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April 8, 2010

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Latest Posts from Economist's View


Layoff, Hiring, and Unemployment Rates

Posted: 08 Apr 2010 01:17 AM PDT

Jolts

This is from a discussion of the Job Openings and Labor Turnover Survey (JOLTS) from the Atlanta Fed (much of the discussion is about the southern region; also, the unemployment rate is on the left-hand side, not the right-hand side as indicated in the graph).

Notice the crash in the hiring rate coinciding with changes in unemployment. The policies that were used to battle the recession didn't put enough emphasis on turning this around.

[I'm traveling - this should post automatically.]

"Public Health Estimates in Marx's Capital"

Posted: 08 Apr 2010 12:33 AM PDT

Daniel Little:

Public health estimates in Marx's Capital, by Daniel Little: Long stretches of Marx's Capital take the form of an effort at developing and defending an economic model of capitalism, based on the theories of value and surplus value.  But there are also recurring efforts at providing a descriptive sociology of capitalism: the forms of day-to-day life that British economic relations imposed upon the working class.  This dimension of the book is descriptive and detailed; it has much in common with Engels's approach in The Condition of the Working Class in England.
Marx was very interested in these descriptive investigations -- Dr. Simon, Dr. Julian Hunter, Mr. Smith, Dr. Bell, and the inquiries and Acts of Parliament in the 1860s that shed light on the depth of English poverty.  The index for Capital includes a section, "Parliamentary Reports and Other Official Publications," which includes references to over a hundred reports on factories, poverty, nutrition, and health.  These range from a Report of Select Committee, London, 1855, on "Adulteration of Bread", to "Reports of the Medical Officer of the Privy Council on Public Health" (1861-66).  And these reports constitute the core of empirical evidence that Marx brings to bear for his economic assertions throughout the work.  In fact, we might describe some parts of Capital as a sort of "meta-study" of current investigations of the public health status of England's cities.
This interest is particularly evident late in Capital where Marx turns to the topic of "The General Law of Capitalist Accumulation."  Consider one fairly detailed section, "The Badly Paid Strata of the British Industrial Class" (link).  Here Marx is offering the best information available, at the household level, concerning the standard of living of this stratum of the British working class.   Consider this passage:
During the cotton famine of 1862, Dr. Smith was charged by the Privy Council with an inquiry into the conditions of nourishment of the distressed operatives in Lancashire and Cheshire. His observations during many preceding years had led him to the conclusion that "to avert starvation diseases," the daily food of an average woman ought to contain at least 3,900 grains of carbon with 180 grains of nitrogen; the daily food of an average man, at least 4,300 grains of carbon with 200 grains of nitrogen; for women, about the same quantity of nutritive elements as are contained in 2 lbs. of good wheaten bread, for men 1/9 more; for the weekly average of adult men and women, at least 28,600 grains of carbon and 1,330 grains of nitrogen. His calculation was practically confirmed in a surprising manner by its agreement with the miserable quantity of nourishment to which want had forced down the consumption of the cotton operatives. This was, in December, 1862, 29,211 grains of carbon, and 1,295 grains of nitrogen weekly.
Marx then quotes a Privy Council inquiry in 1863, which finds that
"in only one of the examined classes of in-door operatives did the average nitrogen-supply just exceed, while in another it nearly reached, the estimated standard of bare sufficiency [i.e., sufficient to avert starvation diseases], and that in two classes there was defect — in one, a very large defect — of both nitrogen and carbon. Moreover, as regards the examined families of the agricultural population, it appeared that more than a fifth were with less than the estimated sufficiency of carbonaceous food, that more than one-third were with less than the estimated sufficiency of nitrogenous food, and that in three counties (Berkshire, Oxfordshire, and Somersetshire), insufficiency of nitrogenous food was the average local diet."
In other words, the Privy Council finds that important segments of the English working class were undernourished by the prevailing scientific standard of the day.  This official report is fundamentally damning of the current economic system; it led to conditions of near-starvation for its workers.
Marx goes on to describe other components of the standard of living -- housing, crowding, sanitation, and clothing, for which the working class are seriously deprived.  And in each case he believes that independent, disinterested observers have documented the conditions of misery in which the working class lived in England in the 1860s.
Consider another interesting example, Marx's use of the Select Committee's report on the adulteration of bread.  This occurs in an extended footnote in Chapter VI, "The Buying and Selling of Labour-Power."
In London there are two sorts of bakers, the "full priced," who sell bread at its full value, and the "undersellers," who sell it under its value.  The latter class comprises more than three-fourths of the total number of bakers....  The undersellers, almost without exception, sell bread adulterated with alum, soap, pearl ashes, chalk, Derbyshire stonedust, and such like agreeable nourishing and wholesome ingredients. (note 3) 
Marx goes on to describe in a little bit of detail the specific timing of the payment of wages, demonstrating the economic coercion that leads workers to agree to buy this adulterated bread.  
Or we might notice that Marx's index refers to a series of Parliamentary reports on child labor, and then consider the use that Marx makes of these reports.  Here is one example of his use of the child labor reports in the chapter on "The Working-Day":
The potteries of Staffordshire have, during the last 22 years, been the subject of three parliamentary inquiries....  For my purpose it is enough to take, from the reports of 1860 and 1863, some depositions of the exploited children themselves.  ... William Wood, 9 years old, was 7 years and 10 months when he began to work.  He "ran moulds" (carried ready-moulded articles into the drying-room, afterwards bringing back the empty mould) from the beginning.  He came to work every day in the week at 6 a.m., and left off about 9 p.m. "I work till 9 o'clock at night six days in the week." (Capital I, chap 7, sect. 3)
What is of special interest in these passages is the way that Marx's mind seems to have worked on these questions.  He was genuinely interested, it would seem, in the concrete details of the conditions of the English working class; and he was fortunate that there was something of an explosion of official and non-official interest in the same set of questions, including especially Parliamentary Blue Books.  These inquiries fall in the category of what we would today call the field of public health, and Marx was plainly an avid reader of the reports that resulted from these investigations.

