Employer-provided health insurance is not that bad

Health insurance is, among OECD countries, uniquely organized in the United States. It is provided by employers, if they can, and is a benefit that is not taxable for employee. The others either buy individual insurance, which is much more expensive than group insurance, or simply bypass insurance. This reliance on insurance by the employer, instead of a group insurance for everyone independent from employment seems clearly suboptimal. For one, the implicit tax subsidy can only lead to over-insurance for the insured. And then, there is clear under-insurance for the others. And lack of mobility of the workforce.

Kevin Huang and Greg Huffman argue that the US system may have advantages that overcome its disadvantages. The basic reasoning is that through this tax subsidy and the fact that insurance is better provided by employers, there is a clear incentive not to fool around and get a job. This decreases unemployment, increases output and possibly welfare despite higher consumption of medical services than optimal.

They argue this welfare improvement through the tax subsidy is possible. But it may also not. It all depends on how much health and leisure are valued, and how risk averse people are. So not everybody prefers the current regime, probably. And the public debate about the subsidy provision while a removal was mulled during the Bush Junior administration clearly shows that. Huang and Huffman, however, argue against using heterogeneous agents, because it is unlikely to have a macroeconomic impact. I am not convinced. Indeed, just look how diverse the insurance packages are that people choose. This highlights fundamental diversities in the perception of risk, and actual risk, in the value of life and health and attachment to work. This has clearly an impact on optimal policy because marginal utilities vary, and there are winners and losers for every policy. This becomes a political economy problem, and heterogeneity is crucial.

The international flow of doctorates

With globalization, the trade of goods has considerably increased. But the substitution to international trade, international migration has also increased. While the migration of low-skilled workers draws headlines, the most "globalized" are the high-skilled ones. In particular, those holding doctorates are very mobile and in particular they move frequently.

Laudeline Auriol has analyzed for the OECD the flow of doctorates across its members countries. For examples, across European countries, 15 to 30% of all doctorate holders has moved across a border over the last 10 years. This is a remarkable transformation for Europe, where language and cultural barriers were much much higher a few decades ago.

This high mobility reflects the particular labor market for doctorates. Positions and candidates are very specialized, thus often need to move far to fond a match. This is compounded by the large increase in new doctorates across the OECD: from 140'000 in 1998 to 200'000 in 2006. But this growth has been very uneven, low in Germany, France and the US, very high for some of the poorer OECD countries, and for women. Currently, the US has the most doctorates (340'000) with Germany not far behind, which explains why a professorship there requires a second doctorate (habilitation).

Unemployment rates are low, 2-3%, but it usually takes several years after graduation until a doctorate finds a stable job, and this after graduating at a much higher age than other workers. While this sort of indicates a healthy labor market, it hides considerable heterogeneity. Women and doctorates in humanities face much higher unemployment rates. The latter are much less mobile because their research (and teaching) topic is much more closely related to the local cultural context, and can thus not take advantage of international opportunities like, say. natural scientists. It is then not surprising that in some countries a fifth hold jobs that are not related to their doctorates. There is also considerable uncertainty about job security. For example, post-docs (which include temporary visiting positions) now outnumber full-time faculty at US academic institutions.

Coming back to international mobility, it is remarkable how in most counties over a fifth of doctorate holders are foreign born, over half in Canada. Half of the foreign born doctorates in the US are from Asia, and two-thirds of the graduate students as well. And in the countries that have lower proportions of foreign born considerable share has stayed abroad recently. A truly international workforce.

Syphilis cannot be eradicated

Syphilis is back. As the most widespread venereal disease in the 1930's it was curtailed after huge efforts, both in developed and developing countries. And ten years ago a push was made to finally eradicate it. But syphilis is quietly making a comeback, hidden in the shadows of AIDS. And because the transmission of this disease is primarily driven by risky sexual behavior, it can be a leading indicator of other sexually transmitted diseases on the rise.

David Aadland, David Finnoff and Kevin Huang use a model of human behavioral response to study this resurgence and come to the conclusion that there is a fundamental cycle that cannot be broken. The point is that the transmission model that epidemiologists use has constant parameters tracing back to biological features of the disease, but these parameters can change through human intervention, and they do. Call this a Lucas Critique of epidemiology. The key here is that when prevalence is low, individuals in a riskier fashion and in particular have more sexual partners. No reasonable policy can overcome this.

Given free Internet to the unemployed

It is of general benefit that people do not stay unemployed too long and that those who are unemployed exert a reasonable effort to find a new job. While it turns out that they spend surprisingly little time looking for a job, the efficiency of this search can be improved in various ways. One, rather costly, is to provide more counseling and coaching, provide child care, another less costly is to give more search means.

