Sunday, December 27, 2009

Health bill thoughts

Short version: It's an expansion of Medicaid, with some doodles in the margin.

Longer version:

Today, the US has the world's highest medical spending and poor-to-mediocre health outcomes. It's the only rich country where health coverage is provided by private insurers; where most people's coverage is linked to their jobs; with a large number of people without health insurance; where millions of people lack any health coverage; and where medical problems often mean financial catastrophe. When this legislation is fully phased in, by 2016 or so ... it still will be.

We know what the bill won't do: fundamentally change the structure of health coverage and finance. But what will it do? My own bottom line is, Enough to be worth passing.

The bill's provisions break down into half a dozen major categories: (1) new insurance regulations; (2) health insurance exchanges; (3) individual and employer mandates; (4) Medicaid expansion; (5) Medicare (and Medicaid) spending cuts; (6) tax on high-cost insurance policies, plus a bunch of other smaller taxes; and (7) a grab bag of experimental measures to improve the efficiency and quality of health care. And then there's the provision that's not there, (8), the public option. There are serious questions about the logic and impact of most of these provisions, many of which I have not seen analyzed seriously. As time and inclination permits, I'll dig more into the most glaring ones. The bottom line, per the CBO, is that the uninsured would fall from 19 percent of the population today to 8 percent after 2015. [1]

I was thinking of walking through the major provisions of the bill one by one. But you can find that elsewhere. (Start here.) I might come back and write up a full summary, but in the meantime, I want to flag a half dozen important issues and questions that I haven't seen discussed much elsewhere.

1. The individual mandate -- is it really necessary to make community rating and related regulations work?
2. the distribution of new Medicaid spending, which is highly unequal between states.
3. The cuts in DSH payments, which could be catastrophic for some urban hospitals.
4. The crazy-quilt employer mandate.
5. Why the public option mattered.
6. How meaningful in practice are the limits on out-of-pocket costs, premiums, and medical loss ratios?
7. How much do insurance companies gain?

There are a couple other issues that have gotten a bit more discussion, where I don't think I have anything much to add.

First, what is the role of insurance companies under this system? It seems they no longer have access to the two main choice variables on which they maximize profits currently: the terms on which they offer coverage, and the mix of benefits they will pay for. If they must offer policies on publicly-fixed terms with a publicly-set package of benefits, there's no margin left for them to operate on. (Which doesn't mean they won't be profitable, just that their profit will depend on federal policy, not on factors under their direct control.) Two possibilities here: First, they will find ways to continue selecting healthier populations and limiting payments; the medical loss ratio restrictions won't bind; in short, the status quo. Second, the insurance companies become essentially vestigial, simply taking a cut off the top of what is basically a public system. Purely parasitic insurance isn't something anyone would propose, but it does have to be admitted it's an improvement on insurance companies that take their cut and try to increase it by denying people health coverage.

Anyway, this is looking at the bill through the lens of universal reform -- what is the logic of the system it creates? Whereas it plainly isn't fundamental reform, and it doesn't create a system with any particular logic, just tweaks the system that's formed itself willy-nilly.

Second, the abortion restrictions. It's clear that for some women, the bill will actually make things worse -- it will restrict abortion coverage compared with the status quo. How much, for how many? I don't know. But I did want to flag this lovely quote from The New Republic: "Poor people pay surprising amounts for cell phones and cable TV. They can be surprisingly resourceful in paying for abortions, too."

[1] Also, at The New Republic, Jonathan Cohn writes, "For nearly a hundred years, the political system has been debating whether access to basic medical care should be a right all citizens enjoy. When reform passes, the political system will finally render its verdict: 'yes.'" But 92% -- or even 94%, if you don't count undocumented immigrants -- is not "all". This kind of dishonest rhetoric has been all too common among those defending the bill.

Friday, December 11, 2009

How biologists think about genes

From Tangled webs: Tracing the connections between genes and cognition, by Simon E. Fisher:

The deceptive simplicity of finding correlations between genetic and phenotypic variation has led to a common misconception that there exist straightforward linear relationships between specific genes and particular behavioural and/or cognitive outputs. The problem is exacerbated by the adoption of an abstract view of the nature of the gene, without consideration of molecular, developmental or ontogenetic frameworks. ... Genes do not specify behaviours or cognitive processes; they make regulatory factors, signalling molecules, receptors, enzymes, and so on, that interact in highly complex networks, modulated by environmental influences, in order to build and maintain the brain. ...

