We Are All Uninsured

There are now 47 million Americans without health insurance - nearly one-sixth of the population. But as Boston University Economist Laurence Kotlikoff points out, the exposure to risk is much, much broader. In an op-ed titled "We Are All Uninsured Now," he writes:

...the rest of us with health coverage are also uninsured. We too face terrible, albeit more remote, healthcare risks -- the risk that our employer will drop our plan, that Medicare will go bust, that our plan won't cover our needs, that premiums will eat us alive, that our doctor will stop taking our insurance, that long-term care will wipe us out, and that our uninsured friends and family members will need major financial help.

If the point of insurance is to reduce individual risk by pooling it, the American "system" is failing all of us miserably. Kotlikoff offers a voucher scheme as a solution - I'm not sure its better than single-payer national insurance, but it would be an improvement on what we have now (its hard to imagine we could do worse!). (Hat tip to Economist's View).

Herbie, the Capitalism Bug

The New Yorker recently carried a nice essay by Steven Shapin on Herbert Spencer, the 19th century British social theorist who is responsible for the idea of "Social Darwinism." Shapin writes:

Nowhere did Spencer have a larger or more enthusiastic following than in the United States, where such works as “Social Statics” and “The Data of Ethics” were celebrated as powerful justifications for laissez-faire capitalism. Competition was preordained; its result was progress; and any institution that stood in the way of individual liberties was violating the natural order. “Survival of the fittest”—a phrase that Charles Darwin took from Spencer—made free competition a social as well as a natural law. Andrew Carnegie admired Spencer enormously and attributed to him the decisive metaphysical epiphany of his life: “I remember that light came as in a flood and all was clear. . . . I had found the truth of evolution. ‘All is well since all grows better’ became my motto, my true source of comfort.” Thanks to Spencer, Victorian capitalists knew that nature was on their side.

Although Social Darwinism is no longer respectable (Shapin: "It was Spencer's misfortune to outlive his reputation" - zing!) its spirit lives on, lurking behind some of the "libertarian," "free market" and "supply side" economic ideology used to justify our new gilded age (which I discussed here).
Though I'm not a fan of his ideas, I do feel a certain connection: Spencer, the author of "Social Statics," was born in Derby. At Derby Middle School, my eighth-grade social studies teacher was a certain Mr. Spencer.

Financial Freak Out Odds and Ends

The recent problems in financial markets still fall short of a "crisis" in my mind. I'll start to worry if we see a significant drop in household consumption. But at this point, I'm inclined to agree with Ken Fisher of Fisher Wealth Management who says (via Real Time Economics) “A few months from now this will all blow over and we will wonder what the noise was all about, as is the case with all corrections.”

On Econbrowser, James Hamilton has a nice post noting a couple of interesting aspects of the situation. The yields on short-term US Treasuries, which normally aren't very volatile, have plummeted as investors try to get into the safest possible assets (as the price of a bond rises the yield falls, so this reflects increased demand for Treasuries). This does, at least, get rid of the inverted yield curve (the situation where short-term yields are higher than long-term, which sometimes presages an economic slowdown). Also, though the Fed has not lowered the target for the Fed Funds rate, it has been below the announced target of 5.25% for a while now (could this dent the Fed's credibility?).

The NY Times reports that several big banks have made a show of tapping the Fed's discount window. The banks say they don't actually need the money - this is a symbolic move to support the Fed's actions, which are also, I think, largely symbolic. Its as if the markets just need a big hug... Poor Wall Street, everything will be okay! Do you feel better now?

Via Economist's View, I see that Dean Baker has a sterner attitude: "Wall Street Welfare Wimps Keep Whining," he says.

For Those About to Optimize

We Salute You.

Some people believe Mozart makes you smarter, but does AC/DC make you more rational? This study by Robert Oxoby of the University of Calgary exposed subjects to the music of AC/DC during an economic experiment called the "ultimatum game." The outcomes were found to be less efficient when the subjects listened to AC/DC under original frontman Bon Scott than under Brian Johnson, who replaced Scott in 1980. From the conclusion:

Our analysis has direct implications for policy and organizational design: when policymakers or employers are engaging in negotiations (or setting up environments in which other parties will negotiate) and are interested in playing the music of AC/DC, they should choose from the band's Brian Johnson era discography.

Yes, its a joke. But as the Chronicle of Higher Education reports, many people, including Steven "Freakonomics" Levitt, did not recognize it as such. Hmmmm...

China's Exaggerated Rise?

The rapid growth of China's economy has aroused fear in some quarters and giddy excitement in others. Perhaps folks are getting carried away: in the NY Times, MIT's Lester Thurow argues that China's official statistics are greatly exaggerated. Based on China's electricity consumption, Thurow guesstimates an annual growth rate of 4.5-6%, which is brisk, but far short of the official reports of 10% or more.

