life and it is your fault. Then presumably you could fix it and then your life would be better. If instead, however, it is someone else’s fault then there is a good chance you are screwed. There may be nothing at all you can do about it.

Wouldn’t you prefer to live in a world where everything bad is your fault? Then you have the power to change the world.

Now, sometimes of course it will be someone else’s “fault.” But, this should be something we eventually resign ourselves to, something that is in its essence depressing, because it means someone else has control over your happiness.

Initial Claims for Unemployment fell by 10K last week to a revised 580K. The revised figure was 4K above the original estimate last week.  The four week moving average fell by 4,500 to 566K.

There is very little good I can say about this. Yes, we are still declining overall but my optimism from a few weeks back is being shattered. it is looking increasingly like a false dip was put in, in July and slope of the recovery is a lot weaker than I had originally thought.


Since, the peak in the week of April 4th, we the initial claims numbers have improved by about 104K or 5K per week.  At that rate it will take roughly 35 weeks, another 8 months, to reach 384K. At 384K the economy is my estimate of where the economy would be neither loosing nor creating jobs.

While we have not yet seen the outright stall of the last two jobless recoveries, and I am not sure that we will, it looks like it will be a long slog back to job growth.

The long view:


The American Heart Association releases new guidelines calling for a dramatic reduction in sugar consumption, in an effort to fight obesity.

Its hard to know how to take this. On the one hand strongly suspect this is more likely to be the right target than the Associations previous wars on fat and a sedentary lifestyle.

On the other hand this is another example of jumping the gun and attacking a convenient target. The science linking sugar to obesity is speculative. Obviously, if hyperinsulmia is a major cause of obesity then it makes sense to limit sugar. However, we don’t know that it is, and even if it is we don’t know how strong the link is between sugar and obesity.

It intuitive that consuming a snack (soda) of which 100% of the calories come from sugar, is likely to induce a significant insulin response and more rapid onset of insulin resistance. However, there are all sorts of thing that can effect this process.

Suppose there was a seemingly benign food additive, that when combined with the digestive process caused polysaccharides to be broken at a much faster rate. We could see sharper insulin responses starches than would have been the case previously.  Not that I think this is what’s going on, but simply to highlight how it easy it is to get sidetracked by an obvious but nonetheless wrong connection.

HT: McArdle

I don’t have a lot to add to Ryan’s take on Europe vs. America. However, I will say the tastes which determine whether or not you like Europe is whether or not you like people – lots of people.

European middle class life seem to be set up in ways that maximize your contact with other people. From cafes to public transportation to the economic reversal of suburbs and the urban core the society expects that you will be okay with being intermingling.

To a large extent I think ethnic anxiety is what keeps Americans from feeling as comfortable in those situations. However, a less other people focused America is more appealing to introverts. The US is in many ways a dork paradise.

Via Calculated Risk, James Bullard is hinting that the Fed is going to let inflation slip a bit.

I take that to mean the Fed would support a policy that allowed core inflation to drift above 3% and that tolerated headline inflation of 5%.  This is, in my view the right policy. A credible promise to be irresponsible will be key in keeping the American economy out of the doldrums.

However, I’d like to see the Fed be more explicit. I understand not wanting to nail down specific numbers should circumstances change. However, right now much of the public and indeed the financial community believes that the Fed is targeting core inflation at 2%. Failure to meet that perceived target is just as damaging.

Furthermore, increased uncertainty in fixed income markets, as participants try to guess the Fed’s new target is exactly what we don’t need. Setting a hard target and genuinely working to get there will help keep the markets settled.

On the political side there is of course risk. There will be accusations that the Fed is headed towards hyperinflation. I imagine a cable commentator or tow will bring up the Weimar Republic or Zimbabwe.

There is a lot of insane rhetoric floating around about the US either defaulting or attempting to inflate away its debt. Its hard for me to get my head around how otherwise analytically minded people could believe this.

Accepting that, however, the political risk of unexpected inflation is more severe. At the very least a well reasoned case for 5% inoculates you against some of the worst rhetoric – the notion that you have lost control.

Matt Yglesias:

Surprising no one, Barack Obama will reappoint Ben Bernanke to a second term as Federal Reserve chair. Brad DeLong is enthusiastic about the choice. I have various doubts . . .

Daniel Indiviglio:

I am pleasantly surprised to see the news this morning that President Obama has decided to give Ben Bernanke a second term as the Federal Reserve Chairman.

A study posted by Bryan Caplan suggests so. 2.9% of prisoners in surveyed said they had been sexually abused by a staff member at the prison, while 2% said they had be sexually abused by another inmate.

Not surprising actually given this finding

Girls are disproportionately represented among sexual abuse victims. According to data collected by BJS in 2005-2006, 36 percent of all victims in substantiated incidents of sexual violence were female, even though girls represented only 15 percent of confined youth in 2006.

The Bailout or TARP is incredibly unpopular among voters. I understand that. As far as they can tell money is being taken away from them and given to people who are much richer than them. To make matters worse those rich people got rich by destroying the economy and jeopardizing the tax payers job.

What surprises me is that the TARP seems to be unpopular among intellectuals and economists. Tyler Cowen offers a half-hearted defense:

Maybe you think that the bailouts will have disastrous long-run consequences.  And maybe they will, I worry about this too.  But if anyone should know that modern politics can only stand so much short-run panic, it is libertarians and fans of Bryan Caplan’s book.  If we had not done the bailouts we did, we would, within a few months’ or weeks’ time have received a much worse and costlier bailout run by Congress and Nancy Pelosi.  How does that sound?

There would have been a worse bailout – that’s the defense?

How about the fact that we stopped the second Great Depression. We prevented untold human suffering and a destabilization of governments in developing countries that could have lead to a vastly more dangerous world.

In my mind the entire point of macroeconomics was that when it happened again — when the forces that created the Great Depression materialized again — we would stop it.

It happened again and we stopped it. That’s success.

Megan McArdle worries about moral hazard.

The bailouts have probably substantially increased moral hazard, and perversely, arguably undermined the political will for regulation that might reign in that moral hazard. 

Yes, moral hazard exists but it is not the end of the world. If the bailouts reduced the incentive for more regulation or tighter self-control because they reduced the actual systemic damage to financial crises then that is good thing. The world is a safer place.

And, specifically it makes no sense at all to worry about moral hazard in reference to preventing wholesale catastrophes. The ultimate problem with moral hazard is that it will make bad realizations more likely. However, if the worst realization is coming true and you don’t stop it then it happens with probability one. You can’t get worse than that.

I think people latch on so tightly to moral hazard because it conforms to their moral intuition. Throughout the rest economics people are constantly told that economics is not a morality play, the virtuous are not rewarded nor the wicked punished. But, here under the guise of moral hazard is finally a chance to punish the wicked and people are not going to let that go without a fight.

Jim Hamilton questions the Greenspan’s “measured pace” mantra from the early 2000s

Our conclusion is that the measured pace at which Greenspan increased interest rates over 2004-2005 may have been counterproductive, and that economic performance might have been improved if the Fed instead had raised interest rates more quickly to the higher warranted levels.

