Maxine Udall (girl economist)

Maxine's Links for September 30 2009

Media Matters: More lives to lay at the feet of the tobacco industry Can anything stop them?

Think Progress: America's shame It is insane that people living in a developed country and the largest economy on the planet do not have health insurance or access to regular, affordable health care.

Financial Crisis for Beginners by three credible sources

New Yorker: John Cassidy provides a good post-mortem of the financial & mortgage market meltdowns and a wonderful metaphor for behavioral externalities. Excerpt: “Note the phrase “the efficiency properties of market outcomes.” What does that refer to? Builders constructing homes for which there is no demand? Mortgage lenders foisting costly subprime loans on the cash-strapped elderly? Wall Street banks levering up their equity capital by forty to one? The global economy entering its steepest downturn since the nineteen-thirties? Of course not. Mankiw was referring to the textbook economics that he and others have been teaching for decades: the economics of Adam Smith and Milton Friedman. In the world of such utopian economics, the latest crisis of capitalism is always a blip.”

Maxine isn’t convinced that we’ve been teaching “the economics of Adam Smith” for decades. Milton Friedman, for sure, and MF’s take on Adam Smith, but Adam Smith? I don't think so.

The Economist seems pessimistic about the US dollar's reserve currency status Oh, dear...

The Economist: Maxine ordered this book and can't wait to read it. “Mr Sandel illustrates the old classroom chestnut—is it ever right to kill one innocent person to save the lives of several others?—with a horrifying dilemma from Afghanistan in 2005. A four-man American unit on reconnaissance behind lines stumbled on a shepherd likely, if let go, to betray them to the Taliban. They could not hold him prisoner. Nor, on moral grounds, would the serviceman in charge kill him. Released, the shepherd alerted the Taliban, who surrounded the unit. Three were killed along with 16 Americans in a rescue helicopter. The soldier in command, who lived, called his decision “stupid, lamebrained and southern-fried”. Which was right, his earlier refusal or his later regret?”

I guess sometimes, no matter what you do, you’re going to regret it. What would be the “minimize regret” solution? I think it would be to kill the shepherd. Maxine hopes she’s never in a similar situation.

 

Post-Modern Applied Economics: It’s the Error Term, Stupid.

I think of economics as the one true modernist social science. Our reliance on mathematics and mathematical models introduced a statistical and theoretical rigor that distinguishes economics from the other social sciences. It has also tended separate the discipline from its 18^th century roots in moral philosophy and it has reinforced our conceit that economics is more like physics than it is like psychology or sociology.  

These are not necessarily bad things.  They have provided economics with what I think is a better developed (than other social sciences, not than physics) theoretical framework from which empirical analyses can be conducted. It has resulted in mathematical and statistical rigor that should be the envy of all other social sciences. However, it has also produced a remarkable uniformity of perspective, opinion, and belief among the members of the tribe. In the last, it has come to resemble a religion rather than a science, at least for some.

Had it not been for the recent crises in mortgage and financial markets, most of the high priests and priestesses of our arcane religion would still be worshipping at the alters of rational expectations, efficient markets, and Pareto efficient equilibria; allowing a morbid fear of free-riders and moral hazard to dominate any attempts to address social issues rationally; and chanting the mantra that rational, fully-informed self-interest would save the day (even in situations where information was highly asymmetrical with little hope of remedy).

Economics has been brought down by animal spirits, fat tails, and insularity.

I believe there are several things that will haul us back from the brink of irrelevance and set us on the track to true science. The one I want to write about today is economics becoming a legitimate social science instead of a branch of mathematics. Deirdre McCloskey has written extensively about this. She and Steve Ziliak have been fighting a two-person war to move the discipline to a more enlightened approach to statistical inference for years. 

Maxine believes it’s time to refocus attention and discussion on the error term. It is often where much of the action is in our models. It is where unexpectedly catastrophic events dwell resulting in fat tails. It is where our animal spirits manifest and cause us to do the right thing or the wrong thing or the thing everyone else is doing rather than the self-interested, fully-informed rational thing. It is where God and miracles and chance dwell.

