Economics – General

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Saving Lions by Killing Them

December 12, 2011 in Economics - General | No comments

Lions are among the most awe-inspiring animals around.  Their regal manes have inspired many and have been the source of numerous Disney cartoon characters.

The question is, how does one protect the animals?  In Namibia, the answer has been allowing hunters to kill them.  Hunting these animals has the obvious drawback that it decreases the number of these animals alive in the short run.  Further, most hunters prefer hunting adult male lions.

“A male lion needs six years to establish himself in a pride and rear a new generation. Overhunting leads to continual turnover in the pride: when a new male takes the throne, he tends to kill the old crop of cubs so he can father his own. But when I asked if he would support a ban on trophy hunting, even Packer demurred.”

However, hunting may save the animals.  Hunters pay thousands of dollars to have the chance to hunt these animals.  Villagers can profit from these hunts.  Thus, they have the incentive to allow the hunting of these animals, but not to the degree that this asset is completely used up.  Furthers, villagers themselves may want to hunt the animals themselves if they trample their crops.  If they are valuable assets, however, the villagers will have an incentive to protect them.

Counterintuitively, hunting may be the only path for lions to survive.

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Holistic Regulation

November 29, 2011 in Economics - General | No comments

“We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components.”

  • Ben S. Bernanke, “Financial Reform to Address Systemic Risk” at the Council on Foreign Relations, Washington, D.C., March 10, 2009

 

In a 2010 short paper, Brunnermeier, Hansen, Kashyap, Krishnamurthy and Lo (2010) argue that the field of economics has not adequately examined the topic of systemic risk. One of the reasons for this is that systemic risk is difficult to observe and quantify.  The Office of Financial Research (OFR) is President Obama’s attempt to fill this gap in knowledge.

Even though systemic risk is poorly measured, that does not mean that economists haven’t thought of ideas to combat systemic risk. The Fed Chairman’s quotation citing the need for holistic regulation is one approach. Is a holistic approach to regulation a good thing? Today, I give my 2 cents.

Merits

Financial and economic market are complex entities. Creating multiple government bodies where each one only regulates a piece of a given market can often be suboptimal. An individual agency may be in charge of making a given financial instrument safer or more transparent. Even if they government body succeeds in their mission, their regulations may create unintended consequence. For instance, another, more volatile, less transparent, unregulated financial instrument is created. Or the regulation could have an adverse effect on real markets. Having a single entity regulate all financial markets in an integrated fashion seems like a promising idea.

Problems

However, regulation generally requires more specialized knowledge than any one agency can maintain. For instance, credit default swaps are complicated entities. Regulators must have specific knowledge in order to properly regulate these instruments. Having a single body regulate all financial markets may create an entity with a wide breadth of knowledge but little depth. Further, if the regulatory scheme created by the central planner is poorly constructed, investors may have no other markets from which they can seek more rational regulation. If regulation by some of the government bodies is successful, investors could migrate to investments in more rationally regulated sectors (although this shift from well-regulated to poorly-regulated markets is a distortion in and of itself).

Motivation

In addition, one has to question the Chairman’s motivation for expanded regulation. He may have the best interests of the country at heart; integrated regulation may be the best mechanism through which one can decrease systemic risk. However, Dr. Bernanke is not an unbiased observer. Centralizing regulatory control increases the power of the Fed, the and the prestige of Dr. Bernanke. Thus, the desire to centralize regulation may not be a completely unbiased opinion.

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Nobel Prize in Economics

October 10, 2011 in Economics - General | No comments

Two months ago I was standing in Stockholm’s Stadshuset (City Hall).  Soon, Thomas Sargent and Christopher Sims will be there as well.  The pair, however, will be accepting the 2011 Nobel Prize in Economics.

Although I am not a macroeconomist myself, Marginal Revolution has a good description of the pair.

My old professor, Jim Hamilton of UCSD explains macroeconomic impulse response functions which Sims helped develop.

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Do Capitalists or Communists Promote Aid to Africa?

August 19, 2011 in Economics - General, Quotation | No comments

“It is significant that none of the most passionate advocates of aid for Africa are African.  Aid can speed up development that people have already decided to carry out for themselves and have the capacity to do.  It is also essential for vaccination campaigns and for ARVs to combat HIV/AIDS.  Emergency aid is obviously vital to help the victims of war or natural disasters, but that is as true in Surrey as in Somalia.  Small amounts of aid can also work well in local contexts.   But aid from the outside cannot transform whole societies, whole countries.  That can only come about through producing things and trading them or doing something someone else wants to pay for.  Ironically, it is the capitalist West that still sees Africa as a continent that needs aid, while Communist and former Socialist governments like China and India see it as a business opportunity.”

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Expenditure vs. Price Index

August 18, 2011 in Economics - General | 2 comments

Can health care productivity be increasing even as costs are rising so fast?  This may be the case.   One study by Aizcorbe and Nestoriak (2011) examines this phenomenon.

“Using retrospective claims data for a sample of commercially insured patients, we find that, on average, expenditures to treat diseases rose 11% from 2003Q1 to 2005Q4 and would have risen even faster, 18%, had the mix of services remained fixed at the 2003Q1 levels.  This suggests that fixed-basket price indexes, as are used in the official statistics, could overstate true price growth significantly.”