What is a gene? Answering this question is far from trivial, but a useful operational definition might be ‘‘a stretch of DNA whose linear sequence of nucleotides encodes the linear sequence of amino acids in a specific protein’’. ... It is important to realise that the appearance and biology of a mature organism is the result of a complex series of ontogenetic events unfolding over time, moderated by environmental and stochastic influences. Genomes are much more like knitting patterns or recipes than blueprints (although even the former are poor analogies for the peculiarities of the genome). ...

The apparent ease of correlating genotype with phenotype without reference to molecular/developmental mechanisms promotes an erroneous impression of neurogenetics; one in which individual genes are able to mysteriously control specific behaviours or cognitive abilities, leading to talk of ‘‘language genes’’, ‘‘smart genes’’, ‘‘gay genes’’, ‘‘aggressive genes’’ and so on. It is indisputable that variations of gene sequence can contribute to variability in cognitive abilities and personality traits (sometimes in a dramatic manner) and that apparently straightforward genotype-phenotype correlations can sometimes emerge in our datasets. But the simplicity of these relationships is merely an illusion; genes do not (and indeed can not) specify particular behavioural outputs or cognitive processes, except in the most indirect way. ... The gross activities of the human brain are the products of a complex interplay between factors at multiple levels; be they genetic, cellular, developmental, anatomical, or environmental, and the routes linking genes to cognition will inevitably be tortuous...

... the gap between genes and cognition can only be bridged by a thorough systems biology account of brain development and function. Even pure candidate gene approaches can be victims of the ‘‘abstract gene’’ perspective. In many cases, when researchers find statistical evidence to support association between a particular variant of a gene and a common trait, it is erroneously assumed on the basis of this that the variant is likely to be causative and that there is a simple pathway connecting gene to trait. ... There is a large gulf between finding statistical evidence for a genotype-phenotype correlation and demonstrating a convincing causal relationship...

There is no doubt that the gene known as FOXP2 is relevant to linguistic ability. However, any characterisation of this as a ‘‘gene for grammar’’ clearly becomes untenable once we are able to view it within a more complete biological framework. ... Reduced amounts of functional FOXP2 protein can lead to disordered brain development or function, in a manner that primarily interferes with speech and/or language abilities. ... this is emphatically not the same as saying that FOXP2 is a ‘‘gene for speech’’ or a ‘‘gene for language’’... FOXP2 [also] regulates key pathways in the developing lung, heart and gut. .... The recycled use of the same regulatory factors to control multiple pathways in different developmental contexts is a common feature of complex biological systems; it is rare to find a transcription factor that has an exclusive role specific to only one context. Thus, calling FOXP2 a ‘‘language gene’’ makes no more sense than referring to it as a ‘‘lung gene’’... the data on FOXP2 from molecular and developmental biology confounds any expectations that one might have for a hypothetical ‘‘language gene’’; and the reason for this is that this entire concept is flawed, being rooted in an abstract view of the nature of the gene. ...

Wednesday, December 9, 2009

Credit and car sales

Here's another one for the file on credit availability and the downturn: How much has tighter financing contributed to the decline in car sales?

The conventional view is that auto sales, like other categories of consumer spending, have been sharply and directly reduced by the financial crisis. From today's Wall Street Journal:

The hardest-hit markets since the crisis were ones at the heart of the financial problem -- the "securitization" markets where loans for everything from mortgages to credit-card debt get sliced up and repackaged into complex securities.

The size of the market for securities backed by loans tied to homeowners' equity has shrunk more than 40% since the second half of 2007. The market for securities backed by auto loans has shrunk 33%...

These securitization markets provided as much as 50% of consumer lending in the years leading up to the crisis, says Tim Ryan of the Securities Industry and Financial Markets Association, a financial-industry trade group. "Without [the securitization markets], it's very difficult to replicate the amount of money moving into the economy," he says.

I've been skeptical about this story in general, but let's see how it holds up in this case. (Click the graph to make it readable; I'm still figuring out the mechanics of blogging.)