The error term is the unexplained residual. Often it contains 70-90% of the model’s variation. It may be reassuring to find that price and income matter and have the expected signs, but if the explanatory power of the model is low, there is almost certainly more we need to know before we can legitimately call ourselves scientists.

Post-modern applied economics, macro and micro, must do a better job of explaining the error term. It is not enough to assume a distribution, a corresponding functional form and then present the most likely model parameters (with 95% confidence intervals). We must investigate the error term by conducting research on what might be left over, what might not be in the model.

This is a well-known problem with economists: omitted-variables bias. It’s time for us to recognize that OVB runs deeper than finding the best instrument (which almost certainly does not exist or if it does, does not vary sufficiently both to reduce bias AND provide precise estimates).  

Ironically, psychology, sociology, and anthropology, the social science disciplines we have looked down on these many years, have done much of this for us. Behavioral economists are now leading the charge, but it will require more than improved behavioral models. It will also require a new approach to statistical inference.

What does this mean? Null-hypothesis statistical testing still has value, but its value should be in supplementing a well-researched narrative. P-values and arbitrary cut-points for statistical significance should be recognized for what they are: tools for inference that must be placed in context and tempered by what else is known about the relationships. They are not hard and fast rules that “prove” anything. Observational data are “observed.” This means we have to “observe” more than the variables in the model and the supposed instrument. We must observe context, political, economic, social, and any other even when we can’t include them adequately in the model.  We should question the “independent, identically distributed” assumption always. It is clear that independence was highly questionable in finance and mortgage markets. Surely, there are other examples. Finally, there are always omitted variables. In every model. They are in the error term. They should not be ignored even if they are believed to be uncorrelated with regressors. They may well be correlated across individuals.

The error term is and has always been where most of the interesting “action” is. Economic research must return to rhetoric and rhetorical discourse derived from extensive research and supplemented by a sounder approach to statistical inference in order to investigate it. Deirdre McCloskey has said something like this before me.

Is it a girl thing?

 

Maxine's HEALTH REFORM posts for September 28 2009

National Women's Law Center on why health reform matters for women 

Women Face Unfair and Discriminatory Insurance Industry Practices

Insurers in most states are allowed to consider gender when setting premium rates in both the individual and group markets. As a result of “gender rating,” women, and businesses with predominantly female workforces, are often charged more than men for the exact same coverage.

 

 In eight states and D.C., it is still legal for insurers to reject a woman’s health insurance application if she is a victim of domestic violence.

 

Insurers may exclude coverage for certain “pre-existing” conditions; if a woman has previously had a Cesarean section, for instance, insurers may refuse to pay for future C-sections or reject her application altogether.

Peter Orszag, OMB Director, on why older workers are working longer “One of the most significant repercussions of the economic downturn has been its effect on the labor market.  It goes without saying that too many Americans are out of work. And as you dig deeper into the data, it becomes evident that the age pattern of changes in labor force participation rates is different now than during past downturns. “

WSJ_Health Reform is dividing business and GOP (unless, of course, the business is an insurance company).

From USA Today, good overview of the uninsured in the US

From the Hastings Center, a summary of 3 components of the Baucus bill that are aimed at improving coordination of care, cost control, and innovation in payment and financing aimed at improving integration and coordination of care.

NY Times: GREAT interactive graphic that shows regional differences in Medicare reimbursements, surgery rates, and enrollees. Data are from the Dartmouth Atlas of Health Care.

NY Times: Another GREAT interactive graphic that provides “A History of Health Reform” timeline from 1912 to the present (in case you thought this was a recent phenomenon).

NY Times Interview with Dr. Marcia Angell   Listen to this woman. She’s terse and she’s correct a lot of the time.

NY Times: Real life (insured) cancer patient describes costs and contrasts US prices with UK prices Remind me again why competition is good for this market, please.