This is what Randolph Beard, George Ford, Richard Saba and Richard Seals Jr. study by looking out the availability of the Internet impacts job search. They highlight one particular aspect of job search: discouragement. Indeed, nothing is worse than someone who is not even trying to find a job. Well, it turns out that having Internet access at home reduces the occurrence of discouragement in job search. Internet access at public locations like libraries have a similar effect. This is not unimportant, because becoming unemployed, especially a longer time where you may become tempted to abandon, lets you rethink budget priorities and Internet access may be among the first items to go. In such circumstances, it may make sense to offer free Internet access.

Trying to justify IS-LM

The IS-LM model is still not dead. Created to reflect the interaction of aggregate markets, it suffered from the rise of dynamics and microfoundations in macroeconomics, yet remained the staple of undergraduate macroeconomics because a generation of teachers knowing nothing else needs first to die out. Yet, even people in research have clung to it, trying to find the microfoundations of IS-LM, which seems to me completely backward. The scientific method should indicate that you build a theory from observations, then create its graphical representation (if possible), and not trying to justify a graphical representation with some theory.

But anyway, I was thinking about these vain efforts while reading a paper by Ingrid Größl and Ulrich Fritsche, whose goal is to show that the standard Neo-Keynesian DSGE model cannot be represented appropriately in the IS-LM framework. So what? Life is more complex than IS-LM, so deal with it and drop IS-LM. But anyway (again), let us see what their arguments is.

First, the claim is that a Taylor Rule is a poor substitute for the LM curve, because it neglects the store of value role of money. And the DSGE model cannot capture the IS curve because is assumes that savings always equal investment, and people never save in unproductive money. The final claim is that an overlapping generation model is better for the IS curve. Now let us see how these claims are formally made. The model starts with a standard Neo-Keynesian representative agent, who has intertemporal preferences over consumption, leisure and real money holdings. Real Money holdings? Why not question that while you are arguing about the role of money in a model? Why would I care about how much money I carry? Not because I need it for transactions, because current consumption is already there. Not because of the wealth it represents, because future consumption is also there. It is simply there because otherwise the LM curve would not exist. How wrong is that?

Then what about the firm? It produces goods proportionally to the number of employees. Where is capital? Are we now trying to derive an IS curve (where I stands for investment) without investment? Not very convincing. Does the resulting model have anything to do with observed facts? Nothing is offered by Größl and Fritsche. What do I take from this paper? To justify LM, one needs to force people to demand money just because, and to justify IS, one needs to assume away investment. Great.

Property rights and the tragedy of the commons

The tragedy of the commons is a well studied and understood problem. When property is shared, the owners tend to abuse it because individual actions and only a small individual impact. Typical examples are overfishing, air and water pollution, and the need for the government to tax to provide public goods. The typical solution is to assign exclusive property rights to the shared good. Do this always work to solve the tragedy of the commons?

No, say Preston McAfee and Alan Miller. The problem is that the exclusive property rights lead to underutilization of the good. This was the purpose of the property rights in the first place, but McAfee and Miller argue that this often goes too far. First, if a good become unavailable, there is a waste of resource trying to find other ways to consume. Second, there could be underutilization if social benefit differs from the private benefits of the owner. The problem is not trivial, for example think about the attribution of radio, phone or wifi frequencies that lead to significant underuse of some frequencies others would love to use. The solution? A part from just abandoning property rights (in the right situations), it is not clear to me what could be done.

How to measure governance

There is now a cottage industry trying to measure how well countries are governed, in particular how bad corruption is, or how well the rule of law is imposed. These indicators are important, they can determine where foreign direct investment is taking place, whether development aid is disbursed, or whether policy reform has been successful. Thus, it is critical that governance be well measured.

Charles Oman and Christiane Arndt point out that most measures are based on perceptions, which are notoriously biased and difficult to change in the face of hard facts. But their is also substantial danger in that users tend to misread these indicators. For one, they are not precise and should only be interpreted as giving a rough picture. Even when intervals of error are provided, they are often ignored by users. Second, international comparison is difficult because the sources used to construct the index differ widely from one country to the next. Third, a single index is used for many different purposes, and each of those purposes should weigh differently the components of the index. Finally, there is no theory that tells us how to scale the measured before or during the determination of a governance index. And let us not forget most measures are subjective, as they are based on opinions. It frightens me when such an index is used in a regression, especially without any robustness test.