It is not accident that brings Marx's detailed discussion of the nutritional status of the industrial poor into Part VII of Capital, "Accumulation."  It is Marx's view that the production of surplus value, and the accumulation  of wealth that it enables, is directly related to the production of the poverty of the worker.  So the circumstances that Marx describes in this section do not constitute simply an unfortunate current reality; they are the apotheosis of a system of production that was working well.

[Still on the road - this should post automatically.]

links for 2010-04-07

Posted: 07 Apr 2010 11:03 PM PDT

Federal Reserve Bank of New York President Dudley Calls for the Fed to Take Action Against Bubbles

Posted: 07 Apr 2010 01:28 PM PDT

At MoneyWatch, my reaction to Federal Reserve Bank of New York President Dudley Calls for the Fed to Take Action Against Bubbles:

Federal Reserve Bank of New York President Dudley Calls for the Fed to Take Action Against Bubbles

[Boarding time -- going here -- guess that's the end of airport blogging for now.]

Bernanke: In the Long-Run, We’re All on Social Security, Medicare

Posted: 07 Apr 2010 11:18 AM PDT

[From the airport...] Ben Bernanke is worried about entitlement programs:

Bernanke on Deficits: In Long Run, We're All on Social Security, Medicare, RTE: This morning Jon Hilsenrath noted the Fed Chairman Ben Bernanke was likely to highlight the importance of deficit reduction in a series of speeches. The following is an excerpt on the issue from the chairman's remarks in Dallas today:
The economist John Maynard Keynes said that in the long run, we are all dead. If he were around today he might say that, in the long run, we are all on Social Security and Medicare. That brings me to two interrelated economic challenges our nation faces: meeting the economic needs of an aging population and regaining fiscal sustainability. The U.S. population will change significantly in coming decades with the combined effect of the decline in fertility rates following the baby boom and increasing longevity. As our population ages, the ratio of working-age Americans to older Americans will fall, which could hold back the long-run prospects for living standards in our country. The aging of the population also will have a major impact on the federal budget, most dramatically on the Social Security and Medicare programs, particularly if the cost of health care continues to rise at its historical rate. Thus, we must begin now to prepare for this coming demographic transition.
The economist Herb Stein once famously said, "If something cannot go on forever, it will stop." That adage certainly applies to our nation's fiscal situation. Inevitably, addressing the fiscal challenges posed by an aging population will require a willingness to make difficult choices. The arithmetic is, unfortunately, quite clear. To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above. These choices are difficult, and it always seems easier to put them off–until the day they cannot be put off any more. But unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth.
Today the economy continues to operate well below its potential, which implies that a sharp near-term reduction in our fiscal deficit is probably neither practical nor advisable. However, nothing prevents us from beginning now to develop a credible plan for meeting our long-run fiscal challenges. Indeed, a credible plan that demonstrated a commitment to achieving long-run fiscal sustainability could lead to lower interest rates and more rapid growth in the near term.
Our economic challenges, both near term and longer term, are daunting indeed. Nonetheless, I remain optimistic that they can be met. ...

