Category: Equitablog

What I think of as the Louise Sheiner fact, as set out by David Cutler (paraphrasing from memory):

Q: How much of regional variation in real health-care (Medicare) costs is due to the fact that some regions have sicker populations than others?

A1 (micro): If we examine how much sicker people in different regions are, and multiply the difference in average sickness by how much extra treatment sicker people get on average, we get an incremental regional R² ~ 0.1: an extra 10%-points of the regional real cost variation can be accounted for because some regions are sicker than others.

A2 (macro): If we just regress regional real costs on some plausible indicator of regional average sickness, we get an incremental regional R² ~ 0.5: an extra 50%-points of the regional real cost variation can be accounted for because some regions are sicker than others.

Clearly the facts are: (a) sick people in high-average-sickness regions are getting treated more than sick people in low-average-sickness regions, and (b) not-very-sick people in high-average-sickness regions are also getting treated more than not-very-sick people in low-average-sickness regions, and (c) there are (by definition) more sick people in high-average-sickness regions than in low-average-sickness regions, and (d) fact (c) is not a large amount–is, in fact, only one-fifth–of the association between average sickness and regional real Medicare costs, and (e) the computer is almost (but not quite) as happy using regional Confederate sympathies in the winter of 1861 to predict regional real cost differentials as it is using current regional average health status:

This seems to me to be an extremely interesting fact about the U.S.’s health care system and health care economy. Complicating things further for me trying to write about this extremely interesting fact about the U.S.’s health care system and health care economy: I am not a health-care economist. I did play one in the Treasury Department from 1993-1995 because the slot of Deputy Assistant Secretary for Health-Care Programs was occupied by Marina Weiss, Lloyd Bentsen’s long-time health-care policy strategist, and the woman whom all of us in the U.S. Treasury in 1993-1994 expected would someday have a lunch with Sheila Burke, Senate Minority Leader Bob Dole’s (R-KS) long-time health-care policy strategist, and they would do a deal, but Dole–apparently, I have never heard an explanation from anyone in the Dole camp, only evasions–decided that he couldn’t win the Republican presidential nomination in 1996 if he did a deal with Clinton and so demonstrated that he was really a RINO, failing to recognize that he couldn’t win the presidency in 1996 unless he did do a deal with Clinton and could sell himself as somebody who got things done and had serious legislative accomplishments, but I digress…

At any event: Marina told me that I was closer to being a health-care economist than she was, and so I needed to man-up and do the job–which I did essentially by asking health-care economist David Cutler (plus Jon Gruber, Sherry Glied, and anyone else I could find) and health-care lawyer Ann Marie Marciarille (my wife) what I should say, and simply parroting them, but I digress again…

Let me start again: This is a very interesting and important fact:

• Louise thinks: regional average health status -> regional patterns of practice -> health care costs -> cheerleading won’t work because exiting regional patterns of practice exist for good reasons and will be very hard to change without first changing regional average health status

• David thinks: other stuff -> regional patterns of practice -> health care costs -> cheerleading has a good chance of working because regional patterns of practice are a complicated emergent phenomenon only tangentially related to regional average health status.

David’s interpretation, however, leaves a puzzle: why are the “other things” that produce high-cost cowboy medical practice patterns so highly correlated with the “other other things” that produce a sick population–as Louise says, a five-year differential in life expectancy at age 65 between Minnesota and the next state on the list, Mississippi? You can say “social capital”, but then why is, say, high Diabetes prevalence a better measure of low social capital than the measures political scientists construct of low social capital? The standard economist’s response is: “well, political scientists aren’t terribly good at their jobs, and ought to construct better indexes of low social capital”. Other economists may nod sagely at this observation and have their prejudices about political scientists confirmed, but I do not find this satisfactory.

The only even half-intelligent thing I have to say is that this smells to me a lot like the cross-country growth regression wars, in which there are massive vicious cycles of relative poverty at work, and as long as you give the computer something that hooks into those vicious cycles–even if it is just “located in sub-Saharan Africa” or “closeness to the equator” the computer is very happy telling you it is the secret to failures of economic development…

Apple iPhone 6

Claims that Barack Obama is actually up to the job of being president–both when I make them and when they are made to me–have, since early 2009, run up against the problem that the low-hanging economic policy fruit is and always has been keeping the Federal Reserve Governor pipeline filled. That means (a) nominating candidates for vacant governorships and (b) doing the congressional outreach to solidify at least Democratic senators behind the candidates you intend to nominate.