Free Exchange piles on

This strategy may well have seemed prudent at the time, but in retrospect it appears to be among the worst possible polcy decisions—too tentative to shake the bubble mindset developing in housing, and least accommodative just as the bubble was running out of steam and the economy was heading for deep recession.

I’ve thought that much of the second guessing of Greenspan’s monetary policy was the product of short memories. For example John Taylor has argued that the Fed kept rates too low for too long, seemingly forgetting that we were in the neighborhood of the zero lower bound and that Greenspan avoided it by promising to leave rates low longer than we would otherwise expect.

That is, Greenspan made a credible promise to be irresponsible and it worked. Deflation never appeared and by many measures the 2001 recession was the weakest in post war history.

These new points, however, drive me to reconsider some of those choices. I did think at the time that the measured pace approach was the best, but for no particularly rigorous reason. My thought was simply that large increases in the interest rate would be too shocking. That is, to say I was working from some sort of implicit adaptive expectations model.

The problem, however, with implicit models is that you don’t actually spell out your assumptions and at least those related to the way financial markets would have responded appear to be wrong.

From Yglesias

Here’s the trend data on whether or not you have confidence in X “to make the right decisions for the country’s future – a great deal of confidence, a good amount, just some or none at all?”


Twenty-one percent have confidence in congressional Republicans! Relatedly, twenty-one percent of Americans believe in witches. Twenty-one percent believe they can communicate with the dead.

Megan McArdle disagrees with one of Luysii’s four guesses as to why Americans are getting fatter but living longer. 

1: More people are exercising than they used to. . .

#2: Fewer people are smoking. . . .

#3: Doctors know more than they did. . .

#4: The drugs are better. . .

#1 can’t be it, since most obese people probably don’t jog. I would imagine the second is very powerful–and also somewhat related to quitting smoking, since the average weight gain after quitting is six to eight pounds, and one in ten smokers appears to gain up to thirty pounds.  Smoking is much, much worse for your health than being fat.  I imagine #3 and #4 contribute as well

The thing is, it could be that the obese are not jogging but that those who are jogging are living longer, thus contributing to an increased average.  Moreover, the obese tend not to job because of the stress on their joints, but you can find plenty of obese people at the gym on exercise machines that lessen the impact.

You have to remember that being obese is simply having a BMI over 30. Sometimes we confuse obesity with morbid obesity, but they are not the same. There are plenty of obese people that the average American would describe as chubby. There are gyms full of chubby people.

Indeed, it could be the case that American’s are exercising more and thus living longer because of the obesity epidemic. The public believes that exercise will help them loose weight and thus as we become more obese, more people exercise. As I noted before, I think this is at least in part the intentional result of public health campaigns that “encourage” people to believe exercise is effective at inducing weight loss.

Before I started this blog, I was busy telling my colleagues and state and local government officials that Europe would see a larger, longer crisis. European banks were just as deep into the credit crisis as the US and European monetary policy was not nearly aggressive enough.

Now it seems that Europe is returning to growth faster than the US. While it is true that the slump overall in Europe is still larger, I did not expect this. At this point I am also not quite sure what to make of it.

Part of it could be snap back from the very sharp contraction. Part of it could be automatic stabilizers from a larger welfare state. Part of it could be aggressive implementation of stimulus packages.

It could be, however, that my basic read on the situation was wrong.

Tyler Cowen is amazed at the addiction to fame and power on display in Washington. I am not.

Many people — especially those who become politicians — really do want fame and power and it is amazing what they will talk themselves into to get there and to stay there.  They don’t even want fame in the sense of being recognized, in the longer run, for having done the right thing.  They want more personal influence and power now.

Why do the powerful covet power? Simple, for the same reason that the living covet life – it is an evolutionary imperative.

Every year new Congressman are elected to office. By chance some of them are obsessed with fame and power. Actually its not completely by chance, such people will be more likely to run, but that doesn’t alter the basic logic.

When the new election cycle comes around those who are not obsessed with power will have had a higher probability of doing something that reduced their odds of reelection. Thus, on average fewer of them will return to Congress. So, the fraction of power obsessed Congressmen grows.

This process continues itself election after election until you have an usually large concentration of power obsessed people in Congress. Indeed, if Congressmen lived forever, or if they were able to pass on their power obsessed traits to the next generation of legislators then eventually Congress would become completely power obsessed.

In large part this is what breeds corruption in monarchies and single party states. Under those systems the next generation is chosen by the existing power elite and in some cases is genetically linked to them. This allows power seeking traits to flow from generation to generation until you have a entirely corrupt government.

Power does not corrupt. The need to maintain power corrupts. And, it corrupts no matter how strong the moral integrity of those seeking power is. Eventually, those who are not willing to do anything to maintain power will be removed from the population.

The only way to stop this process is to make the maintenance of power impossible. To impose artificial limits on how long some one can remain in power. That of course, is not without consequences as well.

I’ve stated my strong suspension that higher glycemic load is the key factor in increasing obesity. Larger portion sizes, more easily digestible carbs and an increase in sweeteners, particularly High Fructose Corn Syrup all contribute to higher GL meals.

Here are two pieces of evidence

One pro

The other contra

I will say that the contra study controls the calories participants consumed while the pro lets people eat what they want, making me think that the pro is a better model. But, of course I am vulnerable to confirmation bias.

New claims for unemployment insurance rose 15K last week from 561K to 576K.  This is not going well. This is the second week in a row that we have seen a rise and its beginning to flatten the overall trajectory.

Staying anywhere in the 500Ks makes for a terrible economy. It indicates that we are still loosing jobs at a fairly rapid clip. I had hoped that we would return to job growth in the next month or two. This seems nearly impossible now.


What it is looking like to me is that the net effect of moving auto layoffs forward did in fact make it seem as if the overall trajectory of new claims was better than it was. This was a view I was critical of at the time. It appears I was wrong.

At least I hope I am wrong and this is not the beginning of a compete stall out or worse an upward trend. Most of the data seems to be moving in the right way. The financial crisis qua financial crises is over. The economy is set up for a recovery. If it doesn’t come soon we’ve got some deeper problem on our hands.

As always, the long view.


Note: This going to get a bit nerdy

By my estimation Megan McArdle has one the most complete understandings of the obesity epidemic in the econ blogosphere. It seems to be Megan’s contention, however, that the declining cost of calories is central to the rise in obesity. People like to eat and eating has become cheaper, she says. This doesn’t seem quite right to me.

Lets think about what we need to make a model like that work.  First we are assuming a calories-in / calories-out model of obesity. People choose to eat more calories than they choose to expend. There are some basic problems with that obesity model including, how people managed to balance this calculation for 1000s of years without the benefits of nutritional science or how this jives with the evidence that exercise does not induce weight loss.

