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Archive for July 2009

Oh Snap!

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You may have recently read about the Chinese discomfort with the recent expansion of the US Fed’s balance sheet.  The worry is based on the claim that a bigger balance sheet means more green-backs are out and about in the world, implying inflation.  This would be quite a bad thing for the Chinese – their reserve balances recently eclipsed $2 trillion, with the majority in $US denominated treasury bills.  Significant inflation would erode these assets.

This idea has been looked at by several different authors recently, who generally go over exit strategies the Fed could take to avoid any problems (in my opinion Jim Hamilton is the one you want to read  – link ).  Another approach to this issue, however, was just offered up by Brad Setser, and I think it’s great:  Pot calling kettle black

One thing that has puzzled me is that some of the countries that have — implicitly at least — been most critical of the expansion of the Fed’s balance sheet during the crisis long have had much larger balance sheets than the US Federal Reserve.

Before the crisis, the Fed’s balance sheet was around 6% of US GDP. Right now, it is around 15% of US GDP. A big increase no doubt. But the balance sheet of the People’s Bank of China (PBoC) is around 70% of China’s GDP. Foreign assets make up about 80% of the PBoC’s balance sheet — or around 55% of China’s GDP. And the PBoC’s estimated holdings of US treasuries and agencies are about equal to 30% of China’s GDP — a level that is far higher, relative to China’s GDP, than the US Fed is ever likely to achieve. The Fed expects its balance sheet to peak at roughly $2.5 trillion, or between 15% and 20% of US GDP.

Oh snap!  Check the link for further comment on how to sterilize the expansion to prevent inflation.


Written by jk

July 30, 2009 at 9:13 pm

Some new QJE papers

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Guiso, Sapienza, and Zingales: “Cultural Biases in Economic Exchange?

There are remarkable differences in the level of trust among European managers. When asked to score fellow managers of different countries on the basis of their trustworthiness their responses implied the following ranking (where 1 is the best and 5 the worst):

1=high trust, 5=low trust

1=high trust, 5=low trust

. . .

We find that a higher level of bilateral trust can explain cross-country trade beyond what extended gravity models can account for. . . .  At sample means, a one-standard-deviation increase in the importer’s trust toward the exporter raises exports by 10%. . . . We find similar results when we analyze the pattern of foreign direct investments (FDI) and portfolio investments. A country is more willing to invest in another (either directly or via the equity market) when it trusts the other country’s citizens more. Not only do the latter results confirm our trade ones, but they also suggest that cultural effects are not limited to unsophisticated consumers, but are also present among sophisticated professionals such as mutual fund managers.

Lalive and Zweimuller: “How does Parental Leave Affect Fertility and Return to Work? Evidence from Two Natural Experiments”

This paper analyzes the effects of changes in the duration of paid, job-protected parental leave on mothers’ higher-order fertility and postbirth labor market careers. Identification is based on a major Austrian reform increasing the duration of parental leave from one year to two years for any child born on or after July 1, 1990. We find that mothers who give birth to their first child immediately after the reform have more second children than prereform mothers, and that extended parental leave significantly reduces return to work. Employment and earnings also decrease in the short run, but not in the long run. Fertility and work responses vary across the population in ways suggesting that both cash transfers and job protection are relevant. Increasing parental leave for a future child increases fertility strongly but leaves short-run postbirth careers relatively unaffected. Partially reversing the 1990 extension, a second 1996 reform improves employment and earnings while compressing the time between births.

Clingingsmith, Khwaja, and Kremer: “Estimating the Impact of the Hajj: Religion and Tolerance in Islam’s Global Gathering

We estimate the impact on pilgrims of performing the Hajj pilgrimage to Mecca. Our method compares successful and unsuccessful applicants in a lottery used by Pakistan to allocate Hajj visas. . . . We find that participation in the Hajj increases observance of global Islamic practices, such as prayer and fasting, while decreasing participation in localized practices and beliefs, such as the use of amulets and dowry. It increases belief in equality and harmony among ethnic groups and Islamic sects and leads to more favorable attitudes toward women, including greater acceptance of female education and employment. Increased unity within the Islamic world is not accompanied by antipathy toward non-Muslims. Instead, Hajjis show increased belief in peace, and in equality and harmony among adherents of different religions. The evidence suggests that these changes are likely due to exposure to and interaction with Hajjis from around the world, rather than to a changed social role of pilgrims upon return.

Written by Alex

July 29, 2009 at 11:12 am

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Shatner interprets Palin

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Edit: Damn intellectual property laws.  Just go here:

Written by Alex

July 27, 2009 at 11:22 pm

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Two new papers about real rigidities

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Dufour, Khalaf, and Kichian, “Structural Inflation Models with Real Wage Rigidities: The Case of Canada.”

Real wage rigidities have recently been proposed as a way of building intrinsic persistence in inflation within the context of New Keynesian Phillips Curves. Using two recent illustrative structural models, we evaluate empirically the importance of real wage rigidities in the data and the extent to which such models provide useful information regarding price stickiness. . . .