Obama’s failure to do this–and the failure of his economic policy staff to yell at him every day it is not done–is and always has been totally bewildering to me…

Anybody have any explanations?

**Matthew Yglesias: Obama’s biggest economic policy mistake: “Barack Obama has not accomplished nearly as much as his most fervent supporters–or, indeed, the president himself–had hoped…. This has led… to a litany of back-biting complaints… corruption or incompetence… tactical failings or ideological betrayals. The truth is… he has accomplished an enormous amount…. But as the country waits to hear the latest announcement from the Fed about how rapidly it will end its Quantitative Easing programs, we are witnessing the biggest mistake of Obama’s presidency: the systematic neglect of the Federal Reserve… a failure that… has likely doomed millions of people to needlessly long spells of unemployment, permanently reduced the structural capacity of the American economy, and through poor macroeconomic performance reduced his political ability to drive change in environmental policy, bank regulation, and other areas….

Obama’s neglect of Federal Reserve appointments is, in some ways, mysterious. Nobody denies that the Fed is an extremely important institution…. When it comes to other important independent institutions such as the federal judiciary, it’s broadly acknowledged that the presidential appointment powers are among his most important powers…. [But[ bolstering the left flank on the FOMC so that Yellen’s consensus-building efforts would land in a more stimulative spot isn’t on the agenda…. The current vacancies are not a new phenomenon. When Obama first took office in 2009, he allowed Fed vacancies to linger for years, only putting forth candidates in 2011. When he did put two names into play, one was a Republican and the other–Jeremy Stein–is a Democrat who holds to an eccentric view that tight money is sometimes appropriate even when unemployment is high….

How much good could have been done if Obama had listened to Romer, Scott Sumner, Joseph Gagnon, or others and placed a higher priority on appointing unemployment-fighters to the Fed? Nobody can say for sure. But the experience of the United Kingdom is illustrative…. FDR’s long-term impact on American policy comes from the structural reforms of the New Deal. But as Romer showed… ‘nearly all the observed recovery of the US economy prior to 1942 was due to monetary expansion’. That recovery–driven by Roosevelt’s pursuit of aggressive monetary policy in the form of ditching the gold standard–is what gave him the political clout to pursue those structural reforms. Had Obama been as attuned to monetary matters as FDR, he could have secured a better result for the country and a firmer legacy for himself.

Must- and Shall-Reads:

• Pew: Data Visualization: The Distribution of Select Federal Tax Deductions and Credits Across the States
• Barclays: The Rise of the Global Citizen?
• Jeff Goodell: China, the Climate and the Fate of the Planet
• David Dayen: Remember This Moment When the Next Financial Crisis Strikes. The SEC could have fixed our broken rating agencies. It whiffed
• Robin Harding: Money Supply: A “considerable” challenge

1. Jonathan Chait: Have Nerds Betrayed the Left?: “[Tom] Frank… held… a lack of familiarity with even the basic concepts of political science, which can explain how structural limits (like divided government and polarization) constrain the domestic powers of a president in a way that cannot be broken with ideological willpower or inspirational speechmaking. Now Frank has written a column (‘All these effing geniuses: Ezra Klein, expert-driven journalism, and the phony Washington consensus’) assailing the influence of political science, which he views as a kind of corrupting force draining the left of its populist fervor…. A good chunk of Frank’s polemic is taken up with generalized experts of all kinds…. He distrusts them all as corrupt handmaidens of power…. After establishing his anti-academic-populist bona fides, Frank provides his readers with an example…. So Frank’s ‘data point’ is that Democrats lost the House in 1994 because Bill Clinton was too conservative. That assumption is belied by a mountain of evidence…. At the end of his rant, Frank almost seems to concede that his problem with political science is that it leads to conclusions he finds inconvenient. ‘The fatalism here may be science-driven’, he concedes, ‘but still it boggles the mind’. Let that phrase roll around in your head for a moment. Frank has just told you everything you need to know here.”