Lets gloss over that and just get to what it says about weight gain. The issue is that if we use a calorie model we have to suppose that people stop gaining weight because the extra weight they are carrying burns off so many calories that it counterbalances their extra eating.

Remember, the calorie equation is a flow equation. Thus eating more calories than you expend doesn’t imply being fat. It implies being fatter. Unless at some point calories-in falls or calories-out rises, the person will grow fat without bound. This doesn’t seem to describe most people. Indeed, most overweight people are in equilibrium. Their weight is stuck where it is and thus they must be burning exactly as many calories as they are ingesting.

So implicit here is that the fattening process is halted by the extra calories burned by being fatter. The standard calculations imply that a sedentary woman has marginal burn rate of 5 calories per pound. Now suppose that our this woman decided to have one Grande 2% Cafe Mocha on her way to work.

The Cafe Mocha contains 330 calories which raises her equilibrium weight by 66 pounds. In BMI terms, if she started out as 5’4” and 130 lbs she would have a BMI of 22.3, well in the normal range. Indeed, its normal by the official standards, most people today would probably describe her as thin.

In equilibrium she would wind up with a BMI of 33.6, well into the obese range. In the visual chart below she would move from the third position to the the seventh position.



Note that these calculations imply that she has become no less active as a result of the increase in her size. She lives exactly the same life as before except now she has a Cafe Mocha and is 66 pounds heavier.

So far this may or may not seem realistic. Having slowly watched my entire generation become addicted to Starbucks, 10 –15 pounds seems closer to reality than 66. Still, there is more.

To follow the cheap calorie hypothesis we have to assume that a drop in the price of calories could have induced a move like this. It seems unlikely that the change in the price of Cafe Mochas was enough to compensate someone for this change in physique. Would we all gain 100 pounds if Cafe Mochas were a quarter each? I am skeptical but maybe its not Cafe Mochas that are doing it. Lets look at food prices more generally.

According to the USDA the monthly cost of a moderate food plan to woman aged 19 –50 is $238. The Consumer Price Index for food is 2.18 times higher than it was in 1983. Disposable income is 4.04 times higher. This implies that food is 54% cheaper as a percentage of income today than it was in 1983. Thus, a moderate food plan would have cost $517 or $279 more in income adjusted terms back in 1983. That works out to an additional cost of food of $3384 a year.

This then suggests that having to pay an extra $3384 was enough to prevent our hypothetical slender woman of 1983 from becoming an obese woman today. In economic terms the net (of food benefit) utility cost of obesity is less than $3384.

It does not seem that are many women for whom $3384 would be sufficient for them to choose to become obese. Nor does it seem likely that very many obese woman would be able loose all of their extra weight if offered $3384. Now perhaps all of the obesity epidemic is being driven by a very small fraction of Americans who face a very low net utility cost of obesity.

It doesn’t make sense, however, that Americans would spend so much time and money on exercise – which they believe will make them thinner – as well as diet books and supplements. After all, their inducement to eat more is only being driven by a savings of a few thousand dollars per year. If having to pay a few thousand dollars less for food makes it worth it to get fat then why is it worth it to spend so much time and money to get unfat?

It seems likely to me that the connection between food consumption and obesity occurs in ways that are not directly observable to consumers. That is, consumers believe in a calories-in / calories-out model of obesity and form their expectations of the costs and benefits of eating based on it. If this is not indeed the correct model then consumers will consistently err in their consumption decisions.

The corollary to that is that obesity is proceeding through some other food consumption choice channel. Something about the mix of food is changing and the causal chain is not immediately clear.

My guess is that it has something to do with the glycemic load of our food. Larger portions, higher glycemic carbs, “unbalanced” snacks and perhaps less dairy cause sharper spikes in insulin levels and eventually lead to hyperinsulimia. This frequent readers know, is how I would explain the strong connection between obesity and diabetes even while liposuction does nothing to help diabetes.

All of this of course assumes that changes in the market for food are at the heart of the obesity epidemic. I strongly suspect that is true but it is not certain.

Prompted by the recent interest in walking away from bad mortgages Megan asks

We spent the last twenty years giving people a bad idea of how much debt it was safe to take on.  Now we’re giving them odd notions about the best way to get out of that debt.  Are we ever going to have a healthy relationship to credit?  Or is this just part of the American soul?

The short answer is no, we are never going to have a healthy relationship with debt. But, its not a part of the American soul. Its a part of the essential relationship between creditors and debtors.

Felix Salmon is anti-leverage. That is, he suggests equity financing is inherently inferior to credit financing. Another way of saying that is that he prefers taking on partners to borrowing money.

The reasoning is clear, in many ways creditors and debtors are inherently in opposition while equity partners are inherently on the same side. Yes, both creditors and debtors want the project, whether that’s buying a new home or expanding a business, to succeed. If it does, they both make money.

However, they don’t want it to succeed the same way. The creditor wants the sure thing. As long as the project just barely breaks even, including principle and interest payments of course, that’s just peachy with creditor. Any extra risk, any stretching for greater reward is foolhardy and to be avoided. Furthermore, should the project fail the creditor wants as modest of a failure as can be managed, so as much of the debt as possible can be repaid.

The debtor has a completely different view of things. To him a breakeven project is worthless and if the project going to loose money then who cares how much it looses. A little nothing is no better or worse than a lot of nothing. On the other hand when it comes to turning a profit, the more the merrier. If that requires taking on greater and greater risks then so be it – history (and leverage) favors the bold.

The essence of the creditor debtor relationship is that the creditor is always pushing for a more conservative approach and the debtor is always pushing to take more risk. The problem, from the creditors standpoint, is that unless their agreement explicitly forbids the debtor from taking on certain risks, the debtor can do what he wants. This is a free country and despite much public opinion to the contrary, people who lent you money don’t own you.

Why then does anyone even bother getting into this dysfunctional marriage? A couple of reasons. One, under the right conditions with the right experience and some good collateral the creditor can manage to severely limit her exposure to risk. To do this she has to be good at writing contracts, good at sizing up collateral and good at reading her borrowers. This is difficult and its why lending money is best left to professionals.

Two, credit maintains the debtors incentive to put himself fully into the project. This is a big deal when the project is mostly about the debtors effort. For example, most small business are essentially the small businessman and his tools. The business rises and falls on the debtors ability to secure good work, to establish a good reputation and to do a high quality job.

This requires enormous effort and enormous risk on the debtors part. He is putting himself out there completely. The rewards have to be high for him to be willing to do this and credit helps maintain high rewards.

For a homeowner the incentives are similar. The homeowner has enormous control over the desirability of the property. He can maintain it pristine condition and watch its value go up or he can trash it and watch its value plummet.  If he were equity partners with the bank then that would seriously diminish his incentive to keep the property in good working order.

In short, with all of its dysfunctions I think the credit financing is here to stay. And as long as it is here, lenders and borrowers will try to get the better of one another.

Stephen Walt’s piece at Foreign Policy leads me to rethink my support for a heavy US commitment in Afghanistan.