The CBO has argued persuasively (scroll down) that demographics is not the main problem:

In addition, Social Security can be fixed relatively easy. It is health care costs rising independent of the aging of the population that must be addressed.

But there may be a solution:

Delayed retirement among Americans may bolster future of Social Security and Medicare, EurekAlert: An unprecedented upturn in the number of older Americans who delay retirement is likely to continue and even accelerate over the next two decades, a trend that should help ease the financial challenges facing both Social Security and Medicare, according to a new RAND Corporation study.

While government projections suggest the number of older Americans who remain employed is likely to plateau over the coming decade, RAND researchers say a more likely scenario is that the increase in delaying retirement that began in the late 1990s is likely to gain speed.

Because the trend holds broad benefits for the nation, lawmakers may want to consider reforms that would dismantle barriers that discourage some older people from remaining employed and even consider changes that would encourage employers to hire older workers. ...

In a report published in the Journal of Economic Perspectives, RAND researchers examine a wide array of evidence that suggests that delayed retirement or partial retirement are likely to increase...

A principal reason why retirement rates have dropped is because of an evolution in the skill composition of the nation's workforce, according to the study. As American workers have gained more education, they have achieved jobs that are more fulfilling, they face fewer physical demands in the workplace and they are paid more for their efforts.

Adding to this phenomenon is the rise in the number of dual-earner families. Since couples tend to retire together and men often are older than their spouse, men may stay in the work force longer to accommodate their wives' work lives, according to the study.

While there have been several changes made to Social Security that encourage people to work longer, researchers say those changes appear to be a secondary force behind the trend observed thus far. ...

Additional incentives are on the horizon that may fuel the future growth of the number of older Americans delaying retirement.

Changes to Social Security that delay full benefits from age 65 to age 67 will not be fully in force until 2022, and there have been discussions about further extending the threshold as well. In addition, as labor force participation among younger women has risen over time, women have become increasingly likely to qualify for Social Security benefits on their own work record. As a result, women now more than ever face direct incentives to extend their work lives in order to qualify for higher benefits.

In addition, as people live longer more Americans may need to extend their work lives to accumulate wealth to provide for their needs during old age.

Researchers say that lawmakers may want to consider policies that would further aid older Americans who want to delay retirement. Such measures include eliminating measures in some pension plans that penalize recipients who continue working and improving the public's understanding of retirement and pension rules. ...

Though they downplay it a bit, bad economic policy that creates lots of uncertainty -- something Congress is expert at -- extends their working lives. That's not a recommendation, just an observation.

The Astonishing Voice of Albert Hirschman

Posted: 07 Apr 2010 10:07 AM PDT

Rajiv Sethi has a birthday wish for Albert Hirschman:

The Astonishing Voice of Albert Hirschman, by Rajiv Sethi: Albert Hirschman is 95 years old today.

Four decades ago, he published Exit, Voice and Loyalty, a slim volume that contains more insights per page than just about anything else I have read. I consider it to be among the finest books ever written by an economist. For reasons discussed below, it also has enormous contemporary relevance.

The subtitle of the book is "Responses to Decline in Firms, Organizations and States." Hirschman's concern is with "repairable lapses" in organizational performance: declines that could be corrected with the right balance of information, incentives and flexibility of response. This is not a subject to which economists had paid much attention, and he begins by asking why:

While moralists and political scientists have been much concerned with rescuing individuals from immoral behavior, societies from corruption, and governments from decay, economists have paid little attention to repairable lapses of economic actors. There are two reasons for this neglect. First, in economics one assumes either fully and undeviatingly rational behavior, or, at the very least, an unchanging level of rationality... In other words, economists have typically assumed that a firm that falls behind... does so "for a good reason"; the concept... of a... "repairable lapse" has been alien to their reasoning.

The second cause of the economist's unconcern about lapses is related to the first. In the traditional model of the competitive economy, recovery from any lapse is not really essential. As one firm loses out in the struggle, its market share is taken up and its factors are hired by others... in the upshot, total resources may well be better allocated. With this picture in mind, the economist can afford to watch lapses of any one of his patients... with far greater equanimity than either the moralist who is convinced of the intrinsic worth of every one of his patients (individuals) or the political scientist whose patient (the state) is unique and irreplaceable.