Football has an impact on college quality

US faculty members are currently quite frustrated with sports programs on their campuses as the swallow substantial budgets at the expenses of academics. Very very programs yield a profit, even (American) football is in deficit save for a handful of colleges. And coaches get salaries that are completely disproportionate to the academic mission of universities. Then why are universities willing to invest all this money in sports? The standard answer that this builds alumni loyalty cannot be good, as they typically donate to the athletic foundation, which is run independently from academic budgets. The only advantage, so to speak, are that they reduce the deficit that needs to be covered by academic funds. Another argument is that it attracts better students. I can believe that for some sports, where student athletes are better than the general student population. But there should be better ways to attract good students, like merit scholarships.

Sean Mulholland, Aleksandar Tomic and Samuel Sholander claim that even the football program improves the academic quality of the student body. It is not that the football player are academically gifted, they are certainly not, but it is all about attracting other students. Their assessment is not based on actual fact, but rather on peer evaluation of faculty and university administrators, as they are records in the US News and World Report college rankings. And the better a sports team is, also from peer evaluation by football coaches, the better is the academic reputation of the student body. Now that the rumors have been established, it would be good to back this up with facts...

Maximizing the Human Development Index

We all recognize GDP per capita is far from a perfect measure of wellbeing in an economy, hence the Human Development Index (HDI) was developed. It aggregates indicators of health, education and income. The idea is to evaluate how well an individual can function in such an economy. But the elaboration of the HDI did not follow any formal theory in the selection of the precise indicators and their weighting. So what about doing the reverse: take the HDI seriously in theory?

Merwan Engineer and Ian King use a standard growth model, calibrated following Mankiw, Romer and Weil, and look for what it takes to maximize the HDI. And they find massive overinvestment into physical and human capital, which saving rates so much higher than what the Golden Rule would call for that consumption is almost reduced to zero. Because consumption is not part of HDI! That looks a crass oversight, as we generally assume, correctly I think, that people care about consumption for their standard of living.

Employment protection and migration

One big big aspect of resistance to immigration has to do with how immigrant might exploit social safety nets. One of them is employment protection. Thus a natural question is to ask whether emigrants choose to move to countries where jobs are better protected. Theoretically it is not that obvious, as employment protection tends to depress wages, as workers bear the cost of protection, and reduce the probability to find employment, but it could also go the other way if it leads to higher bargaining power for workers.

Rémi Bazillier and Yasser Moullan try to sort this out empirically and come to the conclusion that it is really the protection differential between sending and receiving country that matters: migrants like to enjoy the same kind of protection as at home. This is particularly the case for high-skill workers, the ones you actually want to attract. Finally, Bazillier and Moullan also find that employment protection in receiving countries matters more than in sending countries.

Why is the Chinese savings rate so high?

The current global imbalances, at least those between the US and China, are only possible because China is currently saving a historically high share of its income. Various theories have been advanced to explain this surge in the savings rate: 1) Economic reform has increased household-level uncertainty and thus precautionary savings. 2) Forces have shifted from consumption-oriented households to savings oriented businesses. 3) Demographics and the life-cycle combined with the growth in income lead currently to high savings rates because savings change through the life cycle and thus fluctuations in the dependency ratio become important.

As Carl Bonham and Calla Wiemer point out, the savings rate has not been uniformly high and is in fact consistent with the changes in the dependency ratio. The savings rate increased through the 1980s to peak at 41.9% in 1995, then "bottomed" at 37.7.% in 2000, before surging back to 51.4% in 2008. The current global imbalance occurs in part because, unlike before, investment rates are restricted by policy, and stand at 43.5%. A modest decrease in the savings rate can rebalance things.

To test the three theories against these staggering numbers, Bonham and Wiemer use a structural VAR and determine the latter one is the most important, while the others cannot be dismissed. I am not particularly fond of VARs to test theories, they should rather just describe the data, but the evidence is quite compelling in this case. Of particular interest is that one can forecast the savings rate, as the dependency ratio is quite predictable. And this forecast shows that Chinese savings rates have peaked last year and will decrase quite significantly over the next decade. If true, this should reduce considerably the pressure on China to do something about current imbalances.

The Dalai Lama effect on international trade

Since the Nobel Peace Prize was announced this year, the Chinese government has been putting heavy pressure on many foreign authorities to prevent them from showing up at the award ceremony. China has been in particular been using the threat of trade sanctions to ruin the party of Liu Xiaobo. Is this effective?

Andreas Fuchs and Nils-Hendrik Klann note that China is a regular with these tactics, but regarding contacts with the Dalai Lama. Are those threats carried out? Using a gravity model, they find exports to China have been curtailed after high-level visits only recently, and this effect vanishes after two years. This is quite interesting, as it confirms the existence of a "Dalai-Lama effect." But I wonder how this effect could appear at a time where the Chinese government has less control over imports with the liberalization of the economy. Is it that it cares that much more about the Dalai Lama?