. . . it is hardly obvious that Afghan territory provides an ideal "safe haven" for mounting attacks on the United States. The 9/11 plot was organized out of Hamburg, not Kabul or Kandahar, but nobody is proposing that we send troops to Germany to make sure there aren’t "safe havens" operating there. In fact, if al Qaeda has to hide out somewhere, I’d rather they were in a remote, impoverished, land-locked and isolated area from which it is hard to do almost anything. . .

. . . one might also take comfort from the Soviet experience. When the Soviet Union withdrew from Afghanistan in 1989, the mujaheddin didn’t "follow them home." Were the United States to withdraw from Aghanistan and the Taliban to regain power (or end up sharing power, which is more likely), going after the United States won’t even be on their "to do" list. . . .

For a realist, the "safe haven" argument is the only possible rationale for a large military commitment in Afghanistan. But the case is actually quite dubious, and somebody in the administration really ought to take a hard look at it.

HT: Yglesias

Matt Yglesias has the right insight into how most people approach policy and politicians

Voters don’t have a great deal of knowledge about the issues, or a great deal of interest in acquiring knowledge about the issues. But they are human beings, equipped with our species’ excellent ability to read the emotional states of other human beings. If they see a politician acting defensive about his “side” in an argument, they conclude that this critics are probably on to something. If they see a politicians acting outraged and hitting back fearlessly, they’re likely to conclude that he has nothing to apologize for.

I posed this question to a classroom of students: You have severe heart disease, the number one killer in the USA. You have the choice of two surgeons to fix* your heart.  Surgeon 1 is world renown heart surgeon but also an jerk who doesn’t care anything about his patients. Surgeon 2 is a average surgeon but he really cares about the people he sees. Which one do you choose.

Over half of the students chose Surgeon 2. Now the obvious problems with this “survey” aside, it at least suggests that part of what people are buying when they go to the hospital is not health care but health concern. You and your family want to know that everything is being done to save you.

Even, it seems, if one doctor giving it his all to save you actually isn’t as good as another doctor giving you the bear minimum. Many students still wanted the one giving his all, because I would guess, giving it his all is the product.

Now, I will qualify this by saying several of the students simply refused to believe that the jerk surgeon could actually be that good. “He can’t be the best if he doesn’t care for his patients,” so perhaps their is some plausibility bias here.

Thinking of health concern as the product is similar to the Hansonian notion of health signaling. Except here its not information that we’re after. In my thinking people are consuming the concern directly. They feel better when people show they care. Similarly your spouse might know you care, but he or she still wants you to show you care because he or she consumes displays of affection directly.



* I did specify how the heart was to be fixed but it didn’t seem to bother anyone.

A view from the inside:

Neil Irwin’s Washington Post piece (HT: Klein) prompts me to sketch an argument I have been toying with for a while.

Irwin reviews the opinions of economists and suggests they come in two camps. First, there are those who think that deep recessions produce swift recoveries. Those economists see a the economy turning around later this year. Then there are those who note the tattered conditions of the US household and can’t see how consumption turns around any time soon.

I’m torn between the two. I respect empirical regularities. It also makes sense to me that simply reducing the rate high rate of job destruction will produce a failing unemployment rate and with it increased production.

However, when we break down where this growth will come from it seems like a large increase in investment is necessary. The current politics don’t look like they will permit even deeper deficits and net exports can only contribute so much in an environment of increasing oil prices – something I strongly suspect we will continue to see.

So where will this investment come from? The most plausible answer to me seems to be lower real interest rates. Of course we have a problem. We are currently experiencing deflation and short term interest rates are zero. This puts obvious limits on the ability of the Fed to generate lower real rates.

To solve this we need an increase in inflation, however, the shakiness of household balance sheets lead me to suspect the usual target of roughly 2% is insufficient. It does not provide enough room for negative real rates and potential easing in the face of some future shock.

If the Fed were to adopt a higher target, of say 5%, and state that more or less explicitly then we can provide ourselves with extra room and keep inflation expectations anchored.

We can think of low or even negative real rates as lowering the cost of investment but we can also think of them as adding the repair of household balance sheets as well. Households have an overhang of mostly nominal debt. There are those with adjustable rate mortgages but I am willing to be the overwhelming majority of household debt is at fixed interest rates. As inflation rises so will nominal wages and thus the ability of households to repay that debt is eased.

Now this represents a transfer of income from those who lent money to those who borrowed, in many cases irresponsibly. We can debate the morality of that, but as a first approximation I don’t see how lenders in general are in a better position if unemployment stays high. Each lender would of course prefer that her debt was not inflated away, but inflating away the debt of other lenders improves the job prospects of her lenders and lowers her default rates. Thus on net it is possible for lenders to benefit from moderately higher inflation.

In addition we can see inflation as increasing the value of collateral. In a 5% inflation environment real high house prices can continue to gently fall while nominal house prices stay the same or even rise. This provides more security to the system.

Finally, of course inflation gives us the ability to generate negative interest rates in the short term and increase the attractiveness of investment. Obviously this is not sustainable over the long or even medium term. However, it does not need to be. Falling unemployment rates will increase consumption and allow us to reduce the incentive for investment. In the short term, however, what we need is more investment and negative real rates seem the most plausible way to get there.

With the semester gearing up I don’t have much time to put together substantive posts. However, browsing the Health Care debate I saw lots of commentary but no blogs actually posting Section 1233. Maybe I just missed it.

So here it is in all its glory.