WSJ: Insurers Tally Up Baucus Bill Provisions  “Sen. Baucus's health overhaul would create new insurance customers without subjecting insurers to government-run competition -- two victories for the industry. “  Cue cheering from the populace. Surely this is a victory for us all, no?

WSJ: Senators Reject Bid to Cut Drug Prices for Low Income Seniors  “Senators rejected an amendment to health-care legislation that would have cut drug prices for low-income seniors and cost the pharmaceutical industry billions of dollars.” It’s good to know they’re on our side.

WSJ: Health Bill's Proposed Excise Tax Rallies Republicans.  “Republicans are seizing on a proposed fee for people who don't carry health insurance as evidence the White House is breaking a pledge not to raise taxes on middle-class Americans.” It’s OK to raise prices (even above marginal social cost), just don’t raise taxes. For God’s sake, don’t raise taxes. We’ll pay any price, just don’t raise taxes.

FT: Health of US democracy also at stake in battle over health reform  Somewhere in Philadelphia, there is a VERY smart woman. Many probably, but this one deserves recognition.

 

Maxine's Links for September 27 2009

BankTracker: Interactive website from AMU School of Communication Provides bank-specific troubled asset ratios (where lower is better) based on comparison of troubled assets (e.g., loans over 90 days past due adjusted for Federal guarantees ) to Tier One Capital plus Loan Loss Reserves. The ratio does not include risk from non-loan assets (e.g., CDO, CDS). It appears to correlate well with the Unofficial Problem Bank List compiled by Calculated Risk.

Forbes.com Video: Nouriel  Roubini on Financial Sector One Year Post-LehmanWorth a listen. He’s one of the few who correctly forecast the financial sector meltdown (and endured a lot of ridicule for his efforts).

More on the Dark Ages of Macro from a Canadian Economist

Good blog post on Obama's success in neutralizing healthcare interest groups but failing to engage the US public

From the CBO Director's blog: No, Joe, illegal immigrants are not covered under the Baucus bill. But it doesn’t mean that they won’t receive care if enforcement is lax (or just or ethical or fair or compassionate).

From nakedcapitalism blog (no, it's not naked capitalists), a very funny photo...

Courtesy of Exelon Corp: Calculate whether or not it would pay to switch from oil to gas

The Economist: The Bachelet Model  Chile’s popular female president, Michelle Bachelet:  “while sticking to fiscal rigour (at some political cost), she opted to make social protection and the promotion of equality of opportunity her main priority. Her government is building 3,500 crèches for poorer children. It has introduced a universal minimum state pension and extended free health care to cover many serious conditions. Its housing policy features better-quality homes, in model neighbourhoods. But its efforts to shake up education have been disappointingly timid.”

And from another Economist article on Chile: “Under the Concertación, Chile has been the region’s big success story, adding an increasingly robust democracy and welfare provision to the free-market economic policies bequeathed by Pinochet. In the 20 years to 2006, the poverty rate fell from 45% of the population to just 13.7%. Income distribution remains highly unequal but opportunities are widening. Eight out of ten youths now finish secondary school. Four out of ten go on to higher education and of these 70% are the first in their families to do so, in many cases thanks to government-backed grants or loans, points out Mr Velasco.” It goes on to suggest that all is not well as growth bumps up against old regulations and institutions as well as entrenched interest groups. But Bachelet still deserves a lot of credit for overseeing growth and reducing disparities in opportunity, income, and well-being.

Maxine's Links for September 26 2009

The Economist's Schumpeter Column on how B-Schools Need to Change

     You think?

The Economist: Financial Innovation in Service to the World's Poor

     An idea whose time has come and of which Adam Smith would almost certainly approve.

Ken Rogoff on the G-20 (American Prospect)

Financial Times on the Continuing Threat of Credit Default Swaps

    Oh, dear.