The top panel shows the real interest rate on new car loans, the second shows the average loan-to-value ratio, and the bottom shows monthly auto sales in millions, at a seasonally-adjusted annual rate. (Source: Table G.20 from the Flow of Funds; BEA via FRED.) The vertical lines mark business cycle peaks. To make the argument clear, here are the same graphs for just the past two years. The gray area in this one shows when the "Cash for Clunkers" program was in effect.

We see a few things here. First, while auto financing clearly did get tighter as measured both by interest rates and loan-to-value (the latter is a measure of credit availability), the decline in sales started first. Sales were already falling by the end of 2007, while there's no sign of tighter credit until August 2008. So while the collapse of the secondary market for securitized auto loans may indeed have caused lenders to tighten their standards, it's not clear that this was a major factor in reducing sales. Further evidence on this point: Auto credit tightened just as much in 2003-04, with no effect whatever on sales.

Second, while lending standards relaxed this past spring (the bailouts worked), easier credit didn't get people into the dealerships. The spike in sales this summer was all about cash for clunkers; once that ended, sales collapsed, even though interest rates remained extremely low and credit availability, as measured by the loan-to-value ratio, remained fairly high (lower than in the 2000s, but similar to the 90s.) Interestingly, dealers seem to have tightened credit standards during the period of heightened demand in July and August; in this case, the real dog was wagging the financial tail.

So as far as cars go, we can conclude: The credit crisis may have contributed to the decline in real activity, but it wasn't the sole or the decisive cause. And now that sales have collapsed, there's no reason to think that credit conditions are what's holding them down. If you want to support the auto industry, give people money to buy cars (or retrofit car factories to build windmills). Don't try to revive the market for securitized auto loans.

Tuesday, December 1, 2009

Quoted for truth

"You can't completely trust anyone who's not a communist," says Jim Crotty.

No you can't -- except one is often inclined to let the trust extend a generation down. Case in point: A. Hiring A. was, for better or worse, probably my biggest single contribution to the Working Families Party in my five years there. But the guy was a puzzle -- his vibe was pure corporate-pragmatic -- "we don't really believe our own propaganda, do we?" he'd say -- and yet he'd left a successful and presumably lucrative career in business (he'd been, inter alia, general counsel at the teen clothing chain Delia's) to do grunt work in left-wing politics. And he was good at it!

So, a puzzle. So one day, driving back from Albany, E.B. and I started asking him about his background, where his politics came from. And come to find out, A.'s father was a Chilean communist, who'd fled the country after the coup against Allende. We looked at each other as if to say: Well, now it makes sense.

(EDIT: Names changed to abbreviations because these folks still work in politics and possibly don't want to be outed as crypto-commies. Lame, I know.)

Sunday, November 29, 2009

Getting it wrong on credit conditions

I've been obsessed for a while with the idea that credit availability is a much smaller factor in the current downturn than is widely believed -- that the focus on bank balance sheets as a key constraint on output and employment is a symptom of the intellectual capture of economic discussions by Wall Street.

Here's a perfect example from the generally good Gretchen Morgenson of the Times. Morgenson writes:

All that debt overhanging consumers and organizations is the pivotal reason we are still seeing a free fall in bank lending. And small businesses, which account for half of all jobs in this country, are taking the brunt of this credit contraction. Smaller banks are especially worried about their own balance sheets and aren’t making loans. This puts small businesses ­ important engines of growth ­ squarely on the brink.

In its survey, the [National Federation of Independent Businesses] asks small businesses how easy it is for them to get loans. The most recent data shows that credit tightness peaked earlier this fall ­ the worst levels in 23 years, Mr. Shepherdson says. Although credit continues to remain troublingly hard for small business to come by, that phenomenon is a largely untold story.

So let's take a look at what that NFIB report actually says. Yes, on p.12-13 it reports that the net percent reporting easier credit conditions was -14 percent in October, compared with just -4 percent five years ago; in July, the percent saying they had satisfied their borrowing needs over the past three months bottomed out at 29%, with 10% saying their borrowing needs were not satisfied. (The balance didn't need to borrow.)