    (a) Medicare-
      (1) IN GENERAL- Section 1861 of the Social Security Act (42 U.S.C. 1395x) is amended–
        (A) in subsection (s)(2)–
          (i) by striking `and’ at the end of subparagraph (DD);
          (ii) by adding `and’ at the end of subparagraph (EE); and
          (iii) by adding at the end the following new subparagraph:
      `(FF) advance care planning consultation (as defined in subsection (hhh)(1));’; and
        (B) by adding at the end the following new subsection:
`Advance Care Planning Consultation
    `(hhh)(1) Subject to paragraphs (3) and (4), the term `advance care planning consultation’ means a consultation between the individual and a practitioner described in paragraph (2) regarding advance care planning, if, subject to paragraph (3), the individual involved has not had such a consultation within the last 5 years. Such consultation shall include the following:
      `(A) An explanation by the practitioner of advance care planning, including key questions and considerations, important steps, and suggested people to talk to.
      `(B) An explanation by the practitioner of advance directives, including living wills and durable powers of attorney, and their uses.
      `(C) An explanation by the practitioner of the role and responsibilities of a health care proxy.
      `(D) The provision by the practitioner of a list of national and State-specific resources to assist consumers and their families with advance care planning, including the national toll-free hotline, the advance care planning clearinghouses, and State legal service organizations (including those funded through the Older Americans Act of 1965).
      `(E) An explanation by the practitioner of the continuum of end-of-life services and supports available, including palliative care and hospice, and benefits for such services and supports that are available under this title.
      `(F)(i) Subject to clause (ii), an explanation of orders regarding life sustaining treatment or similar orders, which shall include–
        `(I) the reasons why the development of such an order is beneficial to the individual and the individual’s family and the reasons why such an order should be updated periodically as the health of the individual changes;
        `(II) the information needed for an individual or legal surrogate to make informed decisions regarding the completion of such an order; and
        `(III) the identification of resources that an individual may use to determine the requirements of the State in which such individual resides so that the treatment wishes of that individual will be carried out if the individual is unable to communicate those wishes, including requirements regarding the designation of a surrogate decisionmaker (also known as a health care proxy).
      `(ii) The Secretary shall limit the requirement for explanations under clause (i) to consultations furnished in a State–
        `(I) in which all legal barriers have been addressed for enabling orders for life sustaining treatment to constitute a set of medical orders respected across all care settings; and
        `(II) that has in effect a program for orders for life sustaining treatment described in clause (iii).
      `(iii) A program for orders for life sustaining treatment for a States described in this clause is a program that–
        `(I) ensures such orders are standardized and uniquely identifiable throughout the State;
        `(II) distributes or makes accessible such orders to physicians and other health professionals that (acting within the scope of the professional’s authority under State law) may sign orders for life sustaining treatment;
        `(III) provides training for health care professionals across the continuum of care about the goals and use of orders for life sustaining treatment; and
        `(IV) is guided by a coalition of stakeholders includes representatives from emergency medical services, emergency department physicians or nurses, state long-term care association, state medical association, state surveyors, agency responsible for senior services, state department of health, state hospital association, home health association, state bar association, and state hospice association.
    `(2) A practitioner described in this paragraph is–
      `(A) a physician (as defined in subsection (r)(1)); and
      `(B) a nurse practitioner or physician’s assistant who has the authority under State law to sign orders for life sustaining treatments.
    `(3)(A) An initial preventive physical examination under subsection (WW), including any related discussion during such examination, shall not be considered an advance care planning consultation for purposes of applying the 5-year limitation under paragraph (1).
    `(B) An advance care planning consultation with respect to an individual may be conducted more frequently than provided under paragraph (1) if there is a significant change in the health condition of the individual, including diagnosis of a chronic, progressive, life-limiting disease, a life-threatening or terminal diagnosis or life-threatening injury, or upon admission to a skilled nursing facility, a long-term care facility (as defined by the Secretary), or a hospice program.
    `(4) A consultation under this subsection may include the formulation of an order regarding life sustaining treatment or a similar order.
    `(5)(A) For purposes of this section, the term `order regarding life sustaining treatment’ means, with respect to an individual, an actionable medical order relating to the treatment of that individual that–
      `(i) is signed and dated by a physician (as defined in subsection (r)(1)) or another health care professional (as specified by the Secretary and who is acting within the scope of the professional’s authority under State law in signing such an order, including a nurse practitioner or physician assistant) and is in a form that permits it to stay with the individual and be followed by health care professionals and providers across the continuum of care;
      `(ii) effectively communicates the individual’s preferences regarding life sustaining treatment, including an indication of the treatment and care desired by the individual;
      `(iii) is uniquely identifiable and standardized within a given locality, region, or State (as identified by the Secretary); and
      `(iv) may incorporate any advance directive (as defined in section 1866(f)(3)) if executed by the individual.
    `(B) The level of treatment indicated under subparagraph (A)(ii) may range from an indication for full treatment to an indication to limit some or all or specified interventions. Such indicated levels of treatment may include indications respecting, among other items–
      `(i) the intensity of medical intervention if the patient is pulse less, apneic, or has serious cardiac or pulmonary problems;
      `(ii) the individual’s desire regarding transfer to a hospital or remaining at the current care setting;
      `(iii) the use of antibiotics; and
      `(iv) the use of artificially administered nutrition and hydration.’.
      (2) PAYMENT- Section 1848(j)(3) of such Act (42 U.S.C. 1395w-4(j)(3)) is amended by inserting `(2)(FF),’ after `(2)(EE),’.
      (3) FREQUENCY LIMITATION- Section 1862(a) of such Act (42 U.S.C. 1395y(a)) is amended–
        (A) in paragraph (1)–
          (i) in subparagraph (N), by striking `and’ at the end;
          (ii) in subparagraph (O) by striking the semicolon at the end and inserting `, and’; and
          (iii) by adding at the end the following new subparagraph:
        `(P) in the case of advance care planning consultations (as defined in section 1861(hhh)(1)), which are performed more frequently than is covered under such section;’; and
        (B) in paragraph (7), by striking `or (K)’ and inserting `(K), or (P)’.
      (4) EFFECTIVE DATE- The amendments made by this subsection shall apply to consultations furnished on or after January 1, 2011.
    (b) Expansion of Physician Quality Reporting Initiative for End of Life Care-
      (1) Physician’S QUALITY REPORTING INITIATIVE- Section 1848(k)(2) of the Social Security Act (42 U.S.C. 1395w-4(k)(2)) is amended by adding at the end the following new paragraphs:
        `(A) IN GENERAL- For purposes of reporting data on quality measures for covered professional services furnished during 2011 and any subsequent year, to the extent that measures are available, the Secretary shall include quality measures on end of life care and advanced care planning that have been adopted or endorsed by a consensus-based organization, if appropriate. Such measures shall measure both the creation of and adherence to orders for life-sustaining treatment.
        `(B) PROPOSED SET OF MEASURES- The Secretary shall publish in the Federal Register proposed quality measures on end of life care and advanced care planning that the Secretary determines are described in subparagraph (A) and would be appropriate for eligible professionals to use to submit data to the Secretary. The Secretary shall provide for a period of public comment on such set of measures before finalizing such proposed measures.’.
    (c) Inclusion of Information in Medicare & You Handbook-
        (A) IN GENERAL- Not later than 1 year after the date of the enactment of this Act, the Secretary of Health and Human Services shall update the online version of the Medicare & You Handbook to include the following:
          (i) An explanation of advance care planning and advance directives, including–
            (I) living wills;
            (II) durable power of attorney;
            (III) orders of life-sustaining treatment; and
            (IV) health care proxies.
          (ii) A description of Federal and State resources available to assist individuals and their families with advance care planning and advance directives, including–
            (I) available State legal service organizations to assist individuals with advance care planning, including those organizations that receive funding pursuant to the Older Americans Act of 1965 (42 U.S.C. 93001 et seq.);
            (II) website links or addresses for State-specific advance directive forms; and
            (III) any additional information, as determined by the Secretary.
        (B) UPDATE OF PAPER AND SUBSEQUENT VERSIONS- The Secretary shall include the information described in subparagraph (A) in all paper and electronic versions of the Medicare & You Handbook that are published on or after the date that is 1 year after the date of the enactment of this Act.

Megan McArdle points to a Time Magazine piece on exercise. Exercise, it turns out, won’t make you thin.

I’ll try to limit how much I point out that the notion of losing weight simply by exercising had to be questionable to anyone with spreadsheet program and even a moderate desire to verify conventional wisdom. The numbers just don’t add up. The simulations just don’t bear any resemblance to reality.