But is the neglect justified? Hirschman argues that it is not, because the vision of a "relentlessly taut economy" operating at or close to its productive potential is inapplicable to technologically modern societies capable of producing a substantial surplus relative to the needs of subsistence. The very existence of the surplus implies that considerable slack in the level of efficiency can be tolerated without disastrous consequences. As a result, firms and other organizations are "permanently and randomly subject to decline and decay, that is, to a gradual loss of rationality, efficiency, and surplus-producing energy no matter how well the institutional framework within which they function is designed."

It is critically important, therefore to consider the "countervailing forces" that can arrest and reverse such decline. Hirschman identifies two such forces: desertion and articulation, or exit and voice. Exit refers to the fact that the customers of a firm (or members of an organization) can simply leave and attach themselves to a competing firm or organization. Voice refers to the expression of discontent: the natural human tendency to complain, protest, and generally "kick up a fuss." Each of these mechanisms is interesting in its own right, but it is the interaction of the two (and their connection to loyalty) that gives rise to the most intriguing possibilities.

One of Hirschman's key insights is that exit will not serve as a reliable recuperation mechanism if it occurs too rapidly in the face of organizational decline:

For competition (exit) to work as a mechanism of recuperation from performance lapses, it is generally best for a firm to have a mixture of alert and inert customers. The alert customers provide the firm with a feedback mechanism which starts the effort at recuperation while the inert customers provide it with the time and dollar cushion needed for this effort to come to fruition.

In addition, rapid rates of exit can deprive an organization of precisely those customers (or members) who, had they remained, would be most inclined to utilize voice:

[Those] customers who care most about the quality of the product and who, therefore, are those who would be the most active, reliable, and creative agents of voice are for that very reason also those who are apparently likely to exit first in case of deterioration.

As a result, the "rapid exit of the highly quality conscious customers... paralyzes voice by depriving it of its principal agents."

While it is commonly believed that most organizations would prefer that their customers or members had no exit option at all (as in the case of a monopoly) Hirschman argues, instead, that monopolists would welcome a modest degree of competition in order to shed their most vociferous customers:

[There] are many... cases where competition does not restrain monopoly as it is supposed to, but comforts and bolsters it by unburdening it of its more troublesome customers. As a result, one can define an important and too little noticed type of monopoly-tyranny: a limited type, an oppression of the weak by the incompetent and an exploitation of the poor by the lazy which is the more durable and stifling as it is both unambitious and escapable.

This is why those holding power in dysfunctional states "have long encouraged their political enemies and potential critics to remove themselves from the scene through voluntary exile."

More generally, the performance of near-monopolistic service providers may be worse that that which would prevail if monopoly power were absolute. This has enormous and wide-ranging implications. The poor performance of a national railway system might persist indefinitely if the most demanding customers also have recourse to road transportation. Public schools might deliver worse learning outcomes if private or parochial options are available to the most quality conscious parents. A small decline in neighborhood quality could turn into a precipitous collapse if those most affected by it simply move elsewhere. And the ease with which common stock can be sold implies that the most vigilant shareholders will liquidate their holdings rather than attempt to improve the performance of management.

While most environments are such that either exit or voice is the dominant response to decline, there is one arena, that of political competition, in which both mechanisms are critical. In this setting, taking account of voice leads to sharply different predictions than theories based only on exit. Hirschman's critique of the Hotelling-Downs analysis of political competition (and the median voter theorem it implies) is devastating:

As soon as the Hotelling model had been thus refurbished by Downs, its power to explain reality was again cast into doubt by the undisciplined vagaries of history. The selection by the Republican party of Goldwater in 1964... testified to the extreme reluctance of at least one party to conform to the Hotelling-Downs scenario...

[It was not] Hotelling's original assumption of inelastic demand... that was wrong or unrealistic, but the inference that the "captive" consumer (or voter) who has "nowhere else to go" is the epitome of powerlessness. True, he cannot exit... but just because of that he... will be maximally motivated to bring all sorts of potential influence into play so as to keep... the party from doing things that are highly obnoxious to him... in a two-party system a party will not necessarily behave as the Hotelling-Downs vote-maximizer because "those who have nowhere else to go" are not powerless but influential.

With modern communication technologies able to transmit, coordinate and amplify voice to an unprecedented degree, these insights have more relevance than ever. 

As Hirschman's title suggests, the interplay between exit and voice depends critically on the presence or absence of loyalty:

When loyalty is present exit abruptly changes character: the applauded rational behavior of the alert consumer shifting to a better buy becomes disgraceful defection, desertion, and treason. 