A (Mostly) Symbolic Move by the Fed

The Fed's moves today were largely symbolic, but expectations and psychology matter in financial markets. The headline-grabber was the cut in the discount rate, the interest rate at which the Fed will make loans directly to banks. The discount rate is far less important than the Federal Funds rate - the rate at which banks loan reserves to each other - which the Fed tries to keep near an announced target level through its open-market operations.

The discount rate is somewhat of a vestigial organ of monetary policy. Back in the day when the Fed was much more secretive, changes in the discount rate were considered important as a signal of the Fed's intentions. After the Fed began announcing its targets for the Fed Funds rate in 1995, the discount rate has been much less prominent (I don't even mention it in my principles class). Borrowings from the discount window are relatively small - according to FRED, an average $132 million (that's million with an m) per month so far this year - because the Fed keeps the discount rate above the Fed Funds rate and there is somewhat of a stigma attached to it (i.e. it might be taken as a signal that a bank is having problems if it has to use the discount window).

The Fed is also temporarily changing the rules - this may be more important than the rate cut itself and lead to more use of the discount window. From the press release:

The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets.

Real Time Economics has a roundup of the Wall Street reaction. Perhaps more important was this announcement from the FOMC, which suggests a cut in the Fed Funds rate may be in the offing:

Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

NB: The Fed Funds Rate target is set by the FOMC, while the discount rate is set by the Federal Reserve Board.
Update: Charles Wyplosz says the Fed's move is "innovative and shrewd." However, Willem Buiter and Anne Sibert believe the Fed has missed an opportunity.

Capitalism, Jesus and Academic Freedom

I may have underestimated the threat to academic freedom in economics in my post yesterday. I am a bit more concerned about it today. The Rocky Mountain News reports:

What would Jesus teach about capitalism, and what would be on His assigned reading list?

That's the issue dividing Colorado Christian University, where the dismissal of a professor has sparked lively student and alumni chatter on the Internet.

The dispute at the usually tranquil Lakewood campus pits Andrew Paquin, head of a religious charity that aids poor people in Africa, against former U.S. Sen. William Armstrong, R-Colo., president of Colorado Christian and a pillar of the religious right.

Armstrong fired Paquin from a position teaching global studies at the end of the spring semester amid concerns that his lessons were too radical and undermined the school's commitment to the free enterprise system.

The goings on at a small religious college are pretty distant from my academic world, but its disturbing to see this anywhere. The irony is that there is a real tension between Christianity and capitalism. From the Bible, Matthew (19:24):

And again I say unto you, It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God.

Inside Higher Ed's story quoted Paquin's blog:

My stance on capitalism is this ... it is obviously a very efficient and pragmatic economic system that has produced the largest and wealthiest country the world has ever seen. It also can be exploitative, lead to human greed, and leave vast populations behind in its wake. It can turn citizens into consumers. Adam Smith writes that the common good is served by the individual pursuit of self-interest. Excuse me if I believe that the pursuit of my own self-interest might be in contrast to the life of Christ that exemplifies the pursuit of the interest of others. This is my tension.

I would think that a Christian college would encourage students and faculty to grapple with issues like this. But perhaps I'm naive to believe the point of a college is to encourage its students to think. Incidentally, further down in the Rocky Mountain News story,

In a letter of dismissal, Armstrong expressed respect for Paquin's religious faith. "God may be calling you to a full-time ministry with 10/10," Armstrong wrote.

So that's how a "Christian" fires someone - tell them "God may be calling you" somewhere else [10/10 is Paquin's microlending project].

Word of the Day

Agnotology, which I discovered reading this article in Inside Higher Ed (with possibly the best headline since "Headless Body In Topless Bar") on a discussion of academic freedom at the American Sociological Association meetings. The worry is that political pressure is causing academics to avoid certain topics, or at least disguise what they are doing:

...Epstein cited the work of Robert Proctor, a Stanford University historian of science, who studies “agnotology” — the production of ignorance, or a field to contrast with epistemology. “What we are seeing is the construction of non-knowledge,” Epstein said.

There are those who just move into other research areas. But Epstein also asked about those who leave certain words out of their projects’ names or descriptions. “If you leave out the key words, people may not find your work,” he said, and more non-knowledge may have been created.