2. Bill Janeway: Doing Capitalism in the Innovation Economy: “This entails reconstruction of the core of macroeconomics by drawing on innovative approaches to understanding behavior in the peripheral financial markets. Ricardo Caballero observes: ‘In the context of the current economic and financial crisis, the periphery gave us frameworks to understand phenomena such as speculative bubbles, leverage cycles, fire sales, flight to quality, margin- and collateral-constrained spirals, liquidity runs, and so on–phenomena that played a central role in bringing the world economy to the brink of a great depression. This literature also provided the basis for the policy framework that was used to contain the crisis.’ The challenge remains: to construct integrated models of a financial economy whose participants both are aware of the limits and fragility of their own knowledge and condition their behavior on that of others similarly aware. Whether it will prove possible to generate general equilibrium from such realistic microfoundations remains an open question. Perhaps frustration in that pursuit will encourage alternative efforts…”

3. Mark Thoma: Can New Economic Thinking Solve the Next Crisis?: “It is certainly true that mainstream, modern macroeconomic models failed us prior to and during the Great Recession…. But amid the calls for change in macroeconomics there is far too much attention on the tools and techniques that macroeconomists use… and far too little attention on… the questions that economists ask…. Why did macroeconomists adopt a representative agent framework that made financial meltdowns so difficult to incorporate into their models?…. Because macroeconomists, for the most part, did not think questions about financial meltdowns were worth asking, so why bother with those theoretical complications?… The questions that macroeconomists ask are dictated, in large part, by current macroeconomic events…. Presently, for example, questions about the international flow of financial assets and the balance of trade have all but disappeared from the economics discourse…. Does that mean such questions will never be important and research into these topics should be dismissed as uninteresting?… The problem is the sociology within the economics profession that prevents some questions from being asked. Why, for example, were the very questions we needed to ask prior to the Great Recession ridiculed by important voices within the profession? The key to a better economics is to ask better questions, and that will require a much more open mind–particularly from those in charge of what gets published in economic journals–about the kinds of questions economists are allowed to ask.”

4. Andrew Flowers: Martin Wolf’s Grand Theory Of Global Financial Disorder: “As the saying goes (sort of): They had a favorite hammer, so every problem looked like a nail. For Martin Wolf… his hammer is ‘global imbalances’…. The Shifts and the Shocks: What We’ve Learned–and Have Still to Learn–from the Financial Crisis… is a great read… will be unsettling to anyone who thinks the financial system is any more stable…. Global imbalances are the patient zero of financial crises, according to Wolf. And Wolf has swung this hammer before…. Wolf does argue smartly for other reforms, but you get the feeling that global imbalances explain everything. Might financial regulation at the domestic level, or China’s investment-heavy mercantilist model, or the skewed incentives of corporate managers, or the Federal Reserve’s monetary policy, or… any number of other factors also play a role? Perhaps.”

5. Zoe Quinn: 5 Things I Learned as the Internet’s Most Hated Person: “Hi. My name is Zoe, and I make weird video games with some degree of success (and make them playable for free, if you’re so inclined). My life is generally pretty uncomplicated, I guess, aside from the fact that a month ago the Internet decided to make me the center of a supposed global conspiracy. I made the mistake of dating a guy who would later go on to write a several-act manifesto about my alleged sex life and post it to every forum he could create a handle for. Normally, this would blow over with little more than a “whoa, check out THAT guy,” but since I work in an industry that has very strong feelings about women, it quickly mutated from a jilted ex’s revenge-porn to one of the most intense scandals in recent gaming history. Long story short, the Internet spent the last month spreading my personal information around, sending me threats, hacking anyone suspected of being friends with me, calling my dad and telling him I’m a whore, sending nude photos of me to colleagues, and basically giving me the “burn the witch” treatment. During all of this, I found that: #5. This Can Happen to Anybody (But It Helps If You’re Female)…”