Turn to p. 14 and you see that the interest rate paid by small business on short-term loans was 6.0%, down from 9.5% in May 2007. On p.6, we learn that of the half of small business owners who report lower earnings this month, 62% say it's because of reduced sales and another 8% to price cuts; only 13% cite rising costs, including labor, materials, taxes, and regulatory costs as well as finance costs. And then on p. 18 they ask small biz owners what is their most important problem. Sales, 33%; taxes, 22%; government regulation, 11%; competition from big business, 6%; and finally financing, tied with cost and and quality of labor at 4%. Compare this to the early 80s, when nearly 40% cited financing as their single most important problem.

Here's how the NFIB itself summarizes these findings:

Overall, loan demand remains weak due to widespread postponement of investment in inventories and record low plans for capital spending. In addition, the continued poor earnings and sales performance has weakened the credit worthiness of many potential borrowers. This has resulted in tougher terms and higher loan rejection rates (even with no change in lending standards), and there is no rush to borrow money ... It sounds like the Administration thinks the reason small firms are not hiring is that they are not able get credit. Although credit is harder to get, 'financing' is cited as the 'most important problem' by only four percent of NFIB’s hundreds of thousands of member firms. ... Record low percentages cite the current period as a good time to expand, more owners plan to reduce inventories than to add to them, and record low percentages plan any capital expenditures. In short, the demand for credit is in short supply and failing to understand the more major problems facing small business leads to bad policy. ... What small business needs is customers.

Gretchen Morgenson is one of the better business reporters out there, as far as I can tell. So how could she take a report that explicitly says that credit availability is not a major problem for small businesses and turn its findings around 180 degrees? And of course, this has implications for the shaping of policy. The NFIB's story leads to the conclusion that what's needed is government action to raise final demand. But in Morgenson's version, it turns into an argument for further capital injections into the banking system instead. That's how strong is the intellectual hegemony of finance. Stories that don't end with the moral "... and so banks need more money" just do not get told.

Monday, November 23, 2009

GDP skepticism from the Fed

Interesting article by Bart Hobijn and Charles Steindel of the New York Fed, on alternative measures of GDP growth.

They make adjustments for three familiar problems -- the non-inclusion of household labor, the calculation of government output as equal to cost, and the treatment of R&D (and other "intangible capital") spending as an intermediate rather than capital good. The first issue is self-explanatory; the second is equivalent, for purposes of measuring growth, to an assumption of constant productivity in government; and the third means that R&D expenditures are not counted in final output. Hobijn and Steindel adjust for these problems by adding R&D-type expenditures to GDP; assuming that about one-quarter of women's wages represents the market value of foregone household labor (don't ask me how they came up with that number, or how they decided that men's household labor has no value); and assuming that government productivity grows at the same rate as for the nonfarm business sector.

Their results? For 1983-2003, the adjusted and published series correlate almost exactly (0.99) at an annual level. (This isn't surprising given how the adjusted series is constructed.) But over time, the divergence is significant -- the upward adjustments for government productivity and the faster growth of R&D expenditures compared with GDP outweigh the downward adjustment due to a rising proportion of women in the workforce. So annual growth over those two decades runs about 0.5 percentage points, or 15 percent, higher with the adjusted series than with the published one. That's not a trivial difference.

This is obviously of interest to anyone working on constructing alternative measures of GDP. But to me it raises bigger conceptual questions (questions that Hobijn and Steindel don't get into, of course, since being mainstream guys they're chasing the mirage of "welfare"). If short-term fluctuations are robust to alternative measurements but long-term growth is not, shouldn't quantitative economics focus on the former? Is there a firm conceptual basis for talking about long-term growth as something we can even measure at all? Or was Keynes right when he said,

To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth — a proposition not without meaning and not without interest, but unsuitable as material for the differential calculus.

Thursday, October 22, 2009

Max Weber says...

What is the meaning of science as a vocation...? Tolstoi has given the simplest answer, with the words: 'Science is meaningless because it gives no answer, the only question important for us: "what shall we do and how shall we live?"' That science does not give an answer to this is indisputable. ...

Today one usually speaks of science as 'free from presuppositions.' Is there such a thing? It depends upon what one understands thereby. All scientific work presupposes that the rules of logic and method are valid; these are the general foundations of our orientation in the world; and, at least for our special question, these presuppositions are the least problematic aspect of science. Science further presupposes that what is yielded by scientific work is important in the sense that it is 'worth being known.' In this, obviously, are contained all our problems. For this presupposition cannot be proved by scientific means.