By making exit less appealing, loyalty to an organization can therefore be functional; it can "neutralize within certain limits the tendency of the most quality conscious customers or members to be the first to exit." But since "the effectiveness of the voice mechanism is strengthened by the possibility of exit," too much loyalty will stifle voice. In particular, the active promotion of loyalty by an organization can be detrimental to its own long run functioning:

[Loyalty] promoting institutions and devices are not only uninterested in stimulating voice at the expense of exit: indeed they are often meant to repress voice alongside exit. While feedback through exit or voice is in the long-run interest of organization managers, their short run interest is to entrench themselves and to enhance their freedom to act as they wish, unmolested as far as possible by either desertions or complaints of members.

From this perspective, a key determinant of organizational performance is the price of exit (which may or may not arise from loyalty):

Such a price can range from loss of life-long associations to loss of life, with such intermediate penalties as excommunication, defamation, and deprivation of livelihood. Organizations able to extract these high penalties for exit are the most traditional human groups, such as the family, the tribe, the religious community, and the nation, as well as such more modern inventions as the gang and the totalitarian party... Since the high price of exit does away... with the threat of exit as an effective instrument of voice, these organizations... will often be able to repress both voice and exit. In the process, they will largely deprive themselves of both recuperation mechanisms.

And the absence of recuperation mechanisms can have catastrophic consequences, as the current predicament of the Roman Catholic Church vividly illustrates.

I could go on, but the point has been made. This is a book with dozens of sparking insights tied together by a coherent vision. The vision allows for a broad range of human motivation, encompassing (but not limited to) standard hypotheses regarding rational behavior. Economic actors in Hirschman's world shop for lower prices and higher quality, to be sure, but they also capable of making a nuisance of themselves, engaging in self-deception, and displaying fierce loyalty to organizations with which they are affiliated. This rich, complex conception of human behavior allows for a sweeping analysis that is as penetrating as it is ambitious.

My birthday wish for Albert Hirschman today is nothing less than that which he has long deserved: the Nobel Memorial Prize in Economics.

[Traveling here today - hopefully, this will post automatically as planned.]

"Doctors with Ownership in Surgery Center Operate More Often"

Posted: 07 Apr 2010 08:01 AM PDT

Are you surprised to find out that there is evidence suggesting that doctor's with a financial stake in surgery centers do more surgery?:

Doctors with ownership in surgery center operate more often, U-M study finds, EurekAlert: When doctors become invested in an outpatient surgery center, they perform on average twice as many surgeries as doctors with no such financial stake, according to a new study from the University of Michigan Health System.
"Our data suggest that physician behavior changes after investment in an outpatient facility. Through what some have labeled the 'triple dip,' physician owners of surgery centers not only collect a professional fee for the services provided, but also share in their facility's profits and the increased value of their investment. This creates a potential conflict of interest," says study author John Hollingsworth, M.D., M.S., a Robert Wood Johnson Clinical Scholar at the U-M Medical School.
"To the extent that owners are motivated by profit, one potential explanation for our findings is that these physicians may be lowering their thresholds for treating patients with these common outpatient procedures," Hollingsworth adds.
The study looked at all patients in Florida who underwent one of five common outpatient procedures: carpal tunnel release, cataract excision, colonoscopy, knee arthroscopy and myringotomy with tympanostomy tube placement (a procedure to insert tubes in the ear).
The researchers determined which doctors were owners of a surgery center. They then compared surgery use among owners in two time periods—before and after they acquired ownership—with that of physicians who remained non-owners.
Results of the study appear in the April issue of Health Affairs. The findings include:
Owners operated on an average of twice as many patients as non-owners. While caseloads increased overall between the earlier and later time periods for all physicians, the increases were more rapid and dramatic among owners.
The number of surgery centers has increased nearly 50 percent over the last decade, largely driven by the investment of physicians, who had a stake in 83 percent of these facilities. For doctors, investment may give them more control over their practice environment, from scheduling cases to purchasing surgical equipment. For patients, these centers often have shorter wait times than hospitals and may provide more amenities.

"There are some definite advantages for surgeons, as well as patients, associated with care at surgery centers. However, we need to better understand the implications of these new findings, in particular their overall effect on health care expenditures. Insofar as our results are due to lowered treatment thresholds, policymakers should consider, at the very least, requiring all physicians to disclose their financial interests to their patients," Hollingsworth says.

[Traveling here today - this should post automatically while I'm in the air...]

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