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October 12, 2009

Economist's View - 6 new articles

Should Health Care be a Human Right?

William Easterly says defining health care as a human right "has made global healthcare more unequal":

Human rights are the wrong basis for healthcare, by William Easterly, Commentary, Financial Times: The agonizing US healthcare debate has taken on a new moral tone. President Barack Obama recently held a conference call with religious leaders in which he called healthcare "a core ethical and moral obligation". Even Sarah Palin felt obliged to concede: "Each of us knows that we have an obligation to care for the old, the young and the sick."
This moral turn echoes an international debate about the "right to health". Yet the global campaign to equalize access to healthcare has had a surprising result: it has made global healthcare more unequal.
The notion of a "right to health" has its origins in the United Nations' Universal Declaration of Human Rights in 1948. But in the decades that followed, foreign aid's most successful efforts in health – such as the World Health Organization and Unicef campaigns on vaccines and antibiotics – were based on a more limited goal: obtaining the largest possible health benefits for the poor from finite foreign aid budgets.
The moral argument made a big comeback in the new millennium. One of its most eloquent advocates is Dr Paul Farmer, who earned fame with heroic efforts to give people access even to complex medical treatment amid extreme poverty in Haiti and Rwanda, saying that healthcare was "a fundamental human right, which should be available free". The WHO shifted from pragmatic improvement of health outcomes towards "the universal realization of the right to health". Even Amnesty International ... added a new section to its human rights report in 2009 on the "right to health".
So what is the problem? It is impossible for everyone immediately to attain the "highest attainable standard" of health... So which "rights to health" are realized is a political battle. Political reality is that such a "right" is a trump card to get more resources – and it is rarely the poor who play it most effectively.
The biggest victory of the "right to health" movement has been the provision of aid-financed antiretroviral treatment for African Aids patients, who include the upper and middle classes. ...
Saving lives in this way is a great cause – except to the extent that it takes resources away from other diseases. Alas, many observers fear that is exactly what it did.
An evaluation by the World Bank in 2009 faulted the bank for allowing Aids treatment to drive out many other programs. Global deaths due to either tuberculosis or malaria stood at 2m in 2008, around the same as those from Aids. Yet Aids accounted for 57 per cent of World Bank projects on communicable diseases from 1997 to 2006, compared with 3 per cent for malaria and 2 per cent for TB. Other big killers of the poor – such as pneumonia, measles and diarrheal diseases, which together accounted for more than 5m deaths in 2008 – received even less attention. ...
The lesson is that, while we can never be certain, the "right to health" may have cost more lives than it saved. The pragmatic approach – directing public resources to where they have the most health benefits for a given cost – historically achieved far more than the moral approach.
In the US and other rich countries, a "right to health" is a claim on funds that has no natural limit, since any of us could get healthier with more care. We should learn from the international experience that this "right" skews public resources towards the most politically effective advocates, who will seldom be the neediest.

This is not my area, but I do wonder if the problem is the designation of the right, or something more systemic within these countries. That is, the implicit assumption is that with a different goal - a "pragmatic approach" of directing resources where they will have the most benefits - the poor would have fared better, but are we sure that's the case? Who decides what defines "the most benefits"? My guess is that the same people who diverted resources before would manage to do so again by defining the benefits appropriately, i.e. in a way that benefits the same groups of people as before. If so, then the problem is not the designation of a right to health care.


"Will Stimulating Nominal Aggregate Demand Solve our Problems?"

There has been a bit of a pushback, both implicit and explicit, to calls to implement policies to accelerate hiring. For example, Jim Hamilton recently noted an old theory of his where some types of unemployment cannot be overcome through standard stimulative policies (this was in response to a question about whether Arnold Kling's recalculation model can explain asymmetric adjustment, but I am focusing on the technological and physical constraints present in both Hamilton and Kling's model, not whether the asymmetries can be explained):