Much of the decrease in cost to treat specific conditions come from a shift of patients from inpatient care to outpatient surgical centers.  The question is, was this change a one time productivity gain, or does the health care system have other options for improving productivity (in the sense of reducing cost for the same quality).  It could be the case that Health IT and electronic medical records could produce synergies.  Alternatively, more intensive use of physician assistants and nurse practitioners could reduce the cost of treating many conditions.  We will see what the future holds.

Notes: The authors analysis uses the Symmetry grouping algorithm to define episodes of care.  By using the groupers, the authors are not required to have extensive medical knowledge to perform this analysis.   On the other hand, because the groupers are proprietary, the algorithms can be seen as a ‘black box.’

The formula used to estimate the expenditure and price indices are:

  • Price: {Σcd2xd1/N1}/ {Σcd1xd1/N1}
  • Expenditure: {Σcd2xd2/N2}/ {Σcd1xd1/Nd1}

Where cdt is the cost per episode of type d in year t, xdt is the number of episodes with disease d in time t, and
Nt is the total number of beneficiaries in time t.

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Managers of Equality

July 26, 2011 in Economics - General | No comments

“In an egalitarian world, everyone is equal, except perhaps the managers of equality. And certainly in the foreseeable future, there will be endless and not unprofitable work for those whose business it is to spell out in ever greater detail the rules of the game of life, and to adjudicate conflict, and to teach the benighted what thoughts a just society requires. Politics will have died, but everything will be politics.”

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Certificate of Need Stringency

June 15, 2011 in Economics - General, Regulation | No comments

Many states have certificate of need (CON) laws which restrict providers supply for certain procedures.  A paper presented by Vivan Ho at AcademyHealth claimed that there were 37 states with a CON law for at least one procedure.  Following up earlier research which found that CON laws decreased quality, Dr. Ho found that dropping CON laws also reduced cost.

An important point was made by an audience member, however.  CON law stringency is highly variable across states.  According to the commenter, most providers who make applications to receive a certificate of need receive one in states like Massachusetts.  In other states, however, CON laws are much more stringent.

Thus, in any empirical analysis, using an dummy variable to indicate the presence of CON law indicates the effect of CON on average.  Policymakers may care more about this variable if they feel they cannot pre-determine the level of stringency upon passing a law.  The true causal effect of CON, however, may of course vary depending on how severely States restrict providers supply of services.

This issue provides a valuable teaching point: any research into CON or other regulations must explicitly interpret what their findings do and do not say about the regulation under consideration.

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Prince William, Kate Middleton, and Nuptial Economics

May 2, 2011 in Current Events, Economics - General | No comments

Nearly 23 million Americans watched a British Prince and his fiancee get married last week.  Yet you don’t have to be royalty to enjoy a luxurious wedding.

In the U.S., the average wedding costs about $30,000.  Weddings in India are well known for their extravagance.

“India’s legendary nuptial shindigs risk emptying not just the country’s wallets, but its bellies too. In February the food minister estimated that close to 15% of all grains and vegetables in the country are wasted through ‘extravagant and luxurious social functions’, such as lavish wedding banquets.”

On the other hand, other countries are trying to reign in spending on nuptials.

“…the Afghan authorities have been considering a proposal to limit the boom in weddings, sombre affairs under the Taliban. The suggested limit is 300 guests and a few dollars per head.

…Wedding laws in Tajikistan now maintain that only one course may be served.”

When do wedding festivities excess become excessive.  Like love, the answer is in the eye of the beholder.

 

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How the Recession Changing Tiebout Sorting

April 27, 2011 in Economics - General | No comments

Typically tiebout sorting works like this:

“Sharofsky does know — very well — about another Cherry Hill [NJ] institution: its stellar public schools. He’s president of the Cherry Hill Teachers Union. Those teachers can brag that 95 percent of the students they teach go on to college. Not bad in one the state’s largest and most diverse suburban districts. Teachers’ salaries here average $54,000 a year and can go up to $100,000. Families — like Sharofsky’s — move to this suburb, right across the bridge from Philadelphia, for the education.

To support their schools, Cherry Hill residents pay some of the highest property taxes in the nation. According to the Tax Foundation, the town is among the top 10 communities with the highest tax burden relative to home value — in 2009, about $5,600 a year for the median homeowner.”

With the state taking a bigger cut, will there be less Tiebout sorting? I would guess so.  In fact, because of the recent contraction in the economy and resulting squeeze on state budgets, the state of New Jersey is not letting Cherry Hill residents keep as high a share of their tax payments. Governor Chris Christie gave millions of Cherry Hill’s surplus money to schools whose budget was even more in need.  Thus, Cherry Hill is a less attractive option if it has high taxes, but the quality of the schools regresses.

In California most education funding is funneled directly from the state, even if some funds are raised through local property taxes.  Is there less Tiebout sorting in California than other States?

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Health Care Research Awards

March 24, 2011 in Economics - General | No comments

The National National Institute for Health Care Management (NIHCM) recently selected its five finalists for their Annual Health Care Research Award.  These studies include the following:

 

 

 

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