Are military expenses good for growth?

It is obvious that federal fiscal deficits will have to be addressed sooner or later in the US, and seeing how difficult it is to raise taxes, one has to think about how to trim expenses. Of course, the biggest line item is defense, and one can ask what the consequences of cutting these military expenses could be. Critics of those cuts will point to WWII, where the military build-up has pulled the US out of the Great Depression. While I do not quite agree with this interpretation of this anecdote, it is worthwhile to study more generally the impact of military expenses.

Giorgio d’Agostino, Paul Dunne and Luca Pieroni do a literature review and note that out should not just look at the direct impact of expenses. Indeed, a military build-up is also more likely to generate conflicts, and after all a conflict is overall a waste of resources as much effort is spent blowing physical and human capital to pieces. The multiplier argument is also rather vacuous, as these funds could be used for other purposes as well with higher multipliers, in particular when you compare wars in foreign lands versus infrastructure at home. The same applies to the argument that military research has some positive impact on civilian technology (why not simply focus research on the latter?).

This clearly makes it difficult to make a case that military expenses are good for growth. Empirical work is really difficult, like so often with cross-country growth regressions, but d'Agostino, Dunne and Pieroni conclude that the evidence tends towards a negative impact. The only ones that obtain positive impacts are those that include supply-side effects, and those are of course rigged to provide a positive impact.

Money demand: financial adjustment cost, not cash-in-advance

I find monetary models very frustrating. While there is empirical evidence that money is not completely neutral over the range of a couple of years, theory has so far not come up with a believable way to understand why this would happen. The models that come closest have completely outrageous assumptions, such as the infamous Calvo pricing hypothesis I was venting about just a few days ago. This is usually accompanied by money-in-the-utility-function (sure, we all love to walk around with a lot of cash) or with the cash-in-advance constraint. Let us consider the latter a bit more closely.

Essentially, this constraint assume that households have to carry cash for some purchases. Often these models are calibrated to quarterly frequency, because this is what the data bears. This implication is that people have to carry cash for all their purchases in the next three months! How reasonable is that? Or the constraint is imposed on firms for their investment or wage payments, which about as outrageous. Yet, cash-in-advance is used all over, either blindly or because it easily generates a money demand. Of course, as people are forced to demand money.

What monetary urgently needs is a better theory of money demand. People hold money in small amounts because it facilitates transactions. They also hold some as a store of value, as any principles of economics student can recite. But this is not a good solution, as money is dominated in return by almost any asset. People hold money due to some frictions on financial markets, and these holdings are temporary. Now having both these features makes it difficult for the model builder. Which one is more relevant?

Xavier Ragot tells us financial frictions are. For one, looking at data, the distribution of money across households looks much more like the distribution of financial assets than that of consumption. He tries to match both distributions using a model with cash-in-advance for consumption (slightly modified to account for the fact that the rich can buy more on credit), a fixed cost for financial transactions, borrowing constraints and idiosyncratic shocks to household productivity. The model has two degrees of freedom to match the distributions of money, consumption and financial assets: the fixed cost for adjusting your portfolio and the transaction technology parameter from the cash-in-advance constraint. Two values are then obtained, and by turning each of them to zero, Ragot concluded that 85% of money demand comes from financial frictions, and 15% from cash-in-advance transactions. Conclusion: if you want a simple model of money demand, do not rely on cash-in-advance.

How to manage rents from non-renewable resources

Some countries are blessed with natural resources, although this turns too often into a curse as rent seeking can turn the economy into a corrupt hell-hole. To make things worse, this type of revenue is highly volatile and there is much incentive to extract rapidly with little thought for smoothing income or investing for the future. Hence, international organizations have pushed very hard for a more sensible management of resources incomes, and their advice has been to extract or invest income in a way to obtain a constant permanent income.

Anthony Venables thinks this is not appropriate for developing countries that have pressing needs right now, like poverty alleviation or a shortage of public infrastructure. In addition, one has to realize that sustained growth is not going to come from the public sector, but through private investment. And making private investment worthwhile can be helped by good, but limited government. This Venables thinks that revenue management should put more emphasis on current expenses than future ones, in order to make sure the country get out of a development trap and can continue growing on its own latter, with relying on its resource income.

PS: the paper's abstract was much more intriguing that the paper turned out to be. The reason is that the abstract make promises about the proper management of income from renewable resources, which would seem much less problematic, unless I was missing something.