--"Science as a Vocation."

This is why, altho I'm not personally religious, I can't accept atheism as a principled position. Scientific knowledge is immensely useful and aesthetically satisfying, but people can live without it. What we cannot exist without is knowledge of "what shall we do and how shall we live." Religion at least purports to give an answer to this question, science can't. So if the two are really irreconcilable, science will have to go -- at least until someone else can speak to that question with authority.

I ran across this quote recently in Alain Supiot's Homo Juridicus and it inspired me to reread the Weber piece. What a wonderful essay. I particularly like -- because I like anything I can take as a personal rebuke -- his observation that "the dilettante differs from the expert ... only in that he lacks a firm and reliable work procedure." And his insistence -- a genuine rebuke, to professors who try to use the lectern as a political platform -- that political speech can take place only "where criticism is possible."

Saturday, September 12, 2009

Change we can believe in

"To be sure, Wall Street is not exactly as it was before the cataclysm of last year. Then, a dozen or so big banks formed the top tier. Now Goldman Sachs and JPMorgan Chase are clearly the strongest."

In other news, the latest Employment Situation release from the BLS shows financial-sector earnings up over 4.9% year over year -- the third highest (after professional service and fabricated metal products) of any industry reported. Compared with 1.7% for the private sector as a whole. Looks like it's time for Geithner, Summers and co. to hang the "Mission Accomplished" banner out...

How to think about genes

Pre-scientific or magical thinking has several key features:

* The idea of a direct or intrinsic connection between things, i.e. that if two things influence each other or are associated in some way, they are bound by an occult link, are subject to the same invisible forces. One can instantly affect the other with nothing linking them.
* The idea that the visible characteristics of something are the expression of an invisible essence.
* The failure to distinguish between perceptions an reality, so that anything we see or imagine or experience is assumed to have an independent existence in the objective world.

Popular thinking about genetics has exactly these characteristics. Anything we can say about an organism, any description we give it, is reified as an objective trait of the organism. (As if the placement of an animal in Borges' Library of Babel was a property of the animal.) These traits are then assumed to be present in the organism's inner being, i.e. its genes. And the genes are then believed to produce and modify the trait by occult direct action, without any need for specific intermediate transmission mechanisms.

It's just scholasticism. They said a person who behaved intelligently must have a property of intelligence. We say they must have a gene for it.

The alternative, scientific view insists that until we know the mechanism by which something happens, we don't know anything about it at all. And there's no expectation that the mechanism has any formal or inherent resemblance to the observed phenomenon.

The beginning of wisdom is that genes code for proteins. (Or for RNA.) The only thing a gene does is produce a particular protein. Nothing except the protein is the product of the gene, there's no sense in which a gene is “for” anything else.

These proteins then participate in causal pathways. These pathways always involve the organism's pre-existing physical state, the products of other genes, and the external environment, and almost always involve the organism's behavior. Each protein may participate in many pathways, and at least as important, various pathways converge at points where they are interchangeable. Great proportions of this protein or that protein or this dietary change or that behavioral stimulus will all produce the exact same developmental response. And multiple points along the pathway may be sites of selective pressure – there is no sense in which the influence of the gene stops at the point we've chosen to identify as a "trait".

There are many wonderful examples of what this means in practice in Mary Jane West-Eberhard's Developmental Plasticity and Evolution. There she also makes the somewhat related point that organisms constantly lean on the self-organizing capacities of inorganic matter -- another way the whole "code" metaphor is wrong.

Saturday, August 8, 2009

A short dialogue on democracy

From Gerth and Mills' From Max Weber:

Ludendorff: What do you mean by democracy?
Weber: In a democracy the people choose a leader in whom they trust. Then the chosen leader says 'Now shut up and obey me.'
Ludendorff: I could like such a democracy.