Will stimulating nominal aggregate demand solve our problems?, by Jim Hamilton: ...[I]n 1988 ... I presented a model in which unemployment arises from a drop in the demand for the output of a particular sector. The unemployed workers could consider trying to retrain or relocate, or might instead decide to wait it out in hopes that the demand for their specialized skills will come back. ...[T]he key kind of unemployment that I think this sort of model describes-- waiting for an opening in the particular area in which you've specialized-- is caused by drops in demand...
Insofar as the frictions in that model are of a physical, technological nature, increasing the money supply would simply cause inflation and not do anything to get people back to work. I should emphasize that I built that monetary neutrality into the model not because I think it is the best description of reality, but in order to illustrate more clearly that there is a type of cyclical unemployment that stimulating nominal aggregate nominal demand is useless for preventing.
My personal view is that real-world unemployment arises from the interaction of sectoral imbalances with frictions in the wage and price structure of the sort documented by Truman Bewley and Alan Blinder. The key empirical test, in my opinion, is at what point inflationary pressures begin to pick up. If Krugman is correct, we could have much bigger monetary and fiscal stimulus without seeing any increase in inflation. If the sectoral imbalances story is correct, it would be possible for inflation to accelerate even while unemployment remains quite high. ...
Thus, according to this view, some part of the sectoral imblances in of a "physical, technological nature," and standard demand side policy does not help. Policy may be able to induce people to stop sticking around for jobs that will never materialize and move on, but those typically aren't the kinds of policies typically associated with stimulating employment, e.g. tax credits to encourage hiring.

A new colleague of mine, Nick Sly, emails that it is not always optimal, from a long-run economic growth point of view, to provide incentives for firms to hire workers, how those incentives are structured is crucial:

There is a paper on my website called Intraindustry Trade and the Composition of Labor Market Turnover. (It is a heavily revised version with more of a trade focus.) The highlights of the paper are:
1. Because of constant turnover in labor markets, hiring costs are persistent for all firms.
2. Turnover and Hiring occur both because firms update their workforce (job creation costs) and to replace workers who leave for reasons unrelated to the firm (worker hiring costs). These phenomena are distinct 3. (KEY) I show (theoretically and confirm empirically) that each source of turnover has the opposite effect on the incentives of firms to adopt state-of-the-art production techniques. As a consequence industries with different compositions of labor mobility have varying degrees of engagement of foreign markets.

The relevance:

The act of hiring workers could be the result of demand side (firms creating new jobs) or supply side (workers need to be replaced) incentives. We may not want to jump to quickly to put people back to work if it means employing less productive production methods. The short term gains can be lost as poor matching of workers and adoption of weak production methods alter the recovery path.

I believe that the timing of the hiring tax credits, and the sort of hiring it promotes (i.e. creating new vacancies versus filling previously existing positions), will determine the long-run consequences of such a policy.

Let me try to express the main point a different way. When firms hire workers, as they are constantly doing, they have a choice between using old or new technology, and the way in which hiring incentives are structured can affect this choice. As we think about putting programs to induce firms to hire workers in place, we need to be sure that we are not giving firms the incentive to use old rather than new technology so that economic growth is maximized, and we also need to be sure that we don't distort the choice firms make toward labor intensive rather than growth maximizing change.

Our economy faces lots of adjustments as it recovers from the recession, far more than in some past recessions when we could return, pretty much, to what we were doing before the shock hit. But not this time. We have adjustments in the auto, finance, and housing sectors just for openers, and there are other underlying adjustments that are in progress as well (e.g. in the manufacturing sector). As these adjustments occur, it's important that we don't impede the necessary change, or induce firms to make suboptimal choices as we attempt to induce them to hire more workers.

But if we give firms the time they need to make the changes that are needed, there will be excess labor during these adjustment periods, both from sectoral reallocations and from technological change. The question is what we are going to do to help people who lose their jobs or are otherwise negatively affected by these transitions.

One choice is to induce firms to house the excess labor during this time period through tax or other inducements, but the danger is that in doing so you distort the choices of firms away from the optimal trajectory. Another choice is for the public sector to absorb much of the burden by providing jobs to the unemployed and providing the aid needed to carry workers through the adjustment period (and we can also provide incentives for workers to relocate in areas where they have a better chance of finding employment).

Even better, though, is to structure the incentives so that the technological change is encouraged by the hiring of new workers. For example, Nick Sly suggests that the hiring credit be only for "new" jobs offered by firms, somehow defined, because this gives firms an incentive to both hire new workers and to employ the latest technology. Thus, the best choice of all is to provide incentives to employ workers that have, as a byproduct, and inducement to maximize technology and economic growth, and then use public employment (e.g. infrastructure) or aid to help those who remain unemployed.

No matter what we do, however, there will be those who cannot find employment during these time periods, and we need to do a better job than we do in helping those who, through no fault of their own, are caught up in the tumultuous change that sometimes occurs in modern economies.