What’s important is that this is entering the intellectual ether and has some chance of influencing policy and thought on the obesity epidemic. There isn’t a whole lot of evidence that being lazy makes you fat, though being fat might make you reluctant to engage in lots of activity.

The Time article still makes a couple of routine mistakes like conflating theories regarding how much people eat and the composition of the food we eat. Composition theories tend to work by assuming the quantity of eating is not a choice variable. That is, it may seem like you can cut calories by avoiding a second helping at dinner but you’ll just be hungrier the next morning. Eventually, the theory goes, everyone gives in to hunger.

They also, understandably, soft pedal criticism of the public health organizations.

Then how did the exercise-to-lose-weight mantra become so ingrained? Public-health officials have been reluctant to downplay exercise because those who are more physically active are, overall, healthier.

Really? Reluctant to downplay? I would go so far as to say they engaged in a campaign of misinformation bordering on outright deception. I think they did this with the absolute best of intentions. I also would be willing to concede that by convincing millions of Americans that the Stairmaster will help them loose weight, they have done a lot to improve cardiovascular health. However, the fact remains that the basic idea that exercise can help you loose weight was endorsed without any evidence to support it.

From the American Heart Association

Top 10 Tips for Starting a Physical Activity Program

The American Heart Association recommends that all adults get at least 30 minutes of physical activity every day, or at least more days than not. If you’re trying to lose weight or maintain weight loss, you should get at least 60 minutes each day

From the American Cancer Society

Maintain a healthy weight throughout life.

  • Balance calorie intake with physical activity.
  • Avoid excessive weight gain throughout life.
  • Achieve and maintain a healthy weight if currently overweight or obese.

“Balance calorie intake with physical activity.” Now it doesn’t actually say that exercise can make you loose weight. It effectively says: maintain caloric balance. Sort of like telling a sick person: maintain homeostasis. Clearly, however, the implication is that exercise will cause you to loose weight.

All in all, however, the best thing that we can take away is more skepticism about obesity theory. We just don’t know for sure why people get fat. We don’t even know if historical fatness is related to the current epidemic.

That is, for most of human history people could have been gaining weight for reason X. This is still the reason some people are gaining weight. However, reason Y has come out of the blue and is the reason lots of people are now gaining weight.

Will Wilkinson quoting Ludwig von Mises, echoes my basic theory of government

A certain degree of “buy in” is a necessary condition of stability in any kind of regime. The great advantage of democracy is that it keeps policy and public opinion at least loosely aligned and provides a mechanism for peaceful transitions in government when public opinion disagrees too much with the prevailing policies of the state. As the great democrat Ludwig von Mises once put it:

Its function [i.e., the function of "the democratic form of constitution"] is to make peace, to avoid violent revolutions. In non-democratic states, too, only a government which can count on the backing of public opinion is able to maintain itself in the long run. The strength of all governments lies not in weapons but in the spirit which puts the weapons at their disposal. Those in power, always necessarily a small minority against an enormous majority, can attain and maintain power only by making the spirit of the majority pliant to their rule.

This in my mind is what neo-conservatism gets so wrong. By casting the world as a Manichean struggle between good and evil they forget that all existing government carry at least the implicit consent of the people. People must buy the Hobbesian Bargain. They must believe that this government is preferable to no government – to lawlessness. Because, lawlessness is always an option and ultimately the state has no defense against it.

You cannot govern dead bodies and the dead do not pay taxes. For government to work the people have to consent. Governments that cannot maintain consent simply collapse. This is one reason – another other being nationalism – why externally driven regime change is always dicey. You are by definition defying the pre-existing consent. Unless you can quickly forge a new one, there will be chaos.

Mike Konzcal replies to my post on consumption inequality, suggesting that some people save only because they can’t spend fast enough.

A CEO makes 260 times his worker. Now we started this discussion saying that the worker gets a perfectly fine IKEA refridgerator for $350. Now the CEO’s “budget” for refridgerators is 260 * $350 = $91,000. Here is a fun internet challenge – fine me a refridgerator that costs that much.

The most expensive refridgerator I could find is around $17,000: “European appliance maker Gorenje has unveiled the most expensive fridge in the world designed for those to whom money is no object…The £10,000 fridge-freezers, named ‘The Eye-Catchers’, of which there are 10 available, are studded with 7000 Swarovski crystals, to make the black surface glitter and sparkle like a starry night.” (If you can beat that, leave a comment. Searching for high-end refridgerators online is surprisingly engrossing.) Assuming our CEO has 5 houses, he could buy one for each (half the market!) for about $85K. He has spent the practical limit possible in refrigeration, but statistically consumption inequality is still less than income inequality.

I want to thank Mike for the thoughtful response. I think there are a few issues here:

First, refrigerators clearly have an income elasticity less than one. If you quadruple your income, you probably won’t quadruple your refrigerator expenditures.

However, there are goods with an income elasticity of far greater than one: housing which mike mentions but also yachts, jewelry, super sweet sixteen parties.

In addition, not to be too glib myself but those who simply can’t find the time to spend all that money haven’t found the, shall we say, proper distribution of household labor time. There are some people willing to help you with that.

And, even if we assume that some people simply can’t arrange the current consumption of all of their wealth, does this imply that they won’t spend it at all. They are saving now, but presumably they will be spending it later. Retirement will offer plenty of time for 3 month cruises.

My guess is that some people will manage to spend it all and some won’t and preferences for consumption will be at the heart of that decision.


Still, lets assume that some people won’t spend for factors completely beyond their control. Is it important to redistribute their wealth. What is their wealth doing now? Likely it is serving as capital. That capital increases the productive capacity of the rest of society – should we redistribute it? We may or may not wind up benefiting the poor as a whole.

On the other hand, we could choose far more aggressive redistribution of consumption. Focusing on consumption need not lessen the zeal of one’s redistributionist tendencies. While it is true that those who are opposed to redistribution in general tend to emphasize consumption, there is no reason why consumption taxes can’t be the vehicle for strong redistribution. Politically I tend to think the public would tolerate very high tax rates on Kimora Lee Simons, much higher than on income in general.

I am not saying this to advocate for any particular amount of redistribution, just in an attempt to separate the question of how much redistribution from the vehicle of redistribution.

Matt Yglesias notes the lack of empirical evidence for a long run tax-growth relationship.

One issue in this neighborhood that I think is interesting is simply the fact that even though it seems like tax policy ought to be an important determinant of economic growth, it’s pretty hard to find evidence for this proposition




I’d only point out that the theoretical evidence is limited as well. First, as surprisingly few people note, theory is ambivalent on the relationship between taxes and work or savings. It is possible that taxes discourage both, but it is equally possible that taxes encourage both.

It depends on whether people stop working or saving because they can’t get much out of it or work and save more because the taxes made them effectively poorer.