Results based on one of the models are relatively uninformative. . . . However, we obtain economically reasonable ranges for estimates of average frequency of price changes and some evidence for rigidity in real wages (as measured by a rigidity index) based on the other model we examine. In addition, our specification for the latter model yields significant [at usual levels] and correctly-signed reduced-form coefficient estimates, showing a trade-off between unemployment and inflation in the New Keynesian Phillips curve. . . .  [O]ur findings suggest that wage-rigidity based New Keynesian Phillips Curves hold promise empirically and provide interesting research directions.

Turino, “Non-price competition, real rigidities, and inflation dynamics.”

. . . [M]odern-day New Keynesian models [have] has so far neglected the consequences of extending competition between firms to the non-price dimension. This paper tries to fill this gap by enriching the canonical New Keynesian framework to include both price and non-price competition.

. . .

Building on Spence (1977),  [non-price competition] is introduced in the model by assuming that consumers’ tastes are endogenously determined, depending on the distribution of non-price activities across all the firms. . . .  [C]hanges in non-price activities that a ffect the distribution of market shares across firms in turn aff ect the elasticity of demand faced by each individual producer, and hence the degree of substitutability of their products.

. . .

To preview our results, we find that non-price competition does aff ect inflation dynamics, by increasing the inflation-marginal cost coeffcient. This result hinges on the property that, under very general assumptions, non-price competition generates a mechanism that dampens the overall degree of real rigidity in price-setting. In our framework, in fact, pricing and non-pricing policies are strategic complements, so that, through non-price tools, a firm mitigates the e ffect upon its market share made by price movements. This reduces the opportunity cost that price-setters face in changing their relative price, mitigates the degree of real rigidity and eventually increases the size of price changes. As a result, if firms engage in non-price competition, inflation becomes more sensitive to movements in marginal cost.

Written by Alex

July 27, 2009 at 2:36 pm

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Interesting Stuff: The Canadian Tire Money Edition

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— Paul Krugman comments twice (here and here) on the Christiano et al. and Cogan et al. fiscal multiplier papers to which I linked the other day.  I’m pleased to report that Krugman’s guess about the reason for the conflicting results is basically the same as my guess:

My guess — but it’s really hard to decipher — is that in Cogan et al the zero lower bound isn’t really binding; they think the Fed is being too expansionary.

Of course, he goes on to say a lot of much smarter things than I am able to do.

— A new NBER paper on technological progress in the automobile sector:

This paper estimates the technological progress that has occurred since 1980 and the trade-offs that manufacturers and consumers face when choosing between fuel economy, weight and engine power characteristics. The results suggest that if weight, horsepower and torque were held at their 1980 levels, fuel economy for both passenger cars and light trucks could have increased by nearly 50 percent from 1980 to 2006; this is in stark contrast to the 15 percent by which fuel economy actually increased. I also find that once technological progress is considered, meeting the CAFE standards adopted in 2007 will require halting the observed increases in weight and engine power characteristics, but little more; in contrast, the standards recently announced by the new administration, while certainly attainable, require non-trivial “downsizing”.

— From Macleans: Why free trade with the EU goes nowhere.

“Most people who are usually in favour of free trade, both in Canada and the EU, have been served.  They have free trade. They have no obstacles.” But those in other sectors who want protection have it and won’t give it up easily.

In the comments section, someone chimes in with this:

I told a conference on Canada-EU trade a year ago, exaggerating only a little for effect, that if this falls apart, it will be because Europe is a real country and Canada isn’t.

A new study followed “at risk” young boys in Quebec for over twenty years and found that jailing young offenders makes them worse.

The euthanasia debate may soon heat up in Quebec.

— Will Wilkinson at the Cato Institute has a new paper, “Thinking Clearly about Economic Inequality.” One major theme with which I (mostly) agree is this:

The pattern of incomes is affected by both morally desirable and undesirable mechanisms. When injustice or wrongdoing increases income inequality, the problem is the original malign cause, not the resulting inequality.

Here is Wilkinson discussing the paper (among other topics) with non-libertarian journalist Ezra Klein.

I will say more about economic inequality on this blog someday.

A good post at Worthwhile Canadian Initiative about whether or not California is different from Canadian Tire.  Also be sure to read the comments for stuff like this:

Wallace and Eichenbaum ( explain how the decision by Rona to accept Canadian Tire money at face value as payment in 1983 forced Canadian Tire to go to court. After all, had Rona continued to accept Canadian Tire money (and been copied by others in a Mengerian manner), it might be interpreted that Canadian Tire was creating a circulating generally accepted currency, and would have put the company in contravention of the law.

In sum, the reason Canadian dollars circulate rather than CT money could be largely due to the legal restrictions that subsidize trades in C-dollars but prevent CT money from being accepted, and not any intrinsic advantage of C-dollars. No large company will accept CT money as payment, for were they to do so they might be pursued by Canadian Tire in court. Without these laws, it might be that CT money would have displaced C-dollars years ago.

Written by Alex

July 17, 2009 at 11:55 am

Singer on Health Care Rationing

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Prominent utilitarian philosopher Peter Singer has an article in the New York Times arguing that the US government should explicitly ration health care according to some strict cost-benefit principles.