6. Martin Wolf: Russia is our most dangerous neighbour: “Russia is both a tragedy and a menace… the blend of self-pity and braggadocio currently at work in Moscow… is as depressing as it is disturbing…. For Europe and, I believe, the US, there is no greater foreign policy question than how to deal with today’s Russia…. A defensive alliance defeated the Soviet Union because it offered a better way of life…. Yet President Vladimir Putin, the latest in a long line of Russian autocrats, has stated, instead: ‘The collapse of the Soviet Union was a major geopolitical disaster of the century’. It was, in fact, an opportunity, one that many in central and eastern Europe seized with both hands. The transition to a new way of life proved unavoidably difficult. The world they now inhabit is highly imperfect. But they have mostly joined the world of civilised modernity. What does this mean? It means intellectual and economic freedom. It means the right to engage freely in public life. It means governments subject to the rule of law and accountable to their people. The west has too often failed to live up to these ideals. But they remain beacons. In the early 1990s they were beacons to many Russians. As a great admirer of Russian culture and Russian courage, I hoped, fondly perhaps, that the country would find a way…. The alternative of continuing the cycle of despotism was too depressing. With the selection of Mr Putin, a former KGB colonel, as his successor, Boris Yeltsin delivered that outcome…. The west is partly responsible for this tragic outcome. It failed to offer the support Russia needed quickly enough in the early 1990s. Instead it focused, ludicrously, on who would pay the Soviet debt. It acquiesced in the larceny of Russian wealth for the benefit of a few. But more important was the refusal of Russia’s elite to address the reasons for the collapse, then to start afresh…. Today’s Russia feels it is the victim of a historic injustice and rejects core western values. It also feels strong enough to act. Today’s Russian leader also sees these potent emotions as a way to secure power. He is not the first such ruler. His Russia is a perilous neighbour. The west must shed its last post-cold war illusions.”

Should Be Aware of:

• David Glasner: Nick Rowe on Money and Coordination Failures
• David Pescovitz: “Here’s the transcript at Medium of a deeply fascinating Aspen Ideas lecture by neuroeconomist Paul Zak, author of The Moral Molecule, about the chemical reason why the vast majority of us feel good helping others. Those who don’t? Psychopaths, mostly.”
• Andrew Gelman and Guido Imbens: Why High-Order Polynomials Should Not be Used in Regression Discontinuity Designs
• Tim O’Reilly (2013): How I Failed
• New Eyewitness To Palin Family Brawl Robert Thompson: Bristol’s Actions Were ‘Quite Violent’
• Justin Lahart: Calpers Shows Masters of Hedge-Fund Universe Have No Clothes

1. Jason Furman and Betsey Stevenson: Income, Poverty, and Health Insurance in the United States in 2013: “The data also offer a clear illustration of the large amount of work that remains to strengthen the middle class in the wake of the worst recession since the Great Depression…. The overall poverty rate declined to 14.5 percent in 2013 due to the largest one-year drop in child poverty since 1966…. This official poverty rate does not reflect the full effect of anti-poverty policies because it excludes the direct effect of key measures like the Supplemental Nutrition Assistance Program (SNAP) and the Earned Income Tax Credit (EITC). Notably, the EITC was expanded in 2009, and those expansions were subsequently extended. Accounting for such policies would reduce the number of people counted as being in poverty by millions. Real median income for family households rose by $603 in 2013 but remains below pre-crisis levels…. The gender pay gap narrowed slightly in 2013…. Children and the elderly were much more likely than non-elderly adults to have health insurance coverage in 2013, reflecting the contributions of public programs like Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP)…. The data released today by the Census Bureau… do not reflect the notable improvement in the labor market seen over the first eight months of 2014…. Next year’s report is also likely to show that health insurance coverage increased sharply in 2014, reflecting an improving economy and, much more importantly, the effects of coverage expansions under the Affordable Care Act…”

2. Richard Mayhew: “[David Hogberg of] the National Center for Public Policy Research… is dripping in bad faith or crap analysis…. Unpacking this Ms. Hopmann had a pre-exisiting condition. She was uninsurable on the underwritten individual insurance market…. For nine months, she was in a high risk bridge program funded by PPACA, and then went onto the Exchange where she was able to get significantly subsidized insurance without having to pass through medical underwriting. Her Exchange plan is slightly worse than her high risk plan. And for that she is pissed off…. Now if the wingnut welfare landing pad NCPPR was interested in arguing that Exchange subsidies should be significantly richer so Platinum level benefits are the default, this story could be made in good faith. That is not the argument they are making. The NCPPR is arguing that this woman is getting screwed by Obamacare despite the fact that in a non-PPACA world, she is uninsurable…. They are offering FUD and hoping some of it splatters on bystanders in our public discourse.”