Oliver Williamson and Elinor Ostrom Awarded Nobel in Economics

I would not have predicted this (links to other comments are given below):

Two Americans Share Nobel in Economics, by Louis Uchitelle, NY Times: In a departure from prevailing economic theory, the Nobel Memorial Prize in Economic Science was awarded Monday to two social scientists for their work in demonstrating that business people, including competitors, often develop implicit relationships that supplement and resolve problems that arise from free-market competition.
The prize committee cited Elinor Ostrom of Indiana University "for her analysis of economic governance, especially the commons," and Oliver E. Williamson of the University of California, Berkeley, "for his analysis of economic governance, especially the boundaries of the firm."
Ms. Ostrom becomes the first woman to win the prize for economics. Her background is in political science, not economics.
"It is part of the merging of the social sciences," Robert Shiller, an economist at Yale, said of Monday's awards. "Economics has been too isolated and these awards today are a sign of the greater enlightenment going around. We were too stuck on efficient markets and it was derailing our thinking." ...
The committee, in effect, said that theory was too simplistic and ignored the unstated relationships and behaviors that develop among companies that are competitors but find ways to resolve common problems. "Both scholars have greatly enhanced our understanding of non-market institutions" other than government, the committee said.
"Basically there is a common understanding that develops even among competitors when they are dealing with each other," Mr. Shiller said, adding "when people make business contact, even competitors, they can't anticipate everything, so an element of trust comes in."
That is what the Nobel committee recognized, he said, in citing Mr. Williamson and Ms. Ostrom.
In its announcement, the committee said Ms. Ostrom "has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories."
Mr. Williamson's research, the committee said, found that "when market competition is limited, firms are better suited for conflict resolution than markets." ...

See also: Paul Krugman, Marginal Revolution 1, Marginal Revolution 2, Arnold Kling, Real Time Economics, Justin Fox, Cheap Talk, Lynne Kiesling 1, Lynne Kiesling 2, Steven Levitt, Crooked Timber, Ed Glaeser, Michael Mandel.

Update: Steven Levitt:

When I was a graduate student at MIT back in the early 1990's, there was a Nobel Prize betting pool every year. Three years in a row, Oliver Williamson was my choice. At the time, his research was viewed as a hip, iconoclastic contribution to economics — something that was talked about by economists, but that students were not actually trying to emulate (and probably would have been actively discouraged from had they tried to do so). What's interesting is that in the ensuing 15 years, it seems to me that economists have talked less and less about Williamson's research, at least in the circles in which I run. I suspect most assistant professors of economics have barely heard of him. Yet I suspect the older generation of economists will applaud this choice.

The reaction of the economics community to Elinor Ostrom's prize will likely be quite different. The reason? If you had done a poll of academic economists yesterday and asked who Elinor Ostrom was, or what she worked on, I doubt that more than one in five economists could have given you an answer. I personally would have failed the test. I had to look her up on Wikipedia, and even after reading the entry, I have no recollection of ever seeing or hearing her name mentioned by an economist. She is a political scientist, both by training and her career — one of the most decorated political scientists around. So the fact I have never heard of her reflects badly on me, and it also highlights just how substantial the boundaries between social science disciplines remain.

So the short answer is that the economics profession is going to hate the prize going to Ostrom even more than Republicans hated the Peace prize going to Obama. Economists want this to be an economists' prize (after all, economists are self-interested). This award demonstrates, in a way that no previous prize has, that the prize is moving toward a Nobel in Social Science, not a Nobel in economics.

I don't mean to imply this is necessarily a bad thing — economists certainly do not have a monopoly on talent within the social sciences — just that it will be unpopular among my peers.

Update: Henry at Crooked Timber:

To amplify what Kieran has just said – political scientists are going to be very, very happy today. ...[T]his is ... a very interesting statement of what the Nobel committee see as important in economics.

Lin's work focuses on the empirical analysis of collective goods problems – how it is that people can come up with their own solutions to problems of the commons if they are given enough room to do so. Her landmark book, Governing the Commons, provides an empirical rejoinder to the pessimism of Garret Hardin and others about the tragedy of the commons – it documents how people can and do solve these problems in e.g the management of water resources, forestry, pasturage and fishing rights. She and her colleagues gather large sets of data on the conditions under which people are or are not able to solve these problems, and the kinds of rules that they come up with in order to solve them. This is, as Kieran suggests, a vote in favor of detailed, working-from-the-ground-up, empirical work, which doesn't rely on sharply contoured theoretical simplifications and flashy statistical techniques so much as the accumulation of good data, which reflects the messiness of the real social institutions from which it is gathered. ...