So far, I haven't had any problems with social conservatives objecting to my work on adjustment costs and exchange rate volatility. Though I don't see the same problems with academic freedom in economics as the sociologists are having (yet) - there seems to be plenty of agnotology going on in economic policy discussions. The first example that comes to mind is the persistent lie that tax cuts increase tax revenues - on this subject, see Matthew Yglesias on Giuliani and the press and this post at Economist's View. If I was feeling "fair and balanced" I could no doubt easily find some example left-wing economic agnotology, too (perhaps an exaggerated analysis of the "job losses" from free trade, for example).

The problem is that there are plenty of people with vested interests in promoting bad, intellectually dishonest "economic analysis," to support their political positions. Unfortunately, it sometimes seems easy to fool - or at least confuse - the public and the press. This is where academics have a role to play by (i) helping our students become more critical consumers of information and (ii) putting forward honest, rigorous and objective research which can be the basis for better policy choices.

Who's Abusing the First Welfare Theorem?

In an earlier post, I discussed (and seconded) Dani Rodrik's criticism of those who leap to the conclusion that "free markets" always lead to an optimal outcome. A problem with that way of thinking is that applies the conclusion of the first welfare theorem - that markets lead to a efficient outcome - without considering the conditions required for the theorem to hold (including perfect competition and perfect information).

Marginal Revolution's Alex Tabarrok has a riposte. He argues that Rodrik is guilty of misusing the theorem: just because the conditions required for the theorem aren't met in reality does not imply the existence of welfare-improving policy interventions. He writes:

Since the conditions required for the theorem's proof are unlikely to hold in the real world it's common for people to reverse the theorem to suggest that markets cannot be efficient. Thus Rodrik says:

The First Fundamental Theorem of Welfare Economics is proof, in view of its long list of prerequisites, that market outcome can be improved by well-designed interventions.

Now what is wrong with this is very simple. The First Theorem gives sufficient conditions for a market to be efficient it does not give necessary conditions.

Thus, as a matter of logic, the fact that the theorem's conditions are not satisfied does not prove that market outcomes can be improved, even by "well-designed" interventions.

A valid point, I think. So we've identified two ways to abuse this proposition: (i) to argue that "free market" outcomes are automatically optimal and (ii) to argue that because the theorem's assumptions do not hold, welfare-improving policy interventions must exist. Although many non-economists fail to appreciate the benefits of markets at all, within the world of economics I see the first type of abuse much more often than the second.

Principles of "Principles"

In a NY Times column titled "The Dismal Science, Dismally Taught," Bob Frank relates a familiar experience:

WHEN I began teaching economics in the 1970s, I noticed that people were generally disappointed when they learned what I did for a living. When I began asking why, many said something like this: “I took Econ 101 years ago, and there were all those horrible equations and graphs.”

Frank believes that the teaching of introductory economics is fundamentally flawed:

Their unpleasant memories were apparently justified. Studies have shown that when students are tested about their knowledge of basic economic principles six months after completing an introductory economics course, they score no better, on average, than those who never took the course...

...Why aren’t introductory economics courses more effective? One possibility is that professors try to teach their students far too much. The typical course bombards students with hundreds of concepts, many of them embedded in complex equations and graphs. The mathematical formalism that has become the hallmark of economic research has yielded deep insights. But it does not seem to have helped introductory students learn basic economic principles.

As an alternative, he argues for a pedagogy focused on the repeated application of a small group of principles:

Just as a few simple sentence patterns enable small children to express an amazing variety of thoughts, a few basic principles do much of the lifting in economics. If someone focuses on only these principles and applies them repeatedly in examples drawn from familiar contexts, they can be mastered easily in a single semester.

He may be right, if one takes at face value the idea that the purpose of "Principles of Economics" is solely to impart principles of economics. What his argument seems to miss is that there is a broader purpose to an undergraduate economics course - we are not just teaching economics, we are helping our students learn how to think. This is where that much-derided "mathematical formalism" is invaluable: working with economic models - the process of making assumptions explicit in equations and deriving the implications - helps us learn to connect assumptions and conclusions and think about relationships in a careful, logical manner.

The main educational value of economics lies in the abstract reasoning and quantitative skills the students develop through practice. Other fields cultivate different abilities in their students - e.g. students of English don't merely learn about a set of books, they become more critical readers and better writers. The general point is that the value of a liberal arts education lies not in the body of knowledge students take away, but in the skills and habits of mind they develop when they are challenged.

A couple of subsidiary points:
(i) Frank's argument fits much better for introductory microeconomics than macroeconomics - the factual knowledge in "macro" about how the federal budget and monetary policy work is crucial if we care about what kind of citizens our students will be.
(ii) Though most students of economics (and indeed myself and most economists I know) sometimes lament our reliance on mathematical models, the use of mathematics is absolutely central to economics as it is practiced today. To avoid this for the sake of making it go down easier seems to risk misrepresenting what economics actually is.