3. Emanuele Felice: “Christian Grabas and Alexander Nützenadel, eds., Industrial Policy in Europe after 1945: Wealth, Power and Economic Development in the Cold War: As stated in the Introduction (p. 2), ‘for a long time industrial policy appeared old-fashioned, something that belonged to a distant past when mercantilism ruled economic philosophy in Europe. The industrial sector seemed to fade away, marginalized by the Internet boom, the financial sector and other expanding branches of the knowledge economy.’… The neo-liberal credo of superior market efficiency is no longer a dogma, as a consequence of the crisis…. Industrial policy and industrial development are back to the fore, in all the European countries (the good as well as the bad performing ones) and throughout the world–I would add: because the rise of China is a product of industrial policy…. The book lacks a conclusive chapter…. The book makes a considerable and admirable effort in order to provide a broad comparative picture… [but] a common interpretative framework… would have helped.”

4. Carola Binder: “Since I didn’t start studying economics until the Great Recession was in full swing, I don’t have a full perspective on ‘new economic thinking’ compared to old…. I only gain second-hand perspective through reading and through studying economic history (which at Berkeley, coincidentally, is largely supported by the Institute for New Economic Thinking). Thoma’s article was prompted by the Rethinking Economics conference, but for me, I’m still learning how to think economics, much less rethink it. One course that was particularly helpful… was an elective on Empirical Macrofinance taught by Atif Mian…. He told us not to see what questions we could answer with the data we have, but rather, to start with the question, and then think about what data we needed to answer it. More often than not, we’d need microdata. Not a problem! We are not in a data-scarce environment! Mian’s work with Amir Sufi on the role of household debt in the Great Recession is a great example of both his point and Thoma’s point: start with the question, then choose your tools, techniques, and data. I realize this is easier said than done (trust me, I really do, after spending the last few years trying to implement it in my dissertation), but to me, that’s just economic thinking. Speaking of my dissertation, I’m preparing to go on the job market this year, which is why the blogging has been a bit less frequent! While the preparation is a lot of work, I am fortunate to be very enthusiastic about my research, because I did start with questions I care about, so working on it is a joy, even if it takes away blogging time. Eventually I will blog about my research, just not quite yet.”

During the 1990s I used to say that after the “End of History” there would be smooth sailing as long as we avoided the creation of four things:

* The Islamic Reformation (i.e., another outburst of wars of religion like those that happened in 16th and 17th century Europe when a Holy Book met growing mass literacy and political and economic development).

* National Hinduist India (i.e., India replaying the “national unification via aggressive nationalism directed at an internal other”, with India’s Muslims cast in the role traditionally reserved for Europe’s Jews).

* Wilhelmine China (i.e., a social caste that has lost both its practical role and its ideological legitimation still somehow dominating the fastest-growing industrial economy in the world and attempting to hang on to power the aggressive nationalism directed at external others).

* Weimar Russia (i.e., a superpower that regards itself as not just defeated but humiliated, and not welcomed and assisted with its reforms but rather kicked to keep it down, and that then reacts in unpredictable and very dangerous ways).

Well.. National Hinduist India is still only a threat rather than a reality–albeit a threat that is much more visible than it was a decade ago…

Martin Wolf reviews the creation of Weimar Russia:

**Martin Wolf:** Russia is our most dangerous neighbour: “Russia is both a tragedy and a menace…

>…the blend of self-pity and braggadocio currently at work in Moscow… is as depressing as it is disturbing…. For Europe and, I believe, the US, there is no greater foreign policy question than how to deal with today’s Russia…. A defensive alliance defeated the Soviet Union because it offered a better way of life…. Yet President Vladimir Putin, the latest in a long line of Russian autocrats, has stated, instead: ‘The collapse of the Soviet Union was a major geopolitical disaster of the century’. It was, in fact, an opportunity, one that many in central and eastern Europe seized with both hands. The transition to a new way of life proved unavoidably difficult. The world they now inhabit is highly imperfect. But they have mostly joined the world of civilised modernity. What does this mean? It means intellectual and economic freedom. It means the right to engage freely in public life. It means governments subject to the rule of law and accountable to their people. The west has too often failed to live up to these ideals. But they remain beacons.