Now, it does turn out to be true that its hard to get a model where net private savings goes up when taxes on savings go up. Leaving aside for a moment the fact that all else equal, an increase in taxes produces an increase in public savings, a decrease in private savings still doesn’t portend a long term decrease in the growth rate.

In most models the growth rate declines immediately because there is less investment. However, in time a combination of deprecation of old capital and increases in technology combine to bring the savings and investment rate back to where they were before. What we are left with is an economy that is on a lower growth path, but not a slower growth rate.

One, way to think about it is that is this: suppose we have two countries, one where taxes on savings are high and another where they are low.  The two countries will grow together but the low tax country will hit any given level of per capita income a few years earlier than the high tax country.  If we assumed that every dollar in tax results in one less dollar of savings and that the low tax country has a tax rate of 20% and the high tax country has a tax rate of 35% then the high tax county will be roughly 12 years behind the low tax country.


The gap between the economies grows in nominal terms but is constant in year terms. That is the second economy is always 12 years behind. This is more clearly displayed on a log chart


Whether this is a big deal or not is a matter of debate. The difference can get quite large. For example for a 50% tax on capital the high tax country is a full 27 years behind. However, in the long run it always reaches the same income per capita as the low tax country, just at a later date.

Ryan Avent delivers a hearty rebuke to Greg Mankiw

[Greg Mankiw] has made it clear that his support of a carbon tax is primarily about improving the overall efficiency of the tax code. That’s good to know. It suggests that those interested above all else in improving tax policy in an environmentally-friendly manner can continue paying attention to Mankiw, while those of us focused on the problem of climate change while mindful of economic costs can ignore him.

In its report of the CBO results ABC News says

Obviously successful preventive care can make Americans healthier and save lives. But, Elmendorf wrote . . .

Successful prevention sure, but it turns out that most prevention is just not successful. Culled from the Annals of Internal Medicine, increases in life expectancy from some techniques:

  • Breast Cancer Screening: 60 days
  • Lifestyle Modification for Coronary Artery Disease: 1 year
  • Ovarian Cancer screening: 14 hours (yes hours, that’s not a typo)

Breast Cancer and Coronary Artery Disease are big deals. However, the two major preventive steps will on average give a woman 14 more months of life.

That’s not nothing but it also not the kind health revolution that you might expect from a head on attack on two of our most pernicious diseases. Moreover, as things go mammograms and lifestyle modifications are really good deals. The ovarian cancer stats show just how bad of deal some prevention can be.

HT: Mankiw

The CBO admits that prevention doesn’t lower costs.

Preventive medical care includes services such as cancer screening, cholesterol management, and vaccines. In making its estimates of the budgetary effects of expanded governmental support for such care, CBO takes into account any estimated savings to the government that would result from greater use of preventive care as well as the estimated costs of that additional care. Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.

By now this is may be received wisdom among those looking at health care issues. However, when I first starting pushing this six years ago many were shall we just say, less than receptive to the idea. How can you possibly speak ill of prevention? Do you like to see women die of breast cancer?

The take home now should be that health issues – at least as much as economic issues, if not more – can be deeply, deeply counterintuitive. They are counterintuitive largely for the same reason, which is that you have a complex dynamical system that is “trying” to reach an equilibrium you don’t necessarily like.

Every human body is dying. This is fundamental and it will impact everything you do.  So every investment you make has to be with the knowledge that this is a temporary patch not a solution. Even if you prevented all cancers, the would-be cancer patients will become fatally ill with some other disease. This reality makes everything less cost effective than it seems at first.

Via Free Exchange, the Washington Post reports that fertility rates actually start to rise as economies become a very highly developed. A notable exception being, of course, Japan.

I wonder how this squares with Bryan Caplan’s discovery that in wedlock births in the US and Japan are roughly the same. The US simply has more out of wedlock births.

Looking only at most developed countries, the lowest fertility rates correspond to my prejudices about the most traditionalist societies. That is, I imagine Japan and to a lesser extent Italy to be societies in which out of wedlock pregnancies would suffer more scorn. I have absolutely no data to back that up, however.

Arnold Kling suggests that business cycles are a real (non-monetary) phenomenon and that at the heart are errors about what goods or services to produce or what human of physical capital investments to undertake.

I think that in the last 18 months, an unusually high number of people have had their plans go awry. They wish they had made different choices in terms of their education and occupations. Digging out from these mistakes is going to take a long time. A lot of recalculation needs to get done, and the problem is really daunting.

I don’t think that fiscal and monetary policy solve this calculation problem. At best, they substitute the errors of fumbling central planner for the errors of fumbling individuals.

I am sensitive to this perspective. Its elegant and compelling to see real micro problems at the heart of macro fluctuations. There are several problems, however:

  1. How do you get to unemployment from here. If people are retooling I see a huge demand for retraining. Or them accepting very low wages in a new industry but why persistent unemployment. Why doesn’t the labor market clear.
  2. How you get from here to monetary induced contractions.  Maybe there is still debate over whether the Fed can stop a recession or at what costs. However, how do you get from here to the Fed being able to start a recession. The experience of the early eighties seems to clearly show us that the Fed can.
  3. How do we get the Great Depression from here?

Ultimately these are the challenges that I think sink most attempts at a real macro theory.

Job data came in better than expectations, with the US economy only shedding about 250K jobs in July. The unemployment rate did much better than expected, falling for the first time since the recession began.

A few bloggers have taken a stab at trying to explain this. How can unemployment be falling when we are still loosing jobs. This is especially confusing since every econ blogger has be going on and on about how unemployment is a lagging indicator and will keep rising long after the recession is over.

My answer is pretty simple. One, a drop of .1% is not that much and could be noise but two, to the extent this is real it is probably just mean reversion. That is the unemployment rate was unusually high and now it is dropping back.

Here is the unemployment rate measured against job growth.



Unemployment has risen more dramatically that the log term relationship between unemployment and growth.


We can look at the change in unemployment more directly – sort of an Okun’s Law for job growth.


In this case we are not looking at slopes so much as the actual deviation from the the trend line. Prior to this month unemployment had risen 1 percentage point higher than one would expect given the job losses over the prior year.

This month gives us slightly more jobs lost over the 12 months, 4.2% vs. 4.1%, and slightly lower unemployment, 9.4% vs. 9.5%. Thus we are trending back towards the historical relationship.

My theory last month was that fewer people than expected were dropping out of the labor market. In fact, I suspected that some households increased labor supply due to the uncertainty surrounding the financial crisis.  This certainly happened in my household and I recommended it to friends and family.

As the financial crisis has abated this process has unwound in my small sample. There may be something similar going on in the economy at large.

My stance: If someone launches a seething and creepily personal attack on a blogger because he disagrees with her positions, you shouldn’t link it.

James Othmer says drug advertisements make us think we are sick. Megan McArdle defends the use of prescription drugs to treat the unpleasant aspects of the human condition.

Having been raise in an anti-pharmaceutical hippiesque household I guess I could be accused of rebelling to the right but I am huge fan prescription drugs. With the exception of possibly the internet no other single aspect of modern society has had as profound an effect on my life.