By different means we arrive at the same end

James Hamilton has written a number of pieces going back 15 or 20 years (most recently here) on the importance of oil prices to recessions in the US and other rich countries. He claims that every recession in the past 30-40 years has been preceded by a spike in oil prices, and on casual observation seems to be true. Of course, this being economics, a fair amount of his energy is devoted to whether this relationship holds up econometrically, which is not all that interesting; and another fair amount is devoted to whether it would obtain in some kind of idealized rational-agent economy, which is not interesting at all. He does say plenty that is interesting, tho, including this: that the earlier shocks were a reduction of supply faced with more or less stable demand, but the more recent price accelerations were the result of rising demand and inelestic supply.

Which suggests a point of contact with a quite different literature, the cyclical profit-squeeze analysis of business cycles. This is a Marxian approach to fluctuations, which starts from the observation that almost every downturn is preceded by a decline in the profit rate and then decomposes that decline using the same kind of accounting framework that people use to talk about long-term declines in profit rates. Most typically, changes in the profit share are broken down between the profit share of output, the rate of capacity utilization, and the output-capital ratio at full utilization (i.e. the rate of potential output to capital; this isn't exactly the organic composition of capital, but it can be thought of in a somewhat similar way.) The relative importance of these components, secularly and especially cyclically, is in that order; thus this gets called the “cyclical profit squeeze” approach, since it's the rising labor share late in the expansion that evidently triggers the downturn. (In that order in the US, that is; in East Asia, and presumably other rapidly industrializing regions, there has been a steep rise in the capital-output ratio, unlike in the US where it's essentially flat over the postwar period.) Other writers decompose the profit rate differently but the basic approach is the same.

What does this have to do with oil prices? The answer is that more recent iterations of the cyclical profit-squeeze approach have found something very interesting. In the 50s, 60s, and 70s the “labor squeeze” took the straightforward form of an acceleration of real wages late in an expansion. But in recent cycles, real wages have been essentially flat over the cycle – and yet the labor share has continued to rise in expansions. How is that possible? Because late in expansions, the prices of wage goods (i.e. the CPI) rise significantly faster than the price of output (i.e. the GDP deflator.) In other words, even though workers' real incomes don't rise much in a boom, the share of output needed to provide them with those same incomes does rise, meaning less is left over for profits. In other words, in a boom an increasing share of income goes to stuff we consume, but don't produce – including imported oil, obviously, but also things like rent of land.

So these two very different approachs seem to lead to the same place, namely, a cyclical dynamic based on the increasing share of output going to factors in inelastic supply (or non-produced means of production) as growth exceeds a certain rate, or goes on for an extended period. In more recent cycles, profits are being squeezed by land rather than by labor, but maybe the underlying dynamic is the same. And if you think what chokes off growth in a boom is ultimately the claims of owners of non-produced factors, that suggests we might want to revive the classics, and think about a functional distribution between not two claimants – labor and capital – but between three – labor, capital and land. It's a question, one suspects, that will only become more pressing in the coming century as “land” in the broad sense – land itself, oil, water, and other environmental inputs – become an increasing important constraint on growth.

Saturday, August 1, 2009

Why "The Slack Wire"?

The phrase is from Adam Smith, who early in The Theory of Moral Sentiments describes how "the mob, when they are gazing at a dancer on the slack wire, naturally writhe and twist and balance their own bodies, as they see him do, and as they feel that they themselves must do if in his situation." Any situation that you observe, or even hear described, he goes on to say, will bring forth "what [you] imagine to be the sentiments of the sufferer." And why not? -- don't we only even experience our own lives by observing them, or describing them, as if from the outside?

The point, anyway, is that sympathy with others is an immediate, automatic, universal human response. One might go even farther and say our self, as we experience it, isn't limited to our own isolated biological existence but encompasses some more or less broad set of those who are us.

This is a basic prior for my thinking about economics, and for my thinking about about politics. And economics and politics are what I expect this blog to be about.

Plus, slack wire implies, correctly, that what's here is the opposite of taut: loose, underdeveloped, sloppy. And finally, it affirms my membership in the Cobain-Linklater-Copeland tribe (I even published something in the Baffler!) who've never quite got our footing since the 90s ended and we had to get real jobs.

So, the Slack Wire. Voila.


Except, goddamnit, what Smith says is "slack rope." Not wire. And that is not evocative at all. So OK, for my purposes, I read it in some early edition where he did say wire. Prove me wrong.