One plausible characterization of her life's work is that it is about demonstrating the empirical weaknesses of a 'cute' economic model (the Tragedy of the Commons) that assumed a role in policy discussions far out of proportion to its actual explanatory power, and replacing it with a set of explanations that are nowhere near as neat, but are far more true to the real world. ...

It is also a vote in favor of supplementing quantitative work with qualitative understanding – Lin spends a lot of time (albeit less than she used to) in the field, soaking up practical knowledge which informs her work in striking ways. She is hands-on in a way that very few economists, political scientists or sociologists are. It is also interesting to note that the Nobel committee pays specific attention to the political implications of her work.

Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories.

This reflects what she and her husband Vincent refer to as "polyarchy," a normative approach to governance which stresses the degree to which higher levels of government should not crowd out self-organization at lower levels. Her work implies that both pure marketization and top-down government control can have badly adverse consequences for resource management, because they rob individuals of the capacity to govern themselves, and because they both lead to the depletion of important forms of local collective knowledge. Alex Tabarrok is right to see something Hayekian in Ostrom's arguments – but it is Hayek against Hayek. Ostrom stresses repeatedly that even the best functioning markets are undergirded by an array of collective institutions which order people's market interactions, and that in the absence of such rules, self interested behaviour will have highly adverse consequences. ...

I'm delighted that it was Lin. A Good Outcome.

Update: Jeff at Cheap Talk:

Oliver Williamson

This prize is long overdue. The theory of the firm is one of the big ideas in economics and as far as I can tell the Nobel committee was right to trace it back to Williamson.

A firm is a container for a bunch of highly idiosyncratic, repeated, informal transactions. A great thought experiment is to wonder why these transactions are not conducted through a market, making the firm dissolve away. Instead of giant firms building and selling cars, why aren't there a bunch of tiny firms each doing a tiny part with all of their interaction governed by the market or by contract? There are three main reasons why.

First, its costly to use the market. If the chassis firm is going to be buying axles from the axle firm all the time, it would save transaction costs by just integrating. Then it can "procure" axles with a memo.

Second, the contracts would be impossibly complicated and unwieldy. Imagine writing a complete blueprint for the car, breaking it down into individual instructions for every actor who is supposed to contribute, laying out the timing when each party is supposed to arrive and do his part, describing payments as a function of the performance of each interdependent action, etc. That is probably already impossible, but imagine you could do that. Now suppose that a supply shock requires you to use different materials for the chassis. This would require a coordinated change in many parts of the car, to keep structural integrity, balance, etc. The entire volume of contracts would have to be re-written.

The third reason is the one that adds richness to the theory of the firm. Most of the transactions that occur within firms require parties to make investments that only make sense within the context of that specific firm. The party making the investment has little or no option to recover the value of the investment outside the firm. When the chassis firm contracts with the firm building auto bodies, it writes down minute specifications that must be met. The bodies produced could not be sold to any other chassis maker. The firm building auto bodies must invest in the machinery that can make these specific bodies. Once sunk that investment has no value outside of the specific relationship with the chassis firm.

The reason this adds richness to the theory is that it explains which transactions must be encompassed within firms. Transactions that require relation-specific investments would be crippled if conducted across firm boundaries. Once the die is cast for building these specific auto bodies, the chassis firm has no reason to pay a price that compensates for the sunk cost because there is no outside option. This hold-up problem implies that the auto body firm has poor incentives to make the investment in the first place, unless it integrates with the chassis firm and becomes a claimaint to the profits of the integrated firm.


Paul Krugman: Misguided Monetary Mentalities

We need to avoid thinking and acting in ways that got us into trouble in the past:

Misguided Monetary Mentalities, by Paul Krugman, Commentary, NY Times: One lesson from the Great Depression is that you should never underestimate the destructive power of bad ideas. And some of the bad ideas that helped cause the Depression have, alas, proved all too durable: in modified form, they continue to influence economic debate today.
What ideas am I talking about? The economic historian Peter Temin has argued that a key cause of the Depression was ... the "gold-standard mentality." By this he means not just belief in the sacred importance of maintaining the gold value of one's currency, but a set of associated attitudes: obsessive fear of inflation even in the face of deflation; opposition to easy credit, even when the economy desperately needs it, on the grounds that it would be somehow corrupting; assertions that even if the government can create jobs it shouldn't, because this would only be an "artificial" recovery.
In the early 1930s this mentality led governments to raise interest rates and slash spending, despite mass unemployment, in an attempt to defend their gold reserves. And even when countries went off gold, the prevailing mentality made them reluctant to cut rates and create jobs.
But we're past all that now. Or are we? ...[A] modern version of the gold standard mentality ... could undermine our chances for full recovery.
Consider first the current uproar over the declining international value of the dollar. The truth is that the falling dollar is good news. For one thing, it's mainly the result of rising confidence: the dollar rose ... as panicked investors sought safe haven in America, and it's falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters...
But if you get your opinions from, say, The Wall Street Journal's editorial page, you're told that the falling dollar is a ... sign that the world is losing faith in America (and especially, of course, in President Obama). ...
And ... there are worrying signs of a misguided monetary mentality within the Federal Reserve system itself. In recent weeks there have been a number of ... Fed officials ... calling for an early return to tighter money... What's ... extraordinary ... is the idea that raising rates would make sense any time soon. After all, the unemployment rate is a horrifying 9.8 percent and still rising, while inflation is running well below the Fed's long-term target. This suggests that the Fed should be in no hurry to tighten — in fact, standard policy rules ... suggest that interest rates should be left on hold for the next two years or more, or until the unemployment rate has fallen to around 7 percent.
Yet some Fed officials want to pull the trigger on rates much sooner. To avoid a "Great Inflation," says Charles Plosser of the Philadelphia Fed, "we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels." Jeffrey Lacker of the Richmond Fed says that rates may need to rise even if "the unemployment rate hasn't started falling yet."
I don't know what analysis lies behind these itchy trigger fingers. But it probably isn't about analysis, anyway — it's about mentality, the sense that central banks are supposed to act tough, not provide easy credit.
And it's crucial that we don't let this mentality guide policy. We do seem to have avoided a second Great Depression. But giving in to a modern version of our grandfathers' prejudices would be a very good way to ensure the next worst thing: a prolonged era of sluggish growth and very high unemployment.


"A Second Great Depression is Still Possible"

Let's hope Thomas Palley, who says "a second Great Depression remains a real possibility," is wrong. My best guess is that he is (though I don't expect a quick recovery, particularly for labor). But I suppose I "should never underestimate the destructive power of bad ideas":

A second Great Depression is still possible, by Thomas Palley, Commentary, Economists' Forum: Over the past year the global economy has experienced a massive contraction, the deepest since the Great Depression of the 1930s. But this spring, economists started talking of "green shoots" of recovery and that optimistic assessment quickly spread to Wall Street. More recently, on the anniversary of the Lehman Brothers crash, Ben Bernanke, Federal Reserve chairman, officially blessed this consensus by declaring the recession is "very likely over".
The future is fundamentally uncertain, which always makes prediction a rash enterprise. That said there is a good chance the new consensus is wrong. Instead, there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression. ...
There is a simple logic to why the economy will experience a second dip. That logic rests on the economics of deleveraging which inevitably produces a two-step correction. The first step has been worked through, and it triggered a financial crisis that caused the worst recession since the Great Depression. The second step has only just begun.
Deleveraging can be understood through a metaphor in which a car symbolises the economy. Borrowing is like stepping on the gas and accelerates economic activity. When borrowing stops, the foot comes off the pedal and the car slows down. ...
With deleveraging, households increase saving and re-pay debt. This is the second step and it is like stepping on the brake, which causes the economy to slow further, in a motion akin to a double dip. Rapid deleveraging, as is happening now, is the equivalent of hitting the brakes hard. ...
The US economy has hit a debt iceberg. The resulting gash threatens to flood the economy's stabilising mechanisms, which the economist Hyman Minsky termed "thwarting institutions".
Unemployment insurance is not up to the scale of the problem and is expiring for many workers. That promises to further reduce spending and aggravate the foreclosure problem.
States are bound by balanced budget requirements and they are cutting spending and jobs. Consequently, the public sector is joining the private sector in contraction.
The destruction of household wealth means many households have near-zero or even negative net worth. That increases pressure to save and blocks access to borrowing that might jump-start a recovery. Moreover, both the household and business sector face extensive bankruptcies that amplify the downward multiplier shock and also limit future economic activity by destroying credit histories and access to credit.
Lastly, the US continues to bleed through the triple hemorrhage of the trade deficit that drains spending via imports, off-shoring of jobs, and off-shoring of new investment. This hemorrhage was evident in the cash-for-clunkers program in which eight of the top ten vehicles sold had foreign brands. Consequently, even enormous fiscal stimulus will be of diminished effect.
The financial crisis created an adverse feedback loop in financial markets. Unparalleled deleveraging and the multiplier process have created an adverse feedback loop in the real economy. That is a loop which is far harder to reverse, which is why a second Great Depression remains a real possibility.


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