Health care is a scarce resource, and all scarce resources are rationed in one way or another. In the United States, most health care is privately financed, and so most rationing is by price: you get what you, or your employer, can afford to insure you for. … In the public sector, primarily Medicare, Medicaid, and hospital emergency rooms, health care is rationed by long waits, high patient copayment requirements, low payments to doctors that discourage some from serving public patients and limits on payments to hospitals. …

Rationing health care means getting value for the billions we are spending by setting limits on which treatments should be paid for from the public purse. If we ration we won’t be writing blank checks to pharmaceutical companies for their patented drugs, nor paying for whatever procedures doctors choose to recommend. When public funds subsidize health care or provide it directly, it is crazy not to try to get value for money. The debate over health care reform in the United States should start from the premise that some form of health care rationing is both inescapable and desirable. Then we can ask, What is the best way to do it? …

As a first take, we might say that the good achieved by health care is the number of lives saved. But that is too crude. The death of a teenager is a greater tragedy than the death of an 85-year-old, and this should be reflected in our priorities. We can accommodate that difference by calculating the number of life-years saved….

He also talks about quality of life adjustments.  I think Singer is correct to point out that these are the really important questions when it comes to health care policy.  As I have noted before, the scarce resources have to be rationed somehow.  If we decide that willingness/ability to pay isn’t the appropriate mechanism, then we have to face some tough moral choices.

I wasn’t convinced by this:

It’s easy to say, “What if the teenager is a violent criminal and the 85-year-old is still working productively?” But just as emergency rooms should leave criminal justice to the courts and treat assailants and victims alike, so decisions about the allocation of health care resources should be kept separate from judgments about the moral character or social value of individuals.

If we are approaching this problem from a utilitarian perspective, I don’t see how we can ignore the social value of individuals.  As a practical matter, maybe he thinks that those considerations would allow for too much subjectivity in the measurement of the value of particular people, leaving it vulnerable to racism, homophobia, sexism, and other forms of discrimination on the part of the evaluators.  In principle, though, it seems clear if we’re taking this whole exercise seriously, then the value of an individual’s life should be roughly increasing in the positive size of his or her impact on the lives of others.

Admittedly, this would be hard to do.  In a large population think the best proxy would be something like the person’s real wage, but I suspect that most advocates of universal health care would not like that.  Besides, it sort of undermines the point of the whole enterprise if the universal system values the lives of the rich more highly than those of the poor (on average, and controlling for age).

Here is a video of Peter Singer discussing poverty and utilitarianism with Tyler Cowen.

On health care, Will Wilkinson asks whether socialized health care would slow medical innovation in the USA.  As an undergraduate, I saw a guy (whose name I can’t recall; I’m pretty sure he was an economist, but he may have been a philosopher) give a talk in which he argued that the answer to this problem is to socialize health care research and innovation as well.  Would this be necessary?  Is it just the road to serfdom?

Written by Alex

July 15, 2009 at 2:11 pm

Animal Healthcare Spending is Out of Control!

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Via the indispensable Econlog, I find this:


Megan McArdle explains why this is interesting:

Kudoes to AEI for publishing a graph that seriously undercuts one of the major conservative arguments about health care:  that the main problem is consumers who don’t bear their own costs.  Veterinary spending is subject to few of the perversities that either left or right suppose to be the main problems afflicting health care spending.  Consumers pay full frieght most of the time.  They are price sensitive, and will let the patient die if keeping him alive costs too much.  There is no adverse selection.  There is no free riding on mandatory care.  Government regulation is minimal.  Malpractice suits are minimal, and have low payouts.  So why is vet spending rising along with human spending?

Does this graph show that the argument about consumers not facing their own costs must be false?  Or are the two issues — vet spending and human healthcare spending — so different from one another that we can’t draw any conclusions here?  There are no doubt many differences that we would want to control for; this graph isn’t a very sophisticated analysis.  Still, when people say that healthcare spending increases are ‘out of control,’ they tend to look at this aggregate trend.  Veterinary spending has the same upward trend, and approximately the same rate of increase (about 2.5x over the whole period).

And what does this say about some of the ‘liberal’ arguments about healthcare? The market for veterinary services doesn’t have the complex insurance schemes with large administrative overhead.  Without insurance, and therefore without adverse selection, no one spends money evaluating insurance claims for dogs.  Yet total spending is rising in line with spending on human healthcare, which does have those problems.  And those are supposed to be the areas where, according to some, big savings would be realized under a universal system (well, those along with monopsony buying power for drugs and stuff).

Of course the magnitudes are totally different, but the sheer size of total spending on human healthcare isn’t itself the issue.  If the increasing share of national income going to healthcare spending is driven mainly by rising incomes and technological progress, and not by problems with the structure of the health and insurance industries, then the spending problem is only a problem because the spending is being done by the government.  If people were choosing to spend a higher share of their income on health, we wouldn’t say it was a problem.  But when we’re talking about the government budget, it becomes a matter of political tradeoffs rather than individual consumption tradeoffs.  What policies — if any — should the US government implement to deal with this problem?

Written by Alex

July 13, 2009 at 4:35 pm