I sometimes say my father died of insomnia and while that’s not literally true, the chronic condition it left him in contributed directly to his demise. That I can function on a regular basis is largely due to Ambien.

I’ve seen psychotropic drugs have such a powerful effect on people that I began to question basic assumption about what it meant to be an individual. Chemicals don’t just affect what you see, what you hear, what you experience from the outside world. They affect what you believe – what you are able to think is true.

I know there are lots of people who think drugs are ok for the ‘”serious” forms of mental illness like schizophrenia and mania, but that depression and anxiety are a part of who we are and a response to the ups and downs of life. We don’t need to medicate away our humanness.

Long, serious conversations with intelligent people suffering from Generalized Anxiety Disorder disabused me of that notion.  I have never lived a day in my life the way they live every day of theirs.

When they tell you about the nefarious motives that so many people around them have. The horrible consequences they will face from making honest mistakes. The hideous judgments that everyone is making about them all of the time. The unrelenting guilt from having committed a slight you hardly noticed. When they tell you these things, what’s chilling is not how “crazy” this perception of the world is but the realization that this is the world in which they live in. In their world dangers do lurk around every corner.

To make it worse you wouldn’t know this about someone just from looking at them, working with them or even being related to them. You would say, as people do, that so-and-so is cranky, bitchy or high-strung. You’d say it was just part of their personality, part of human diversity. They don’t tell you that their world is so insane because they assume you live in the same world too. They think that you are naive or perhaps too nice for your own good. They can’t even imagine a life free from these haunting concerns.

Its not diversity. Its suffering. It needs to be alleviated and pharmaceuticals can alleviate it.

Brad Delong has a defense of the clunker program based on its environmental benefits. However, I am not completely certain its a bad program on the basis of its economic benefits.

Now, Cash for Clunkers sounds a like an application of the broken window fallacy – that we can improve the economy by destroying things which then have to be re-created. While this is clearly a fallacy during full employment, its not clear to me that its a fallacy during recession.

The difference is that during a recession the service stream from labor and capital are being destroyed anyway. You have workers with no factory and factories with no workers.

The workers produce a service stream, their labor, that is being effectively destroyed. The work an unemployed worker would have done today is just gone and can never be recovered. Much the same is true for the capital he would have used. Though, the calculation with capital is a bit different since presumably it depreciates faster with use.

If instead this labor and capital is employed fixing windows or building cars then it is not lost. So, if I destroy a clunker the economy looses a car but I prevent the loss of capital and labor services.

If it were a one for one trade – every clunker destroyed represented a new car built – then this would be a no brainer.  Destroying the clunker would definitely be worth it. 

However, many of the people using the program would have bought a car anyway so we have to destroy multiple clunkers to get one new car. There is some tipping point where destroying clunkers would not be worth it but I am not sure how close we are to that point.

The program has additional value, however, because it lowers the potential downside risk for auto dealers and potentially auto manufacturers. This in turn should reduce their incentive to hoard cash, which in turn is simulative itself. That is, the clunker program should have multiplier effect.

Taken together this means that we could probably destroy quite a few clunkers per new car built and still be in the positive economically. How many clunkers we are in fact loosing, I don’t know.

Initial Claims for Unemployment Benefits fell by 38K to 550K this week.  Last week was revised upward 4K. The four week moving average fell roughly 5k to 555K.

We’re on a solid trajectory but not a quick one. We’ve improved by about 124K since the peak on April 4th this year. That’s roughly 7K a week at this point, which will put us at 400K, the break even point, by Jan of 2010.


The long view


Will Wilkinson has had an interesting back and forth with Conor Clarke and Matt Yglesias on income distribution. Most of this is based on Will’s paper income inequality, which held that income inequality in and of itself is not that important.

When the paper came out I didn’t say much about, because it matched what I already believed, namely:

  • Consumption inequality is more important than income inequality
  • Consumption inequality between nations is much more important inequality within nations
  • There is no real empirical support for the idea of class interests
  • Consumption at the high end probably yields a lot less direct happiness than consumption at the lower ends

It was this last point that caught the attention of several bloggers. If consumption doesn’t yield much at the high end they said, then it makes a lot of sense to take it away from wealthy people and give it to poor people. Conor went so far as to call Will a liberal hero for pushing this point.

I tend to agree that in and of itself declining marginal utility is an argument in favor redistribution. There are a couple of points that need to be made, however.

First, none of this undercuts the basic argument of Will’s paper which is that concentrating on income inequality is not particularly useful. It is entirely possible for someone to have high levels of income but moderate levels of consumption. Its not immediately clear that this is someone whose income it would be beneficial to redistribute.

Something is driving them to save so much. It could be paying off past debt. High earning professionals might have significant educational debt that they are paying off. It might be that this bit of income is transitory, a one year bonus.  Or, it might be that they have really high risk aversion. This last point, I think, is key.

Some people are hoarding money primarily out of anxiety. They may not voice it this way. They may think that their actions are the prudent thing to do. That people who don’t save so much are “flirting with disaster.” However, at the heart it is anxiety that is driving them to do it. Taxing away their savings exposes them to increasing anxiety and that’s a serious cost. After all, they were willing to forgo so much consumption to avoid it.

People with high income, but not particularly high consumption might also have lower than average happiness. They are driven to earn and save money because they want to avoid a negative emotion. The fact that this haunts them may mean that even at high levels of income they are not happy at all. I suspect that this is behind some of the finding that higher income doesn’t lead to greater happiness. Some people are high income because they are generally nervous people and they need the accumulate wealth to make themselves feel okay.

You might object that the investment banker with a house in the Keys and a her own airplane looks pretty happy. Yes, she does. But, now we are talking about someone with high income and high levels of consumption. Wouldn’t it be much more sensible to tax that consumption? The only people you miss in such a tax are precisely the one’s who for some reason are driven to squirrel away lots of money and never spend it.

Second, to rehash an old point, its typically true that the more we consume the less that happiness we get out of each additional unit of consumption. However, that doesn’t say anything directly about interpersonal comparisons of utility. Its entirely possible that the joy someone that someone receives from buying their 500th pair of shoes is much greater than I would get spending the same money.

I can tell you that many of them look like it gives them a great deal of pleasure. On the other hand I am not that much happier buying stuff even though my overall consumption is probably lower. From a utilitarian perspective it doesn’t make sense to transfer income from them to me. Indeed, this is one of the weaknesses in my view of the utilitarian approach. It doesn’t benefit me enough. No, more seriously under utilitarianism it is possible to justify extremely unequal distributions of happiness, so long as one person is a more efficient producer of happiness than another.

Utilitarianism suggests we should not work too hard on the depressive precisely because its so hard to get the depressive to feel better. Its more efficient to give those resources to the bubbly, who feel even more great because of it.

Those kind of results cut against the moral intuition that supports utilitarianism in the first place and makes me think a more consumption based Rawlsian approach is better.

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