>In the early 1990s they were beacons to many Russians. As a great admirer of Russian culture and Russian courage, I hoped, fondly perhaps, that the country would find a way…. The alternative of continuing the cycle of despotism was too depressing. With the selection of Mr Putin, a former KGB colonel, as his successor, Boris Yeltsin delivered that outcome…. The west is partly responsible for this tragic outcome. It failed to offer the support Russia needed quickly enough in the early 1990s. Instead it focused, ludicrously, on who would pay the Soviet debt. It acquiesced in the larceny of Russian wealth for the benefit of a few. But more important was the refusal of Russia’s elite to address the reasons for the collapse, then to start afresh…. Today’s Russia feels it is the victim of a historic injustice and rejects core western values. It also feels strong enough to act. Today’s Russian leader also sees these potent emotions as a way to secure power. He is not the first such ruler. His Russia is a perilous neighbour. The west must shed its last post-cold war illusions.

Andrew Flowers: Martin Wolf’s Grand Theory Of Global Financial Disorder: “As the saying goes (sort of)…

…They had a favorite hammer, so every problem looked like a nail. For Martin Wolf… his hammer is ‘global imbalances’…. The Shifts and the Shocks: What We’ve Learned–and Have Still to Learn–from the Financial Crisis… is a great read… will be unsettling to anyone who thinks the financial system is any more stable…. Global imbalances are the patient zero of financial crises, according to Wolf. And Wolf has swung this hammer before…. Wolf does argue smartly for other reforms, but you get the feeling that global imbalances explain everything. Might financial regulation at the domestic level, or China’s investment-heavy mercantilist model, or the skewed incentives of corporate managers, or the Federal Reserve’s monetary policy, or… any number of other factors also play a role? Perhaps.

Martin would say– correctly–the global imbalances have been an important part of every story in and by which things have gone badly wrong. Without global imbalances, either things would not have gone wrong or things would’ve gone wrong in a different, and probably less serious, Way.

That does not mean that there is any easy way to resolve global imbalances. Nevertheless, what Larry Summers said 15 years ago is still true: with global imbalances, they will be resolved, but they can be resolved in either of two ways–by balancing up, or bouncing down.

Mark Thoma: Can New Economic Thinking Solve the Next Crisis?: “It is certainly true that mainstream, modern macroeconomic models failed us…

…prior to and during the Great Recession…. But amid the calls for change in macroeconomics there is far too much attention on the tools and techniques that macroeconomists use… and far too little attention on… the questions that economists ask…. Why did macroeconomists adopt a representative agent framework that made financial meltdowns so difficult to incorporate into their models?…. Because macroeconomists, for the most part, did not think questions about financial meltdowns were worth asking, so why bother with those theoretical complications?… The questions that macroeconomists ask are dictated, in large part, by current macroeconomic events…. Presently, for example, questions about the international flow of financial assets and the balance of trade have all but disappeared from the economics discourse…. Does that mean such questions will never be important and research into these topics should be dismissed as uninteresting?… The problem is the sociology within the economics profession that prevents some questions from being asked. Why, for example, were the very questions we needed to ask prior to the Great Recession ridiculed by important voices within the profession? The key to a better economics is to ask better questions, and that will require a much more open mind–particularly from those in charge of what gets published in economic journals–about the kinds of questions economists are allowed to ask.

This is, I think, why whenever things get interesting the only people who have something to say are the economic historians–all the other macroeconomists have been part of the swarm of 20 six-year-olds in a mass scrum around the soccer ball, have not been playing their positions, and thus have little to say when reality makes the ball squirt out and go someplace else…

Bill Janeway: Doing Capitalism in the Innovation Economy: “This entails reconstruction of the core of macroeconomics…

…by drawing on innovative approaches to understanding behavior in the peripheral financial markets. Ricardo Caballero observes: ‘In the context of the current economic and financial crisis, the periphery gave us frameworks to understand phenomena such as speculative bubbles, leverage cycles, fire sales, flight to quality, margin- and collateral-constrained spirals, liquidity runs, and so on–phenomena that played a central role in bringing the world economy to the brink of a great depression. This literature also provided the basis for the policy framework that was used to contain the crisis.’ The challenge remains: to construct integrated models of a financial economy whose participants both are aware of the limits and fragility of their own knowledge and condition their behavior on that of others similarly aware. Whether it will prove possible to generate general equilibrium from such realistic microfoundations remains an open question. Perhaps frustration in that pursuit will encourage alternative efforts…