WSJ_Caution about Fed Policy from a Fed Governor

NYT: Recent poll indicates that 65% of US public favor public Medicare-like health insurance option

     Of course, the headline indicates that the public is “wary of Obama” on health care. Is it possible they are “wary” because they elected him to change things, but he seems to roll over without a fight on the stuff that would actually improve their lives?

FT_Equities are overpriced

   You think?

Financial Times: Economist, Paul De Glauwe, adds his voice to those wishing for a change in macro theory 

   How many will it take?

(Note, if you don’t subscribe, you get only 2 free views (per day, I think) at FT. I would read Paul De Glauwe and the one on CDS if I had to choose.)

That’s all for now.  It’s Saturday and Maxine has a life...

One more link for September 25 2009

Two economists question economists' definition of "rational"

    It’s about time...

Maxine's Links for September 25 2009

WaPo's Steve Pearlstein warns that Wall Street is still a casino, not a place where captial gets allocated efficiently to sound investment and innovation

You should listen to this man.

Trollblog on animail spirits and confidence men with a little Veblen thrown in

Capitalistimperialistpig likens the freshwater-saltwaster dispute to the fall of Sauron

So who was Sauron? Milton Friedman or Robert Lucas?

Brad Delong's post that everyone is talking and blogging about

Facts and myths about the financial crisis from a team at the Minneapolis Fed written in Oct 2008

I wonder if they still believe this?

Paul Krugman's Review of Robert Skidelsky's book, Keynes: The Return of the Master

Paul Krugman on Being Green

Kermit was wrong. It’s easy to be green.

Intergenerational Win-Win: Health Insurance, Education, Environment, Infrastructure

Lately, I’ve been thinking about discount rates and subjective rates of time preference and intergenerational win-win.  

Discount rates (in the context of this post) are the rates by which cost benefit and cost effectiveness analysts (CBA/CEA) discount costs and benefits of programs and projects that are realized in future years. They reflect both the erosion of purchasing power (i.e., inflation) and the opportunity costs of an investment that pays off over several (or many) years in the future (i.e., the interest rate or the return on investment that would have been realized had you invested the money elsewhere rather than spending it on a project like, say, a health care clinic or a road or schools). The use of discount rates has the consequence that the further out in the future benefits and costs occur, the less “weight” they receive when they are added over time to obtain their “present value,” i.e., the net value (total benefits minus  total costs) of the stream of gains (benefits) and losses (costs) associated with the project over time.

Subjective rates of time preference (SRTP) relate to how individuals subjectively value future gains and losses. It is econ-speak for whether you prefer your money now or later. Someone who would prefer to have $100 today rather than $110 a year from today has a subjective rate of time preference of 10% [($110-$100)/$100=.10 X 100 = 10%)].  You can think of it as economists’ way of measuring or talking about a person’s tolerance for delayed gratification. If you have a high SRTP, you aren’t very good at delaying gratification, you’re not very future-oriented, and you probably don’t worry too much about what your health state will be in 10 years, so you don’t lose weight, stop smoking and cut your alcohol intake to a moderate level. It is the eat-drink-and-be-merry-for-tomorrow-we-may-die syndrome; the grasshoppers in Aesop’s fable. If you have a low SRTP, you are far-sighted with regard to the future. You alter your diet to improve your health 20 years from now, you save money for a rainy day, you’re willing to wait longer for the same payoff as a high SRTP person. You are the ant in Aesop’s fable.

Recent research in behavioral economics suggests that all humans, even people with low SRTP, tend to be fairly myopic (with regard to the time horizon) when making decisions like how much money to save for retirement or whether or not to buy health insurance. This is called hyperbolic discounting. It means that the weight or value we place on future gains and losses drops off steeply at a time that is fairly proximate to the present (say, 2 to 3 years). For this reason, things that are likely to yield gains or payoffs farther out in time, like something you could do now to improve your well-being in 10 or 20 years,  don’t have much influence on decisions that we make today whereas more proximate (in time) gains or payoffs do. So we prefer to keep smoking rather than to stop smoking. We prefer to eat dessert rather than to lose weight. We prefer to consume more now and rather than later. This is one of the “animal spirits” that Keynes originally alluded to and that has been described recently by George Akerlof and Robert Shiller.

