Adam and ifs

From the Great Depression to the Great Recession

David Leonhardt thinks that the Great Recession will end up reducing income inequality rather than increasing it, for the same reasons as the Great Depression did:

1. The stock market crash will hurt the wealthy and upper middle-class households more than others, because they own the bulk of stock.

2. The Obama administration is planning to raise taxes on the rich and cut taxes for everyone else, as the FDR administration did, kinda.

3. The Great Depression resulted in a surge in school enrollment, as teenagers who would have been working in the factories stayed in high school. We may be seeing a similar surge now, e.g. in applications community colleges - if those schools have the capacity to take in and train more students.

Restoring irrationality to man

Pieces from the last couple of months on why BE matters - David Ignatius interviews Nouriel Roubini in the Washington Post and cites Roubini's explanation that "the rational man theory of economics" blinded (other) economists to indicators that a financial crisis was coming, a point of view shared by Daniel Kahneman; and David Leonhardt gets practical advice from behavioural economists on how and when to spend and save in a recession.

David Brooks for the New York Times: An Economy of Faith and Trust

David Brooks of the New York Times writes about "An Economy of Faith and Trust". Classical economics, which assumes that individuals are rational and markets are efficient, cannot explain the current financial crisis. "The crisis has delivered a blow to classical economics and taken a body of psychological work that was at the edge of public policy thought and brought it front and center." The effectiveness of monetary policy is curtailed in this crisis. Brooks questions if the fiscal stimulus package being proposed will have any effect because it rests on a "mechanical, dehumanized view of the economy" when the economy is more like a "society of faith and trust".

An important issue may be whether people who benefit from the fiscal stimulus will spend or save the increased income from the stimulus due to a lack of confidence in the future.

http://www.nytimes.com/2009/01/16/opinion/16brooks.html?_r=1

Co-author of Nudge to head US Office of Information and Regulatory Affairs

Cass Sunstein, co-author of the book Nudge: Improving Decisions on Health, Wealth and Happiness, is expected to be named by US President-elect Barack Obama to head the Office of Information and Regulatory Affairs. Sunstein had written prolifically about regulation in the past. Interesting to see how he would incorporate behavioural economics concepts to regulation, and the effectiveness of BE in public policy.

http://nudges.wordpress.com/2009/01/09/cass-sunstein-goes-to-washington/

We shall experiment, but how shall we learn?

Paper by Harvard economist Dani Rodrik on different methods of evaluating policies and key elements of growth diagnostics (and why it's not so different from microeconomics and policy analysis).

Interesting to me for the discussion on methodologies - regressions, qualitative surveys, randomized field experiments - and their strengths and weaknesses. His basic point, which all policy makers know (or should know), is that nothing is conclusive. Even if internal validity can be established to everyone's satisfaction, there is always the question, how generalizable is this study or experiment or result to my particular context? The question Rodrik thinks we really want to ask is, does the research change your priors on the question of interest?

Rodrik offers a stylized account of the traditional policy framework:
- presumptive rather than diagnostic
- operationalised through a long list of reforms (the laundry list approach)
- emphasizes complementarity among reforms rather than their sequencing and prioritization
- biased towards universal recipes, best practices and rules of thumb.

In contrast, growth diagnostics:
- starts with relative agnosticism on what works and what doesn't, is explicitly diagnostic in terms of bottlenecks and constraints
- emphasizes experimentation, monitoring, evaluation - to find out what works
- looks for selective, relatively narrowly targeted reforms
- suspicious of best practices and universal recipes, looks for policy innovations instead.

Which sounds like how we do policy, or, more accurately?, how we would like to do it.

A new Pigouvian tax?

Kinda.

The Governor of New York has proposed an 18 percent sales tax on soft drinks and non-diet sugary beverages to increase state revenues. An op-ed in the NYT thinks the new soda tax will do for this generation of Americans what the tobacco tax did for the last, which is reduce consumption of something bad for you.

Consider the refrigerator

A New Yorker article of Dr Steven Chu, a Nobel Prize-winning physicist and nominee for the next Secretary of Energy.

Dr Chu delivered a talk on climate change and how to combat it earlier this year.

Consider, Chu said, the refrigerator.

Refrigerators consume a lot of energy; all alone, they account for almost fifteen per cent of the average home’s electricity use. In the mid nineteen-seventies, California—the state Chu now lives in—set about establishing the country’s first refrigerator-efficiency standards. Refrigerator manufacturers, of course, fought them. The standards couldn’t be met, they said, at anything like a price consumers could afford. California imposed the standards anyway, and then what happened, as Chu observed, is that “the manufacturers had to assign the job to the engineers, instead of to the lobbyists.” The following decade, standards were imposed for refrigerators nationwide. Since then, the size of the average American refrigerator has increased by more than ten per cent, while the price, in inflation-adjusted dollars, has been cut in half. Meanwhile, energy use has dropped by two-thirds.

The transition to more efficient fridges, Chu pointed out, has saved the equivalent of all the energy generated in the United States by wind turbines and solar cells. “I cannot impress upon you how important energy efficiency is,” he said.

BE comes of age?

An article in the NYT on why the Obama administration should take the insights of behavioural economics seriously when making public policy. Some potential applications of BE:

- Prescription drugs: currently, Medicare separates hospital insurance and drug insurance into different programmes. The incentive for drug insurers is to cover fewer prescriptions. People don't always refill their prescriptions because each refill costs money, or for other reasons. But the incentive for the government is to get people to take their medicine for chronic illnesses like diabetes, because it would cost more (under Medicare) to treat these people when they land up in hospital.

- Jobs after retrenchment: many laid-off workers remain unemployed for months in the belief that they will be able to find a better job. One solution: help people get over this psychological barrier by temporarily subsidising a new, lower-paying job. (Wage-loss insurance, though not named as such in this articles.)

BE and executive pay

An op-ed by Dan Ariely, author of Predictably Irrational, on experiments he conducted with some colleagues that found that people do worse when offered very large rewards, even though they may want to do better. (For this to work, the task has to involve some cognitive ability.)

Healthcare financing: things to read

From the New York Times - the health insurance industry will accept all customers if the govt will require universal participation. No cherry-picking in return for no adverse selection. That seems reasonable - everyone has to be in the pool.

Here's an article from 1999 by A/P Phua Kai Hong - a quick run-through of various health care financing systems, including medical savings accounts in Singapore. 

Bryan Caplan is in town, as a guest of the College. This is his blog post on Singapore's healthcare system.

Jonathan Gruber on lessons from the RAND Health Insurance Experiment way back when. Read the comment too.