SRTP is a subjective way that we discount future gains and losses. It tends to “tilt” the world in favor of the present.  The discounting used in CBA and CEA tends to reinforce this “present” orientation. Projects and public policies that yield benefits or costs sooner are valued over those whose benefits and costs are realized later.

So we “borrow” from our grandchildren and their grandchildren to finance things that we prefer today. We rationalize it by using methods like cost benefit analysis and costs effectiveness analysis that employ discount rates that effectively down weight future gains and losses. And we prefer to do this because we would prefer to gain today rather than tomorrow.

Don’t get me wrong. There are good reasons for employing discount rates in public policy analysis. It’s just not clear that the folks with the most to gain now are the right ones to be using a tool that is skewed in their favor.

The reason I’ve been thinking about discounting and SRTP is I’ve been wondering how can we rationalize, i.e., make rational, this tendency of ours to borrow from our children and grandchildren to finance our consumption today? Can we figure out ways to do it that not only don’t bankrupt them, but actually provide them with some net benefits? Is there an intergenerational win-win position?

 If my grandparents had better nutrition and health care, I would be healthier.  So anything my grandparents or the US government spent on those two commodities are intergenerational win-wins. The public monies spent during the 1930s to build National and State Parks are still yielding benefits to outdoors lovers like me: another intergenerational win-win. The national highway system that Eisenhower began in the 1960s is starting to crumble, but it still represents an intergenerational win-win. You, dear reader, think of some other examples.

So when we’re talking about fiscal stimulus packages and we’re borrowing from our grandchildren to finance them, we should be thinking about how to use stimulus monies to create value for those grandchildren AND stimulate our economy. Expanded health insurance now will improve our health and their health and increase their well-being and productivity (wealth). Win-win. Improved infrastructure now will improve our economy and their well-being and productivity.  Win-win. An improved environment and green technologies will build new industry now and improve their well-being by improving the climate and the planet on which they dwell. Win-win. Expanded education now improves grandparent well-being and productivity and fosters the intergenerational transfer of human capital. Improved education has also been linked directly to improved health.  Win-win.

Intergenerational win-win: It’s how we should have spent the stimulus money. It’s how we should be spending generally. National health insurance, education, environment, infrastructure. We AND our grandchildren would win.

 

 

Economics focus: Measuring what matters | The Economist

Economics focus: Measuring what matters | The Economist Shared via AddThis

Maxine’s Links for September 20 2009

 

 

Politics, Finance, & Economics

NYT_Simon Johnson & Peter Boone on the continuing weakness of financial regulation

NYT_Frank Rich on how Glenn Beck occasionally gets it right, but is never consistently right in either sense of the word. Unlike Rich who occasionally gets it right and is consistently left.

WSJ_on consultant health salary spread at federal agencies

WSJ_Estate Tax Revisited

McClatchy_Teachers Find Obama Not the Friend They Had Expected

McClatchy on Secession: Et tu, Vermont?

FT_Carlyle Group gets into Chinese milk business

FT_Larry Summers hits back at special interests efforts to derail finance oversight & consumer protection. You go, Larry!

FT_A most excellent interactive graphic show present and future regulation changes in US, EU, and UK (subscription may be required)

Health & Health Reform

NYT_The medical profession finally acknowledges there is more to healing than western medicine

NYT_It takes a woman...specifically, Olympia Snowe...to restore the Public Option (I hope)

WSJ_On the possible unintended consequences of taxing high cost health insurance. Like it penalizes the richest, but it may also penalize the sickest ?

 General Interest or Funny

NYT_Trying to remember all the photos of you that might be out there? Check Facebook.

NYT_Interesting glimpse into Carl Jung's Shamanic Journey, Soul Retrieval, or Psychotic Break (depending on your openess to alternative realities)